China Power System Transformation Abstract China Power System Transformation Assessing the benefit of optimised operations and advanced flexibility options Abstract China Power System Transformation has a two-fold objective. First, it provides a summary of the state of play of power system transformation (PST) in the People’s Republic of China (“China”) as well as a comprehensive discussion of PST internationally. This includes a comprehensive review of all possible sources of power system flexibility (power plants, grid infrastructure, storage, and demand-side response) and a detailed discussion of market, policy, and regulatory frameworks to effectively mobilise power system flexibility. Second, it presents findings from a detailed power sector modelling exercise for China in 2035, building on the 2018 World Energy Outlook New Policies and Sustainable Development Scenarios. The modelling identifies the establishment of spot markets and trade between provinces as two of the main elements to improve system operation efficiency in China. In order to integrate very high shares of variable renewables consistent with the WEO SDS, activating the demand side – especially electric vehicles – and targeted use of electricity storage are found to be crucial for an accelerated transformation of the Chinese power system. reserved rights All Page | 1 IEA. China Power System Transformation Highlights Highlights • The rise of low-cost wind and solar power, deployment of distributed energy resources (DER) and increasing digitalisation are accelerating change in power systems around the world, including the People’s Republic of China (“China”). With the right framework conditions in place, these trends can combine, leading to a much stronger integration between the demand and supply sides while allowing a more rapid uptake of variable generation resources, notably wind and solar power. “Power system transformation” describes the processes that facilitate and manage changes in the power sector in response to these novel trends. • Power system flexibility – a concept that goes beyond power plant flexibility – is the crucial element for a successful transformation of the power system at growing proportions of wind and solar power in China. Traditionally, flexibility has been associated with the more flexible operation of coal power plants in China. However, the concept of power system flexibility is much broader. Apart from power plants, it can be provided by grid infrastructure, demand-side response, and electricity storage. Changes to market, policy, and regulatory frameworks are crucial for unlocking flexibility. • Establishment of spot markets and trade between provinces are two of the main elements to promote power system transformation in China. Building on the World Energy Outlook (WEO) New Policies Scenario, modelling results indicate that if current efforts to implement economic dispatch, boost short-term inter-regional trading and expand transmission interconnectivity succeed, annual power system operational costs in 2035 can be reduced by 15% or USD 63 billion (United States dollars) annually, and power sector CO2 emissions reduced by up to 750 million tonnes per year. • Power system flexibility is the most important cornerstone of a fundamentally transformed Chinese power system which achieves the goals of the Paris Agreement. Building on the WEO Sustainable Development Scenario, modelling results indicate that utilising advanced flexibility measures such as smart electric vehicle charging, demand-side response, and electricity storage can support the reliable integration of extremely high shares of variable generation without any substantial variable renewable energy curtailment in 2035, while simultaneously reducing power system operational costs between 2-11% and reducing the need for fossil generation capacity by up to 30%. Other clean energy technologies such as nuclear power and carbon capture and storage benefit from flexibility in the form of increased utilisation. • Accelerated progress on power sector transformation could bring substantial benefits in China and the world. An accelerated transformation of the Chinese power system could bring significant benefits in the drive to limit climate change in line with the Paris Agreement. China can use the path of power system transformation to make accelerated progress in restructuring its economy towards a pattern of growth in advanced high-quality industrial sectors, while making clean energy technologies affordable for countries around the world – including today’s developing countries, which will see a rapid increase in energy demand over the coming years. reserved rights All PAGE | 2 IEA. China Power System Transformation Executive summary Executive summary China Power System Transformation has a two-fold objective. First, it provides a summary of the state of play of power system transformation (PST) in the People’s Republic of (“China”) and a comprehensive discussion of PST internationally. Second, it presents findings from a detailed power sector modelling exercise for China in 2035, which explores the impact and value proposition of various public policy and technology deployment options currently under consideration by Chinese policy makers. The report provides a number of insights on possible Chinese PST pathways based on the results of this modelling exercise. Actions to boost flexibility and investment Power system transformation requires action to boost power system flexibility and support clean energy investment. Global experience suggests that PST requires the co-ordinated orchestration of actions across the entire value chain of electricity production and consumption to facilitate cleaner, more reliable, more resilient and more affordable power systems. A number of interventions can be made to support PST and promote the increasingly important characteristic of power system flexibility. Traditionally, flexibility has been associated with the more flexible operation of coal power plants in China. However, it encompasses all resources of the power system that allow for its efficient and reliable operation at growing shares of variability and uncertainty. Apart from power plants, it can be provided by grid infrastructure, demand-side response and electricity storage. In a transformed power system with higher shares of variable renewable energy (VRE), the importance of flexibility options beyond power plants increases sharply. This can open synergies with other developments in the energy sector, such as the deployment of electric vehicles (EVs). Modelling analyses Advanced energy modelling exercises explore the value of reform goals and innovative system flexibility measures. The energy modelling analysis presented in this report builds on two International Energy Agency (IEA) World Energy Outlook 2018 (WEO 2018) energy system scenarios for China for 2035. These scenarios provide the overall energy system setting, including installed power generation capacity. For this report, the power sector is modelled at a much higher level of detail, based on eight regions. In addition, different cases are analysed that represent changes in the way the power system is operated and how much power system flexibility is available. The New Policies Scenario (NPS) aligns with the achievement of China’s Document No. 9 reforms and aims to provide a sense of where today’s policy ambitions seem likely to take the energy sector in China. The NPS cases are used to explore the value of currently considered polices, notably the ongoing power market reform that aim to introduce spot markets and increase levels of cross-provincial trade. The SDS achieves the main energy-related outcomes of the Sustainable Development Goals, including delivering Paris Agreement commitments, achieving universal access to modern energy by 2030 and dramatically reducing negative health outcomes due to energy-related air pollution. Its vision is aligned with the “Beautiful China” initiative proposed at the 19th National reserved rights All Page | 3 IEA. China Power System Transformation Executive summary Congress in 2017 as the general blueprint for China’s future development. The SDS is used to explore the importance of advanced flexibility options – in particular on the demand side – to support a deeper transformation of the system. Spot markets and trade Establishing spot markets and trade between provinces are two of the main elements to improve system operation efficiency in China. China’s goal of a transition from fair to economic dispatch would result in significantly lower power system operational costs and improved ability to integrate wind and solar power. Detailed power sector modelling results for the NPS indicate that China’s ongoing market reforms to introduce economic dispatch make good financial sense and should strongly benefit the environment. Transferring to economic dispatch could yield an annual operational cost saving of approximately 11% or USD 45 billion (United States dollars) per year in 2035, sharply reducing VRE curtailment and power sector CO2 emissions by 15%. The implementation of spot markets in China is a crucial element of realising these benefits. Increasing power trading and further expanding regional transmission interconnectivity will yield substantial economic and environmental benefits, and promote clean energy investment. Boosting power trading has long been considered a national priority in China. While some cross- regional, mid- and long-term trading already occurs,