China’s market for domestic renewable energy certificates called Green Electricity Certificates, or GECs, face growing uncertainty due to existing liquidity issues, lack of coordination with wider decarbonization and climate policies, and a rising number of competing green power products.
The GEC mechanism was launched in 2017 as a “crucial measure” for China to create stronger financial incentives for renewable energy development, boost renewables and reduce the government’s subsidy burden, according to the country’s top economic planner, the National Development and Reform Commission.
The government had accumulated large arrears in unpaid subsidies to the renewables sector up to 2021, and the mechanism allowed onshore wind and solar based power projects to access an alternative revenue stream by selling environmental certificates, or GECs. Each GEC represents 1 megawatt-hour of renewable power produced.
GECs were China’s earliest green power products, launched when an increasing number of private and state companies were looking to purchase clean energy or equivalent market instruments, to offset their carbon footprint.
Some of the top buyers of GECs by volume are multinationals like Apple, BMW Brilliance, a joint venture between BMW and Brilliance Auto, LG Display, and Sumitomo Rubber Industries, according to GEC online trading data. China’s five largest state-owned power groups, jointly known as the “Big 5”, which includes Huaneng Group, Huadian Group, China Energy Investment Corp (CEIC), State Power Investment Corp (SPIC) and Datang Group, have also been active participants in the GEC market.
Despite its growth, the GEC market suffers persistently from liquidity issues. For instance, the number of GECs sold is only a fraction of the certificates issued.
As of July 26, 34.08 million wind GECs and 12.45 million solar PV GECs have been issued. In contrast, only 1.05 million wind GECs and 2.05 million solar PV GECs have been purchased, accounting for only 3.1% and 16.5% of the total issued volumes, respectively, the GEC trading data showed.
Liquidity problems
“China’s GEC market has not been particularly liquid owing to constraints on both the sell and the buy sides,” Feng Xiaonan, senior research analyst with S&P Global Commodity Insights, said.
Among the reasons for this is that GECs have been priced at high levels. When the mechanism was first launched, power producers could opt for either issuing GECs or accepting the government’s renewables subsidy.
Feng said power producers were initially reluctant to sell GECs at prices lower than the subsidies they were entitled to, and thus the average price of GECs over 2017-2021 was about Yuan 665/MWh [$98/MWh] for solar projects and 180 Yuan/MWh [$27/MWh] for wind projects.
As China’s renewables projects became cost-competitive in 2021, the NDRC halted subsidies for new onshore wind projects and commercial solar PV projects. In the same year, China allowed unsubsidized solar and wind projects to issue GECs that added to the supply of certificates.
“The prices for both unsubsidized wind and solar GECs plummeted and stabilized since then at around Yuan 50/MWh [$7.39/MWh], which to a certain extent helped to spur sales,” Feng said.
But still GECs from unsubsidized projects were not as attractive as alternative products like I-RECs, some of which traded at below Yuan 30/MWh [$4.43/MWh], Feng added.
I-RECs are Renewable Energy Certificates or RECs certified by the International REC Standard Foundation, or I-REC Standard, headquartered in the Netherlands.
“IRECs have wider coverage, including hydro and biomass, while GECs only apply to onshore wind and utility solar,” said Caroline Zhu, senior analyst with S&P Global Commodity Insights who specializes in Asia Pacific low-carbon electricity research.
Competing products
Zhu said GECs are preferred by smaller consumers with one-off demand for green power, such as conferences and large events, and bought mainly by entities that face difficulties in engaging in large scale, complex green power trading.
However in 2021, China kicked off green power trading pilots with new rules issued by China Southern Grid and State Grid in 2022. As trading becomes more accessible, it will become easier and more economical for companies to directly procure green power from the market, Zhu said.
Feng said that when GECs were launched, it was not possible to directly purchase renewables-based electricity from the grid, and renewables were only available for market transactions in some provinces. Direct power purchases were also not always viable as companies could not meet the volume threshold of the mid-to-long term market.
As power market reform progressed, many of these restrictions no longer applied, leaving the GEC market obsolete. Experts said demand for GECs is likely to shrink over time as China lowers its barriers to entry to the renewable power market.
GEC buyers have also cited concerns over the ambiguity of how the mechanism will be integrated with China’s new compliance carbon market and overall climate policy framework. The GEC mechanism needs to be better coordinated with other climate policies to avoid confusion and tackle the risks of double counting.
“It remains to be seen how GECs or other forms of green power consumption will be recognized and counted towards offsetting Scope 2 emissions when companies report their emissions for purposes such as the ETS [national compliance carbon market],” S&P Global’s Feng said.
Source: Spglobal.com