Renewable portfolio standard: a tool for environmental policy in the Chinese electricity sector

Abstract

The renewable portfolio standard (RPS) requires the electricity sector to include a minimum amount of electricity from renewable energy sources. Renewables often have more desirable social and environmental effects in comparison with conventional electricity sources such as fossil fuels. Support for renewables is currently needed because they are usually not yet financially competitive with conventional sources because of: subsidies to conventional sources, minimal pollution charges for conventional sources, and the newness of many renewables technologies, whose relative costs will fall with widespread commercialization. Mechanisms normally used to support renewable electricity generation include direct financial support, indirect support and pollution charges on conventional sources. However, the RPS, a new policy mechanism, is rapidly gaining in popularity because: it maintains cost reduction incentives for producers, ensures the attainment of the market penetration target and possibly associated environmental targets, and minimizes government involvement. The RPS has been recently implemented in jurisdictions in Europe, the US and Australia. Developing countries, such as China, are now also interested in this policy tool. If China were to implement a RPS, it would need to ensure that such a policy was designed to meet the unique needs of China. This would require research and policy development covering several design and implementation considerations. • For setting its target, the government needs to establish explicit goals for renewables, linked to environmental and economic development objectives. This will help in setting the size, timing and percentage growth of the target. A cost cap may be necessary until more information is available about resource supply markets. • The definition of eligible renewable resources needs to be determined. If large hydro is deemed a renewable resource, it may need to have its own, separate target. • The estimated renewable resource endowment of China should be assessed in terms of its relationship to the different electricity grids in the country, different levels of government and different administrative jurisdictions. This will help determine the geographic scope of a RPS (national, interconnected grids, provinces). It would be easiest to initially apply the RPS to electricity suppliers (utilities, independent generators). Setting the renewable percentage by energy instead of capacity will ensure that the standard is closely associated with environmental improvement. The RPS should also provide some flexibility to allow electricity providers to meet each year's requirement with some re-allocation of output from the previous or following periods (banking and crediting). Finally, trading certificates should be developed to ensure that renewable electricity is produced at low cost. • Allocation of administrative responsibilities for the RPS (setting targets, certifying renewables, compliance-monitoring and penalties) depends on the structure of the Chinese electricity industry. (If independent regulation is established, the regulator could have this responsibility.)