Is China’s power sector on track to meet decarbonisation goals?

The 2015 Paris Agreement set an overarching goal for nations worldwide to strive towards limiting the global average temperature increase to 1.5°C above pre-industrial levels. However, the challenges and opportunities associated with this goal can vary significantly across different regions and sectors. Investors will need to take these nuances into account when engaging with companies around their decarbonisation targets.

As a global manufacturing hub, China is the world’s largest CO2 emitter. It has set a “30-60” target, meaning that carbon emissions will peak before 2030 and reach net zero by 2060. The power sector in China is responsible for 47% of the country’s total CO2 emissions and will play a critical role in achieving the country’s net zero ambition.

In this article we examine China’s power sector and consider its trajectory and pathways to net zero.

Regional dynamics: fewer power sector SBTi signatories in Asia than Europe

In recent years, initiatives that provide sector-specific guidance on decarbonisation pathways, such as the Science-Based Target Initiative (SBTi), have gained significant traction. This is part of growing regulatory efforts to promote transition planning by companies and financial institutions. Company targets are considered ‘science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement.

When we examine the distribution of SBTi validated targets across sectors, we find that the power generation industry has the lowest uptake. Europe leads the way with over three-quarters of the targets, while in Asia only eight power companies have established science-based targets, and none of them are from mainland China.

We note that while the SBTi promotes global sector pathways, there has been less guidance provided on regional differences specific to the power sector. This likely explains the composition of companies that have chosen to set and validate targets.

Recognising the need to understand more granular regional benchmarks and pathways, we have undertaken some research to study the China power sector pathways.

We draw from the climate research (Jiankun He et al, 2022, Towards climate neutrality) conducted by the Tsinghua University Institute of Climate Change and Sustainable Development (ICCSD). The ICCSD is widely regarded as one of the most credible sources on China’s net zero transition, known for its deep expertise in energy and environmental research and close interaction with policy makers.

The ICCSD has outlined various long-term climate transition scenarios for China, based on quantitative assumptions derived from the country’s economic and social development goals.

Our key findings from the analysis are as below:

• There is high likelihood that China will reach peak emissions before 2030 and surpass its non-fossil energy target, which aims for non-fossil fuel to account for 25% of primary energy consumption in 2030. However, uncertainties remain regarding the absolute peak level, carbon intensity reduction and emissions per capita.
• China’s current economic and social development is an important consideration when projecting the country’s decarbonisation pathway. Specifically, China has an ambition to become a modern socialist country by 2035, which implies an economic target to double GDP per capita by 2035. This leads to “inertia” in tackling emissions and poses challenges in rapidly transitioning emissions to align with the 1.5-degree pathway. As a result, China’s total CO2 emission pathway may plateau at high emissions levels between 2030-2035 before experiencing a sharp decline thereafter.
• Based on our assessment of all the climate scenarios developed by Tsinghua University, a 2°C target path which assumes accelerated transition from 2035 and 1.5t CO2 emission per capita by 2050 appears most likely, considering China’s existing policies.

What does this mean for the power sector?

We used the climate scenario data from Tsinghua ICCSD and incorporated both top-down and bottom-up assumptions to project possible emission pathways for China’s power sector in our own model. We present a few trajectories derived from our model below:

Note for chart:

ENDC (top-down): based on China total CO2 emission pathway under Tsinghua Enhanced National Determined Contribution (ENDC) scenario, and our assumptions on the proportion of power sector emissions in China’s overall emissions.

2°C (top-down): based on China total CO2 emission pathway under Tsinghua 2°C scenario, incorporated with our assumptions on the proportion of power sector emissions in China’s overall emissions.

1.5°C (top-down): based on China total CO2 emission pathway under Tsinghua 1.5°C scenario, incorporated with our assumptions on the proportion of power sector emissions in China’s overall emissions.

SBTi 1.5°C: based on SBTi 1.5°C global power sector curve and our assumptions on regional emissions budgeting.

2°C (bottom-up): based on power generation forecasts under Tsinghua 2°C scenario and our assumptions on energy emissions intensity.

ENDC (bottom-up): based on power generation forecasts under Tsinghua ENDC scenario and our assumptions on energy emissions intensity.

Which technologies will help China’s power companies to decarbonise?

Our analysis shows that wind and solar will play a critical role in driving the transformation of China’s power sector across all scenarios. We anticipate a substantial increase in both wind and solar capacity, with growth projected to be between six to 10 times higher in 2050 compared to 2020.

Similarly, nuclear capacity is expected to experience significant growth, reaching up to six times its 2020 capacity by 2050. However, due to resource constraints, the growth of hydro capacity will remain limited.

Apart from the uptake of renewable energy, the pace of coal phase-down and the development of technologies such as carbon capture and storage (CCS) could also have significant impacts on the emission pathways of China power sector.

In addition, while coal installed capacity drops significantly after 2030, coal is likely to remain in significant use within and outside of the power sector until 2050. This is in line with the observation that newly approved coal power plants are estimated to close after an average plant life of 30 years.

What is the key finding from our model?

Based on our projections, we have observed a difference between the SBTi global power curve and the other projected paths, even when compared to a 1.5°C path in our model (the Tsinghua 1.5°C curve under Figure 2). This suggests that a global sector curve may not adequately make allowance for the unique dynamics and the differentiated pace of change in the China power sector.

While SBTi offers a valuable sectoral framework for setting science-based targets aligned with the goals of the Paris Agreement, it is important for investors to recognise that there are alternative approaches and pathways that could contribute to achieving net zero emissions.

As investors and policymakers navigate the transition to a low-carbon economy, it is important to consider specific circumstances and challenges faced by different regional sectors. Engagements with individual corporates will be valuable, as this approach allows for a deeper understanding of the challenges associated with meeting country-specific and sectoral decarbonisation pathways on a granular level.