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Issue #03: In-depth: For 2022, China wants to balance climate ambitions with energy security

State planner’s 2022 outlook prioritizes energy security, announces energy regulation reform, lowers enthusiasm for nuclear power, and hints at changes for overseas coal plants.

Today, 2022’s “Two Sessions” wrapped up in Beijing. Over the last eight days, major draft documents were reviewed by the National People’s Congress (NPC) in smaller group meetings before being adopted, with mostly minor adjustments, through a plenary vote earlier today.

Among the most important documents of every year’s Two Sessions is the “Plan on National Economic and Social Development” (hereafter “the plan”). Prepared by the state planner, the National Reform and Development Commission (NRDC), it includes a review of how the country fared the year before, and a list of what the government sees as priorities for the year ahead.

Below, I will mainly analyze the energy and climate policies included in the plan for 2022. 

(Note: The plan has been adopted by the NPC. However, as of the time I sent out the newsletter, the final text of the plan has not been published by Xinhua News Agency. The following analysis is made based on the draft plan. PDF: EN/CN).

My key takeaways

A few things stand out to me in the new plan:

First, energy security, framed as a “mounting” economic risk and a national security issue, is given a level of priority on the government’s agenda higher than ever before;

Second, the current energy security measures are heavily oriented toward securing the supplies of fossil fuels — primarily coal, but also oil and gas — and stabilizing their prices;

Third, the Chinese government acknowledges the governance challenge of “balancing and coordinating” the competing priorities of stabilizing the economy and reducing carbon emissions. But, judging by the overall policy package, ensuring economic stability — with fossil fuels — trumps all;

Fourth, in an immediate example of this balancing, China has decided to reform its “dual-control” energy policy, which seeks to limit overall energy use and energy intensity, or energy use per unit of production. Targets will be changed from annual to over five years so as to “provide reasonable leeway” for energy consumption to boost the country’s economic growth.

Fifth, the plan further tones down its directives on hydropower and nuclear development, calling for more “prudence” and “absolute safety” — a strong contrast to the “vigorous promotion” of wind and solar.

Finally, the plan hints that China will “help” transform energy-intensive and highly polluting facilities abroad, which includes coal-fired power plants as well as other hard-to-abate industries. This is the first time that the Chinese government has provided a follow-up on Xi Jinping’s early announcement of “China will not build new coal-fired power projects abroad.”

Energy security

The new plan reflects a policy trend that has rapidly developed, starting in the second half of 2021 as the country was suffering electricity shortages.

Following that energy crunch, Beijing is shifting much more political resources to ensure energy security. This is no longer treated as a task for the energy system but as a crucial economic, social, and national security issue.

It’s the third consecutive year for the plan to include “safeguarding energy security,” but compared to previous plans, this year’s section on energy security goes beyond generic descriptions of related measures. Instead, it says energy security is one of the “mounting” risks in the financial and economic sector, as well as one of the “markedly grown” problems and challenges that “confront China’s development.”

The plan also considers energy security one of the three “key areas” in which risks must be defused to safeguard economic security, alongside fiscal and financial risks, and the real estate sector.

Ensuring energy security is now given the same importance as fiscal, monetary, and employment policies. In 2022’s plan, it is listed, for the first time, shoulder-to-shoulder with the macro policies on fiscal, monetary, and employment issues, both as a key achievement of the government in 2021 and as a “macro policy orientation” for 2022.

Quick aside: Defining “energy security”

The classic definition of energy security consists of three “A”s: availability, accessibility, and affordability. As intermittent renewable energy like wind and solar are rapidly installed around the world, gradually replacing fossil fuels in the electricity mix, it poses new challenges in supplying consistent and reliable electricity. That explains why recent definitions from United Nations and International Energy Agency (IEA) complement “availability” with “reliability,” highlighting the importance of an “uninterrupted” or “continuous” supply of energy, and “variability,” suggesting to source energy from “all fuels” or “in various forms.”

In light of last year’s energy crunch, China’s policy measures on safeguarding energy security have mostly focused on two of the three “A”s — “ensuring energy supply” (“availability”) and “stabilizing energy prices” (affordability). “Accessibility” is much less of an issue in China, as the country provides universal energy services to its citizens and achieved 100% electricity access in 2015.

Beijing puts chips on coal

It seems Beijing has decided, at least for the near term, to bet on fossil fuels, particularly coal, to safeguard the country’s energy security. Ideally, China should be holding control of these energy supplies “in its own hands.”

The plan emphasizes once more the principle of “establishing the new before abolishing the old,” which was first articulated by Xi Jinping in August 2021. On March 6, 2022, during the Two Sessions, Xi reiterated this point, stressing the importance of “pursuing progress while ensuring stability step by step” in meeting the “shuang tan” goals of peak carbon by 2030 and carbon neutrality by 2060. He also said, “[We] cannot throw away our old household instruments before the new ones have arrived.”

These phrases are often interpreted as instructions to government departments not to phase down coal power before other clean energy sources can provide reliable and stable access. (In a speech to the World Economic Forum in January 2022, Xi used a slightly different phrasing of the above principle, but the change was not incorporated in any formal policy documents. Read my Twitter threads here and here for more context.)

Looking back at 2021, the state planner mentioned four key measures on safeguarding energy security, all related to coal: ensuring coal fuel supply for electricity generation, stabilizing coal prices, ensuring the supply of coal-fired electricity, and ensuring communal heating in northern China (83% fuelled by coal as of 2016).

Chinese leaders have referred to coal as the “ballast stone,” “stabilizer,” and the “last barrier” of the energy system, and coal power as the “backbone” of the electricity system. Similar statements are also frequently seen in articles or speeches by the energy administrator, as well as op-eds by Chinese scholars published in state-owned media. (More in last week’s newsletter.)

Hu Zucai, deputy director of NDRC, said in a press conference during the Two Sessions, “If coal price is stable, then power tariff will be stable, and the ‘fundamentals’ of energy prices will be stable.” (See my Twitter thread on the NDRC’s recent moves on securing coal supply here.)

China’s preference for coal is partly explained by the fact that the country has so much of it. Ninety percent of the coal it burns is mined domestically, compared to 28% for oil and 56% for gas. Europe’s months-long gas crisis and the soaring oil and gas prices following Russia’s invasion of Ukraine may well have further reinforced Beijing’s determination to prioritize coal to safeguard energy security. (The Russia-China energy trade will be the topic of an upcoming newsletter — stay tuned!)

Storage and support

In the plan, the state planner outlines four key tasks for “ensuring energy and resource security” in 2022, all focused on storage — coal storage, oil and gas storage, electricity storage that provides instant grid services, and infrastructure for longer-term storage, such as pumped hydro.

It’s worth noting that these measures on improving storage capacity are not just about making sure there are no supply shortages. The state planner makes it clear that coal and gas have roles to fulfill in stabilizing the electricity grid. The state planner wants urgency, using phrases like “as early as possible” and “at the earliest opportunity.”

The emphasis on storage aligns with China’s consistent technical pathway of leveraging its massive coal power capacity — half of the world’s total — to absorb more intermittent renewable electricity generated from wind and solar in the energy transition. In 2021, renewable energy (including hydropower) accounted for 44.8% of total installed power generation capacity but only generated 30% of electricity. (More energy and climate statistics in last week’s newsletter.)

At COP26 Glasgow, Prof. Wang Zhongying, director-general of NDRC’s Energy Research Institute, told me, “coal exit”, in the Chinese context, doesn’t mean shutting down coal power plants immediately, but instead, constantly lowering the operational hours, so as to keep a smooth, safe and efficient power system while absorbing more renewable energy. (The full transcript of the interview is available here.)

Climate goals are to be balanced

In the new plan, China’s carbon peak and carbon neutrality (“shuang tan”) climate goals are mentioned several times.

The state planner first states that the government needs to enhance its ability to “balance and coordinate multiple targets and policies.” In this context, it mentions “pointless formalities” and “bureaucratism” as “acute issues,” and criticizes local government officials who fail to “stay grounded in reality” and “act against the public will.”

Following the generic description, the state planner lists a few examples: some local governments use “one-size-fits-all” or “campaign-style” approaches, some “have yet to gain a correct understanding” of “shuang tan,” and some are “overly simplistic and mechanical” in policy implementation.

To tackle the above governance challenge, the state planner asks government officials to “acquire a sound understanding” of “major theoretical and practical issues” such as “shuang tan” and “common prosperity” — a slogan for lowering inequality. ​​

These examples all echo Xi Jinping’s address at the Central Politburo Meeting of the Communist Party of China (CPC) in July 2021, at which he emphasized carrying out “shuang tan” work in a “coordinated and orderly manner.” At that time, Xi’s comments were interpreted by scholars as the leadership “issuing strong caution on ‘economically and socially disruptive actions’ in emission reduction.” (More in the excellent explainer authored by Xiaoying You here.)

Finally, “shuang tan” appears as one of the four work areas in realizing an ecological civilization, a “major task” for 2022. Compared to last year, when “shuang tan” first appeared in the plan following Xi’s pledges in September 2020, the state planner has swapped the order of “shuang tan” and “the green transformation of economic development.” The climate goals, listed first last year, now come second after economic development. This subtle difference might indicate a decreased priority.

Climate is a task apart

The plan segregates “green economic policy” from “climate policy.” Policy instructions such as “[to] boost the development of energy conservation industries,” “[to] channel more financial resources into green and low-carbon industries,” and to make further progress in sorting scrap iron and steel, are grouped under “economic development.”

Fuel switching, energy efficiency improvements in energy-intensive sectors, and stepping up international cooperation on trade, technology, and finance, are grouped under “shuang tan.”

This gives me the impression that the state planner still views “shuang tan” and economic development as two parallel and non-overlapping areas of work. Even though pursuing a greener and lower-carbon economic development path will no doubt reduce emissions.

This might explain why economic and climate targets are seen as competing priorities that need to be balanced and coordinated, rather than seizing on the “shuang tan” goals as an opportunity to foster economy-wide decarbonization that creates emissions reduction, growth, and development at the same time. (Energy Foundation China illustrated such a “new growth pathway” for China in a 2020 report.)

Energy reform for short-term economic growth

Unlike previous years, this year’s plan doesn’t mention whether, in 2021, China met its goals on reducing carbon intensity and energy intensity, and doesn’t set new targets for 2022.

Instead, the state planner wants to reform the “dual-control” energy policy, China’s most important macro regulation on energy since its introduction a decade ago. “Dual-control” refers to controlling how much energy is consumed per unit of GDP (“energy intensity”), and overall energy consumption (“energy cap”). The plan includes mentions two reform measures, one for each:

  • There will no longer be hard annual energy intensity targets. Instead, it is to be “assessed with appropriate flexibility” during the current five-year plan (the 14th FYP runs from 2021 to 2025).
  • For calculating overall energy consumption, newly added renewable energy, as well as fossil fuels consumed as raw materials, are to be excluded.

The above measures are an extension of China’s ongoing reform on “dual-control” since September 2021. This is the first time that the policy’s methodology for calculating emissions and consumption is adjusted.

Chinese energy experts explain the exclusion of incremental renewable energy consumption in the energy cap as a measure to “encourage the development of renewable energy.” The exclusion of raw materials consumption is an act of implementing “meticulous” statistics, as processing fossil fuels releases much fewer carbon emissions than combustion. This measure should relieve the pressures on emissions reduction for enterprises processing fossil fuels as feedstock. (Read my Twitter thread here for more context.)

Professor Wang Yi, an influential Chinese scientist and politician, has argued it is “misleading” to control total energy consumption when China’s economic development has not yet decoupled with energy consumption. Under such circumstances, he thinks it makes more sense to control the total carbon emissions and total fossil fuels consumption. (The full transcript of my interview with Prof. Wang is available here.)

While the reform measures on the energy cap seem to align with the country’s energy transition and climate targets, the introduction of “appropriate flexibility” to the assessment of energy intensity over a five-year period has raised concerns. For example, Li Shuo, senior global policy advisor at Greenpeace China, thinks this “certainly opens up more space for energy-intensive growth.”

These reforms are listed as one of the seven “major objectives” for 2022, besides more quantitative goals such as those relating to GDP growth and the unemployment rate.

The state planner adds, there is a need to “provide reasonable leeway for energy consumption to ensure the steady performance of the economy” while “urging local governments to maintain their energy conservation efforts.”

This is an immediate example of how Beijing balances and coordinates multiple targets and policies: development vs. emission reduction, current needs vs. long-term benefits, and low-carbon development vs. ensuring energy security. The new language in this year’s plan suggests that, for the next few years, this balancing act is likely to lean toward short-term energy security to safeguard economic development rather than increasing ambitions for emissions reductions.

Cooling down on hydro and nuclear

Compared to the “vigorous promotion” of wind, solar, and biomass, the plan uses a much more conservative tone for hydropower and nuclear power.

On hydropower, it stresses to “proceed prudently” and “in accordance with local conditions.” In comparison, the 2021 plan said to promote hydro in a “scientific and orderly manner,” which is already a cooler tone from the “active and steady development” of 2020’s plan. In 2021, hydropower represented 16.4% of China’s total installed power generation capacity, generating 15.7% of the electricity, which makes it the single largest non-fossil energy source in China at the moment. (See more 2021 statistics in last week’s newsletter.)

China’s attitude to nuclear power is ever tightening. According to 2021’s plan, nuclear power should be “actively” developed while ensuring “safety.” This year, it should be developed “orderly” while ensuring “absolute safety.”

In 2021, nuclear power represented 2.4% of China’s total installed power generation capacity, and generated 4.7% of the electricity. The 14FYP aims for a total of 70 gigawatts (GW) of operable nuclear capacity by 2025. With 19.4GW of capacity under construction to be added to the existing 54.6GW of installed capacity, there doesn’t seem to be room left for any major new developments within the 14FYP.

An update on overseas coal power plants

In detailing measures to promote the “high-quality development of the Belt and Road Initiative” (BRI), the state planner says China will “help” with the green and low-carbon transformation of energy-intensive and highly polluting facilities abroad, “such as coal-fired power plants.”

It adds, China will “enhance the risk control and security safeguard systems” for BRI, and “take prudent steps” toward cooperation on health, green development, digitalization, and innovation.

This is probably the first time that the Chinese government has provided a follow-up on Xi Jinping’s announcement that “China will not build new coal-fired power projects abroad from September 2021. (For more context of the announcement, read my analysis here.)

In November 2021, the verbatim announcement was included in the country’s new National Determined Contribution (NDC) as part of its international climate commitments. However, Beijing has not provided any further clarifications or formalized the pledge by writing into a domestic policy document.

It is thus not clear how China plans to deal with the BRI projects that it has already financed or helped to build, or which had been planned prior to the announcement. According to a joint briefing by the Centre for Research on Energy and Clean Air (CREA) and Global Energy Monitor (GEM), this decision — if implemented — could remove two-thirds of planned coal-fired power plants outside China.

The plan doesn’t provide further explanation besides the short description. Read literally, I can think of a few possible directions of development in the BRI. 

First, China might start steering its foreign investment toward transforming the existing coal power plants abroad for basic security and power dispatch, similar to its domestic policy of retrofitting coal power plants. 

It might also increase its investment in transitional finance, to help hard-to-abate industries such as iron and steel, cement, and chemicals, improve efficiency and reduce emissions while meeting the demand for industrial products in the host country. The plan’s measures, coupled with Xi’s comments, made at the same occasion, that “China will step up support for other developing countries in developing green and low-carbon energy,” suggest China could start actively spreading the positive spillover effects of its domestic clean development to accelerate the global transition.

The article is written by Hongqiao Liu and edited by Kevin Schoenmakers. It was firstly published in the "Shuang Tan" newsletter on 11 March 2022. 

Published in Newsletter