Power Sector Futures in China: A Multi-Model Approach to Understanding China’s Carbon-Neutral Pathways and Power Sector Reform

Executive Summary:

This report outlines power sector reforms developing in China and the increasingly complex landscape of climate and energy policies intended to support carbon neutrality. It then presents two different but complementary energy-economy models of the energy transition and power sector in China: the REPO model developed by 3E at Tsinghua University and the E3ME-FTT:Power model developed by the University of Exeter and Cambridge Econometrics.

These models are used to illuminate possible futures for the Chinese power sector. In combination, they show that, whichever modelling approach we take, the impending dominance of solar and wind power in China is clear. However, the implications of this transition for costs and wider macroeconomic impacts are more subtle. Costs could increase or decrease depending on what pricing mechanisms are used and our assumptions about the exact power mix. Impacts on GDP and investment appear to be positive in high renewable scenarios, but the impacts on employment vary by sector and are more balanced in our analysis.

These findings have serious implications for a range of policy issues in China. They suggest power sector reforms, and specifically market-based pricing mechanisms, have the potential to support China’s carbon neutrality goal. They also make clear the role of the ETS in supporting the goal, through a meaningful carbon price. Finally, both sets of analysis make clearer than ever the need to address a range of potential barriers to rapid deployment of renewables, whether financial, technical, legal or otherwise.