Need to Know: Energy and the 14th China 5-year Plan

Just over three weeks ago, the fifth plenary session of the 19th Communist Party Central Committee was held by the Chinese Communist Party (CCP).  Overseen and presided over the Chinese General Secretary Xi Jinping, the plenary session has two overarching functions – to take stock of the outcomes and results of the previous 13th five-year Plan spanning 2016 to 2020, and to consider a proposal for a 14th 5-year plan from 2021 – 2025.  

The process for the 5-year Plan is uniquely, and perhaps surprisingly to many, consultative. In the period August 19 to August 29, around 1 million suggestions for the Plan were received via an internet-based platform from China’s roughly 400 million households.  The Plenary process, held at a Hotel in Beijing with no media or observers, considered and revised the draft Plan, with the final Plan to be approved in late March 2021 at which time targets will be published. The Plenary process does, however, produce a communique which provides advance notice of broad directions. Based on those, the future for energy, at least where China is concerned, looks overwhelmingly green. 

Balancing Innovation, Development and Sustainability at Pace

One of the challenges in growing any economy is balancing the need for power with the price of power and the environmental sustainability of producing that power. These three aspects of the trilemma are based on an old benchmark that 100MW of power is needed for USD$1Bn of GDP; one cannot produce goods when the lights are out. The announcement by Mr Xi in September that China would be net zero by 2060 is therefore a leading indicator on the direction and momentum of travel in terms of how China intends to balance these goals. These goals are ambitious and transformational - meeting net zero will require roughly 1900 GW of additional renewable capacity to be built in China between now and 2060.  

The Plenary communique makes clear that innovation, regional coordination, green development, international openness, and social equity will be critical areas of focus for China over the next 5 years, with a particular emphasis on strengthening the domestic economy.  On green power specifically, the translated communique noted “…during the 14th five-year Plan period, there is a strong emphasis on the concept of "green development", and the "energy revolution" is one of the three focal points of industrial upgrading. "Green development" has become the means and proper meaning to promote high-quality development, and the environmental protection policy is becoming institutionalized”. 

As the Chinese proverb says “one bee alone cannot produce honey”; China does not stand alone in its commitment to change. Sweden (2045), United Kingdom (2050), France (2050), Denmark (2050), New Zealand (2050), Hungary (2050), China (2060) and Japan (2050) are already committed to net zero and a Biden administration has strongly committed to a lower carbon pathway. The implications of a Chinese 5-year plan which entrenches this scale and momentum, however, are especially significant. China has both the market size to impact technological costs faced elsewhere in the world, and coupled with a focus on innovation, may break new ground technologically for scale application of new energy systems. China will, for example, add between 30 and 40GW of new solar capacity this year alone, and is estimated to add between 40 and 50GW in 2021. Although this is significant (almost the size of the Australian NEM), it will need to be matched each year to meet a net 2060 target.

Implications for Australian Utilities from the 14th Plenary Communique

There are several things that Australian utilities should watch carefully for in further announcements leading to March 2021:

1. Firstly, industry should watch carefully whether China elects to favour nuclear or renewables, whether it seeks to invest in scale hydrogen/ammonia supply chains, and how it intends to balance the choices between batteries and natural gas for peaking, a subject of intense debate in Australia. These choices will drive scale in new technologies, change the competitive landscape for companies exporting hydrogen, and alter the outbound investment behaviours of Chinese State-owned enterprises; and
2. Secondly, industry should watch for changes in China's clean energy targets, or the phasing in of earlier milestones. China’s existing targets of 20% of energy consumption to come from renewables by 2030, for example, may no longer be ambitious enough – the country reached 15.3% in 2019. It is possible that 2025 targets may be added to drive momentum. These both drive the choices made within China as well as the environment for international agreements. 

We are living in changing times. Strategy within utilities is now, more than ever before, a dynamic process of scenario setting and the careful establishment of data driven watchtowers spanning not only technological advances and costs, but the complex evolution of a net zero political, insurance, lending, investing and stakeholder environment. For utilities basing their strategies on AEMO’s Integrated System Plan (ISP) central or fast change scenarios, what China does in March 2021 will matter for two reasons. 

Firstly, a united China/US approach on clean energy targets may alter, for example, AEMO’s most likely scenario away from central and towards fast or step change, which will guide policy and rule changes towards these outcomes. 

Secondly, large trading partners cannot help but add momentum to the prospect of targets in Australia, either explicitly or driven through financial markets. These factors drive closure timetables, decommissioning budgets and transformational agendas for incumbents; decision pathways which are already struggling to navigate shareholder requirements and first time minimum demand events. 

The Government of China has made clear its intentions; the 13th Plenary set out a clear plan for the changes in domestic scientific, commercial and institutional focus that were required to best position China as a net exporter, and saw China shift its focus to life sciences, deep expertise technologies and renewable energy. The 14th Plenary looks set to continue this focus - the Draft 14th Plenary Proposal contained no less than 19 mentions of "green growth" and 47 mentions of "innovation", with a clear intention to lead the world in new technology and focus in these areas. Industry would do well to take notice.

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