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Environment

China's Energy Dilemma: Surge in Renewable Usage Leads to Market Challenges

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Lauren Miller

May 7, 2024 - 05:52 am

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China's Renewable Surge Overwhelms Green Certificate Market

In the bustling metropolis of Shanghai, China, towering cooling systems rise against the backdrop of a city under siege by relentless heat. These giants, part of a thermal power plant, have seen their activity skyrocket as a persistent high-temperature wave grips Southern China. The increased usage, spurred by the citizens' need for air conditioning, is pushing power generation to record-breaking levels, leading to blackouts in some areas due to the overloaded power network. An arresting image of these cooling towers, captured by Qilai Shen of Bloomberg, encapsulates the mounting strain on China's energy infrastructure.

Cooling towers of a thermal power plant in Shanghai, China

The Decline of Green Electricity Certificates

As China makes strides in its quest for green energy, its commitment has spawned a paradoxical effect in a niche market for clean power. This shift is prominently reflected in the plummeting prices of Green Electricity Certificates (GECs), which have reached an unprecedented low. Recent data from an online trading platform reveals that the average daily transaction price for GECs sank to a mere 0.82 yuan per megawatt-hour, marking a stark decline from the 22 yuan per megawatt-hour average in February, according to insights from BloombergNEF.

GECs function as both environmental aids and financial instruments. Generated alongside renewable energy, entities invested in green energy production can sell these certificates, while buyers use them to counterbalance their carbon emissions. These transactions could enable wind and solar farm proprietors to procure additional income beyond the standard grid electricity sales.

Surging Demand Versus Escalating Supply

Demand for GECs skyrocketed to over 36.3 million certificates last year, jumping from roughly 3.9 million the previous year. BloombergNEF attributes this surge to governmental expansion of applicable sectors for GECs, including meeting mandatory decrees on reducing carbon emissions intensity.

However, this spiraling demand is increasingly overshadowed by a massive supply, spurred on by China's accelerated rate of renewables installations. Despite a likely impact from decreased trading activity over a public holiday, the low price of GECs is symptomatic of a broader trend, a nosedive from approximately 50 yuan a megawatt-hour in 2021.

The prevalence of an oversupply is evident and potentially persistent. As of late March, only about 13% of the total supply of GECs had been traded nationwide, projecting a continuation of the glut, as detailed by BloombergNEF.

Imperative International Climate Dialogue

In a world grappling with the specter of climate change, high-stakes meetings of major greenhouse gas contributors carry significant weight. This week, top climate negotiators from China and the United States are poised to convene in Washington D.C. The agenda for these crucial talks includes a range of vital topics, from curtailing potent pollutants that contribute to global warming to advancing energy efficiency and addressing other pressing environmental concerns.

Revival of China's Trade Performance

Another key event on the horizon is the release of China's trade data for April. Indications from Bloomberg Economics suggest a return to year-on-year increases in exports and imports. The anticipated recovery can be partially credited to comparisons against less robust previous periods.

Xi Jinping's Call for Global Cooperation

Chinese President Xi Jinping's recent outreach to France embodies China's endeavor to navigate the icy waters of international politics. With the European Union showing greater concordance with U.S. apprehensions over security risks and trade tensions, Xi urges collaboration to stave off what he perceives as the emergence of a "new Cold War."

Prospective Economic Events and Data Releases

A dynamic week awaits, filled with diverse summits and briefings that could influence both regional and global markets. Below is a chronological outline of the key events:

Tuesday, May 7:

Events in the resource sector will kick off in Perth with the Energy and Mines Australia Summit, continuing through May 8. Concurrently, Jakarta will host the Nickel Producers, Processors & Buyers Conference, signaling the importance of nickel in the evolving energy landscape. Economic observers will also eye China's foreign reserves data for April, inclusive of gold holdings.

Adding to the business activities, solar companies, including Jinko and Trina, are set to engage with stakeholders in a post-earnings briefing facilitated by the Shanghai Exchange at 15:00.

Wednesday, May 8:

The weekly online briefing by CCTD on Chinese coal at 15:00 is expected to furnish valuable insights into China's coal industry, reflecting the country's ongoing energy mix transformation.

Thursday, May 9:

A breadth of trade data awaits, encompassing China's initial batch of April figures, including imports of steel, iron ore, and copper, as well as exports of steel, aluminum, and rare earth elements. The energy sector's eyes will be on statistics for imports of oil, gas, and coal, along with imports and exports of oil products. The slate also features soybean, edible oil, rubber, and meat & offal imports.

Additionally, China will disclose April aggregate financing & money supply data by May 15, further illuminating the financial landscape.

Friday, May 10:

The monthly CASDE crop supply-demand report from China will be released, offering perspectives on agricultural production and potential market impacts. There will also be updates on China's weekly iron ore port stockpiles and the Shanghai exchange's commodities inventory update around 15:30.

Saturday, May 11:

The week will culminate with China's unveiling of inflation data for April at 09:30, which could indicate the trajectory of economic policy.

All times are noted in Beijing local time unless otherwise specified.

Conclusion

To encapsulate, China stands at the nexus of intensifying struggles – grappling with the consequences of its own growth and burgeoning renewable energy sector. The nation’s renewable trajectory reflects its broader economic pulses and international posturing, from trade dynamics to geopolitical tensions.

The landscape of renewables and clean energy certificates reflects China's ongoing journey towards sustainable development, coupled with the pressing need to address the intricacies of market forces in balance with environmental stewardship. As the global community looks to China on various fronts, from climate change initiatives to economic forecasts and global diplomacy, the nation remains a focal point of interest and influence.

For the full image shared by Bloomberg, visit here: Cooling towers image.

This comprehensive outlook—addressing the decline of green electricity certificates, imminent climate negotiations, trade dynamics, and a suite of pivotal economic events—conjures a broad, yet intricate narrative. China's responses and strategies moving forward will undoubtedly reverberate across the global stage.