China expands eligible project types for domestic renewable energy certificates

China has expanded the scope of its domestic renewable energy certificate scheme to include all types of renewables projects, in addition to only solar and onshore wind projects previously, top economic planner National Development and Reform Commission (NDRC) said on its website late-Aug. 3.

Under the expanded scheme, all renewable energy projects will now be eligible to generate Green Electricity Certificates, or GECs, which are bought by Chinese companies to certify that their electricity consumption from renewable energy sources.

One GEC represents 1 MWh of renewable electricity consumption and can be traded in the open market. The trade volume of GECs increased by 15.8 times on the year in 2022 to 9.69 million, representing 9.69 TWh of renewable electricity consumption.

"Extending issuance eligibility to other renewable energy projects would allow better tracking and reporting of renewable power consumption and ease the challenges for companies on carbon accounting and reporting, incentivizing accelerated Scope 2 emission reductions," said Caroline Zhu, senior analyst with S&P Global Commodity Insights.

"PPA [power purchase agreement] has been acknowledged in CBAM [carbon border adjustment mechanism proposed by the EU], while calculation methodology details remain unknown. Developing a credible tracking system could better prepare local manufactures for the upcoming policy announcement and enforcement," she added.

Increasing GEC supplies

More eligible projects will result in a substantial increase in the supply of GECs, which is in line with the government objective to expand the GECs scheme to make it the primary renewable energy certificate scheme in China, according to market participants.

Zhu said this updated GEC policy was in combination with the government’s earlier announcement that enabled older wind and solar projects under the government’s subsidy scheme to trade GECs as well as continue receiving subsidies, while the subsidy amount for such a project will be reduced to the initial subsidy level minus the GEC’s settlement price.

In the past, these subsidized projects cannot apply for GECs, otherwise they needed to give up the subsidies.

"Overall, the industry has mixed feeling on the GEC scheme refresh," said Peng Chengyao, director for Greater China power & renewables research and analysis with S&P Global.

"The inclusion of all types of renewable generation has been longing for, however, GECs price will be very likely hammered if subsidized wind/solar projects can also trade GECs while claiming the remaining portion of subsidy as usual," she explained.

"In short term, oversupply of GECs is foreseeable," she concluded.

In the past month, the average price of one solar GEC was Yuan 41 ($5.71) and one wind GEC was Yuan 66.5 ($9.26), statistics from the official trading platform showed.

Paramount role of GEC

GECs will be viewed exclusively as the "the only proof of the environmental attributes of electricity in China" and "the only certificate that validates renewable electricity consumption," according to the joint statement from NDRC, Ministry of Finance, and National Energy Administration (NEA).

NDRC said GECs will be positioned as "the fundamental proof of the consumption of renewable energy in China" implying strong government backing for the instrument.

State-owned enterprises, top industrial firms and trade-exposed companies should take the lead in increasing their green electricity consumption and GEC procurements, NDRC’s statement said.

The government backing is a strong signal to both renewable project developers and corporate buyers of certificates to prioritize the issuance and procurement of GECs as opposed to other renewable energy certificates in the market, such as I-RECs, which tips demand and prices in favor of the domestic scheme, market participants said.

The new GECs policy comes after NDRC had issued a high-level guideline on the expanded scope in November last year to reform the GEC market.

"Some buyers could still prefer I-REC due to cost competitiveness, only if credibility is secured," Zhu said.

Details for implementation

The GEC market will continue to be supervised by NEA, and certificates can be traded through the national online trading platform, as well as the pilot power exchanges in Beijing and Guangzhou, NDRC said.

It said GECs can be traded through bilateral agreements, listed transactions and auctions, but can only be traded once, implying that currently there’s no secondary market.

"Power exchanges have been actively facilitating GEC deals already and green power trading would be backed with GECs. Green power trading has offered bundled purchase [with GECs]," Zhu said.

Income from selling GECs belongs to the power generation company or renewable project owners, as an additional revenue stream besides selling the renewable electricity, the government said.

The eligible project types no include solar, wind, conventional hydropower, biomass, geothermal, and marine energy projects, the announcement said. For hydropower, tradable GECs will only be issued to new projects that start operation after Jan. 1, 2023, the government highlighted.

This is likely due to the large number of hydropower projects that generate a lot of renewable energy, and could flood the market with GECs, causing further price disruptions, if tradable GECs were issued to all existing projects.

Coordinating with carbon market

Coordinating the domestic carbon market and the GEC market will be an important area for the government.

As China’s compliance emission trading scheme or ETS expands, it needs to be clarified whether the industrial sectors can procure renewable electricity and use GECs to reduce their ETS-liable emissions, especially for sectors like electrolytic aluminum with large emissions from power consumption.

"GECs have been acknowledged in Tianjin’s regional [ETS] carbon market," Zhu said.

Meanwhile, the domestic voluntary China Certified Emission Reduction or CCER market, is about to restart. It needs to be clarified whether conventional solar, wind, hydro projects can still generate CCERs like the old system paused in 2017. If so, countermeasures will be needed to avoid double counting of emission mitigations from GEC and CCER markets.

The policy did not call out details on the CCER market despite that renewable projects have contributed a high share in historical CCER supplies, Zhu pointed out.

Both the domestic compliance and voluntary carbon markets are supervised by a different government body, Ministry of Ecology and Environment or MEE. Integrating different climate policies and environmental markets need cross-functional coordination within the central government.