China is rapidly transitioning from coal-fired power to renewable energy and plans to make unprecedented investments of more than $800 billion in its power grid over the next six years to overcome strains on its energy system.
China’s aging power grid is a major obstacle to its green energy transition. In the first four months of this year alone, China invested 122.9 billion yuan ($17 billion) in power grid projects, up 24.9% from a year earlier. That compares with $3.5 billion for 58 projects in 44 states announced by U.S. President Joe Biden’s administration in October.
China’s projected capital spending is set to rise to $157 billion by 2030 from about $102 billion this year, according to data from research group Rystad Energy.
But despite China’s big spending plans, there are signs of growing pressure on electricity distribution and transmission: Over the past year, more than 100 counties and cities in five provinces have stopped connecting new small-scale solar power plants to grids.
At least 12 of China’s 34 provincial-level administrative regions are encouraging or requiring solar power producers to use battery storage to ease strain on local power grids, indicating that many areas are reaching their limits.
You’re seeing a snapshot of an interactive graphic. This may be because you’re offline or have JavaScript disabled in your browser.
China’s debt-ridden southwestern province of Yunnan could face a shortfall of around 10 percent in electricity supply this year, despite doubling its renewable energy capacity last year, local media reports said.
The situation is similar in northwest China’s Qinghai province, where much of the electricity generated by solar plants there goes to waste during the day, forcing the province to buy power from coal-fired plants in neighboring provinces to meet its nighttime demand.
“Current spending levels are not keeping up with the rate at which China is adding new solar and wind capacity,” said Shuyan Dong, a China energy analyst at Climate Energy Finance, a think tank.
China has accounted for more than a third of the world’s power grid expansion over the past decade, and according to a report by the International Energy Agency, it has the highest percentage of power lines in the world that are less than 10 years old.
This will include more than 500,000 km of railway lines connecting the energy-rich western and northern states with the largest demand centres in the east.
Dong noted that the power needs of artificial intelligence, data centers and electric vehicles are accelerating a long-term rise in electricity’s share of energy use, which will grow from 12% in 2006 to 19% by 2023.
Electricity demand growth in the first four months of 2024 was 7.4% year-on-year, outpacing first-quarter GDP growth of 5.2%.
“As electricity demand grows due to the ‘electrification of everything,’ it is essential that China prioritizes power grid construction, upgrading and modernization, and deploys sufficient battery storage capacity to curb coal use in the foreseeable future,” she added.
Against this backdrop, Beijing has once again increased spending on power grid hardware, software and market systems to efficiently supply electricity to the country’s 1.4 billion people.
President Xi Jinping has set a dual goal for China to peak its carbon emissions in 2030 and achieve carbon neutrality by 2060. Overcoming grid constraints will be crucial to meeting these demands.
Despite this acceleration, Fitch Ratings predicted that China’s solar and wind power curtailment rates will rise in the near term as the aggressive rate of renewable energy additions outpaces power system upgrades.
China will account for 65% of the world’s wind power capacity and 60% of the world’s solar power capacity in 2023, according to research group Wood Mackenzie.
Fitch analysts noted that national solar curtailment rates doubled to 4% in the first quarter of this year, as renewable energy capacity additions continue to set new records.
A key challenge will be improving the dispatch systems, or software, that control the flow of electricity to residential, commercial and industrial users, said Ken Liu, head of China renewables, utilities and energy research at UBS.
Liu expects 15 percent of China’s total power-grid capital investment will be allocated to the software, with another 15 percent going to extra-high voltage lines, 30 percent to local-level distribution systems and the remaining 40 percent to building more transmission lines, he estimates.
“The grid needs to get better,” he said. “Electrification is happening faster than a lot of people expected from a demand perspective, and AI is developing a lot faster than people expected.”
But Liu also warned that China has been plagued by years of delays in the supply of transformers, switches that can turn voltage up or down.
The shares of the sector’s two top companies, Coyuan Electric and Shanghai Huaming Power Equipment, have risen more than 600% and 300%, respectively, over the past five years.
“Making these transformers has proven difficult. They all have to be made to order,” he said. “The delay in ordering these transformers is [waiting times for world leading] “It’s an Nvidia chip.”
A surge in energy storage, primarily large battery packs for grid-level storage, should ease the supply-demand mismatch on China’s power grid in the long term: Goldman Sachs analysts predict battery storage will be 70 times larger in 2030 than in 2021.
Dong, the Climate Energy Finance analyst, also noted that there has been a “notable shift” in the scale of solar power generation in China last year.
Utility-scale solar PV grew to 120 GW from 36 GW a year ago, overtaking the increase in small-scale distributed solar PV (mostly rooftop) from 52 GW to 96 GW. Over time, this change is expected to further relieve some pressure from the local electricity distribution system.
Climate Capital
Where climate change meets business, markets and politics. Read the FT’s coverage here.
Interested in FT’s commitment to environmental sustainability? Find out more about our science-based targets here.
