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"Dual control" to reduce energy intensity and to limit total
energy consumption is a key measure that the Chinese government
implements to help meet its energy and climate goals. Despite a
policy tool implemented five years ago, on 3 June and 12 August
2021, the National Development and Reform Commission (NDRC) issued
the quarterly reviews of the target achievement for the first time,
with progress alerts upon provinces. On 16 September 2021, the
policymaker released "The Scheme to Refine Dual-Control of Energy
Intensity and Total Energy Consumption" (the Scheme). Just days
after that, some provinces with "progress alerts" started to employ
power rationing and production curbs.
China's dual-control policy on energy consumption was first
implemented in 2016 during the 13th FYP, but the energy intensity
target has a longer history that dates to 2006 during the 11th FYP.
Under the current dual-control mechanism, lowering energy intensity
is given a much higher policy priority compared with controlling
total absolute energy consumption.
In addition to power market fundamentals, meeting 2021
dual-control targets is also an important driver of power
rationing
China has been able to steadily bring down its energy intensity
level in the past decade thanks to the continuous energy efficiency
enhancement of the industrial sector as well as the expansion of
the less energy-intensive services sector.
However, the COVID-19 outbreak has created a strong counterforce
that has disrupted this declining trend. Exuberantly upbeat
manufacturing activities and the yet-to-fully-recover services
sector have combined to tilt China's energy intensity balance
towards the heavier end, shoveling up the market's total power
consumption to a decade-high growth of 17% in the first half of
2021. This has made reducing energy intensity particularly a
challenging task for this year especially for many of the
manufacturing-reliant provinces.
This challenge is met with China's ambitious carbon pledges that
have turned energy consumption control into a highly prioritized
nationwide campaign, essentially forming a strong "policy crunch"
against underperforming provinces that has forced them to resort to
power rationing to meet dual-control targets. This has coincided in
time and contributed to the severity and scale of a recent wave of
power outages sweeping across two-thirds of the region, of which a
shortfall in coal supply is believed to be the chief cause.
Dual-control-induced power rationing is expected to be
rather short-lived
However, IHS Markit expects that the recent round of
dual-control-induced power rationing and production curbs will be
relatively short-lived and is expected to be gradually lifted
during the fourth quarter. The manufacturing sector is expected to
cool off into next year thanks to the moderation of export demand,
while the services sector will continue to rebound to reshuffle
some of the energy use toward less energy-intensive ends. This will
make it directionally easier for provinces to meet their
dual-control targets next year, reducing their likelihood of having
to resort to last-minute control measures.
Even if conditions render such actions necessary in the future,
IHS Markit expects the rationing will happen over a more limited
scale and time horizon. The governments will likely adopt a more
forward-looking, proactive, and differentiated approach in managing
their province's energy use profile.
The dual-control mechanism will remain a primary
long-term policy tool to meet the market's energy and climate
targets
Looking beyond just the recent scramble, IHS Markit expects the
dual-control policy will be one of the primary long-term tools that
the Chinese government will use to meet its energy and climate
targets. It is no easy task for an economy as grand and complicated
as China to regear itself from the traditional energy-intensive
development pathway to a low-carbon and clean future, and the
market's ambitious carbon pledges have simply made this process all
the more urgent and necessary. Various forms of control measures
are therefore needed to facilitate and accelerate the much-needed
transition so that China could land on a lower-carbon emissions
peak before it sets out to neutralize the emissions. In this
context, the strong synergy between energy consumption and carbon
emissions has enhanced the priority level of this dual-control
policy. Moreover, at this stage, energy conservation policy is a
more effective tool compared with direct carbon emissions
reduction. The policy already has a history of more than 15 years
in China, and the market has maintained a much more developed
measurement, reporting, and verification system on energy intensity
and energy consumption compared with that on carbon emissions.
The scheme promotes renewable use and supports the
development of strategically important projects
To accommodate and balance the need to control energy
consumption and to maintain high-quality economic growth, the
Scheme has put in place several mechanisms to enhance the
flexibility in the implementation of the total energy consumption
cap.
The scheme promotes the use of renewable power by linking the
energy consumption targets with renewable portfolio standard (RPS)
targets. If a province's total renewable use exceeds its extended
RPS target, then the province can have the part of renewable power
consumption that exceeds its base RPS target to be exempted from
the accounting of total absolute energy consumption.
Projects that are designated as strategically important and
approved by the State Council and NDRC can be exempted from the
province's energy intensity and consumption evaluation.
