Regulatory Strides and Market Impacts of China's Green Electricity Certificates Scheme

Regulatory framework for the GEC scheme

In China, Green Electricity Certificates (the “GECs”) are recognized as the sole proof of the environmental attributes of green electricity, serving as the only evidence for the production and consumption of green electricity. Since its inception in 2017, China's GEC scheme has undergone significant changes. Initially, the GEC was introduced to alleviate the financial burden on the government by shifting renewable energy companies’ reliance on state subsidies to private funds by encouraging market transactions. While renewable energy companies can sell their GECs and earn a profit, they are no longer entitled to the subsidies for the corresponding green electricity once the GECs are sold. Despite the effort, the GEC market faced challenges due to a lack of incentives, pricing mechanisms, and international recognition. To address these issues, the Chinese government implemented several key regulatory reforms since 2019 to enhance the appeal and functionality of GECs.

One of the key policy changes was the integration of GECs into the mandatory renewable energy consumption guarantee mechanism. This integration was formalized by the Circular on Establishing and Improving the Mechanism for Guaranteeing the Consumption of Renewable Energy issued by the National Development and Reform Commission (the “NDRC”) and the National Energy Administration (the “NEA”) on May 10, 2019 (Fa Gai Neng Yuan (2019) No.807) (the “Circular 807”). Under Circular 807, each province is required to meet its annual renewable energy consumption target, known as the renewable energy consumption weight.  The integration enables market entities to fulfill their renewable energy consumption obligations by one of three ways, (i) consuming renewable energy, (ii) purchasing surplus consumption or (iii) purchasing GECs. Since its implementation, such linkage of GECs to renewable energy consumption obligations has further encouraged participation in GEC trading.

On July 25, 2023, the NDRC, the Ministry of Finance (the “MOF”), and the NEA jointly issued the Circular on Achieving the Full Coverage of the Renewable Energy Green Electricity Certificates and Promoting the Renewable Energy Electricity Consumption (Fa Gai Neng Yuan (2023) No.1044) (the “Circular 1044”). This landmark policy marks the expansion of the GEC scheme to include all forms of renewable energy projects, such as wind (both onshore and offshore), solar (distributed and utility-scale), biomass-to-power, geothermal, wave power and  fully-marketized conventional hydropower projects that has commenced operation since 2023. Additionally, Circular 1044 sets out fundamental rules for GEC’s issuance and trading protocols in order to create a robust GEC market. Furthermore, on April 26, 2024, the NEA issued the draft Rules for Issuance and Trading of Renewable Energy Green Electricity Certificates (the “Draft Rules”), which reinforces and supplements the fundamental principles set out in Circular 1044 regarding the issuance and trading of GECs.

Key Features of the GEC Scheme

The above legislative developments significantly enhance and clarify the regulatory framework of the GEC scheme in China. Key features of the scheme include:

Dual Certification Status of GEC

Circular 1044 establishes the GEC as the exclusive proof of the environmental attributes of green electricity in China, granting it "dual certification" status. This makes GECs the sole credential for recognizing the production and consumption of green electricity in China.

Issuance of GEC

GECs are valid for a period of 2 years, starting from the natural month of electricity generation. The NEA issues GECs monthly for electricity produced by qualified renewable energy projects, with each GEC representing 1,000 kWh of green electricity. The issuance process relies on data from grid companies and electricity trading platforms, verified by the energy producers or project owners. This process is coordinated through a national GEC issuance and trading system managed by the NEA. To ensure the traceability of GECs, the NEA has established a unified numbering system. The NEA is also tasked with setting technical standards for encryption, anti-counterfeiting, and the sharing of GEC-related information.

Trading of GEC

Circular 1044 and the Draft Rules establish the framework for trading GECs. Sellers, primarily renewable energy companies registered with the NEA, engage in GEC transactions with a diverse group of buyers including government agencies, multinational corporations and their suppliers, technology companies, manufacturing companies in high-energy-consuming industries, energy companies, and individuals in the PRC. Transactions are facilitated through platforms like the GEC Trading Platform, Beijing Power Exchange, and Guangzhou Power Exchange. Currently, foreign companies are not able to purchase GECs through these platforms.

The trading mechanisms on trading platforms at this stage include transactions concluded through bilateral negotiation, where parties agree on prices and quantities and complete transactions via trading platforms, and real-time bidding of listings provided by sellers, with listing agreements for real-time transactions prioritized by price. It is envisaged that centralized bidding, which involves a centralized exchange where buy and sell orders are collected, matched, and executed based on price and time priority, will be introduced when the market matures. Transaction parties have the option to settle payments either through the platforms or by other means.

Green Electricity vs. GECs

Under the current regime, market players can engage in renewable energy through purchasing green electricity or purchasing GECs, each offering unique benefits and challenges. Green electricity transactions, also known as the “certificate-with-electricity” approach, involve the direct purchase and use of electricity generated from renewable sources, linked with the issuance of the corresponding GECs to the buyer. This ensures that the environmental benefits of the electricity used are directly attributable to the buyer, promoting transparency and accountability. This "certificate-with-electricity" approach guarantees that companies are not only claiming the consumption of, but are actually consuming, green electricity. However, this approach also faces a number of limits such as the supply and demand imbalance in China’s green electricity market that necessitates inter-provincial trading, complicated by different regional regulations, price disparities, and power transmission constraints. On the other hand, GECs provide a more flexible method for companies to claim renewable energy consumption, which is particularly beneficial for those facing practical challenges in procuring green electricity, for example, companies in regions with limited green power infrastructure or where the direct integration of renewable sources into their operations is impractical.

In short, both green electricity and GECs aim to enhance corporate consumption of renewable energy, but the choice between them hinges on specific operational, geographical, and strategic considerations. Green electricity offers a direct, impactful method that aligns with actual power usage, while GECs provide better accessibility and ease of transaction, making them suitable for companies facing logistical constraints or those positioned in less developed green energy markets.

Implications of Regulatory Developments on the Market Dynamics of GEC Trading

Circular 1044 exemplifies China's dedication to evolving its GEC scheme to match the dynamic renewable energy sector. This regulatory advancement is designed to expand GEC supply channels, broaden their scope of application, and integrate them with the overall carbon emission management strategies. Since the implementation of the above changes, GEC issuance skyrocketed from 20.6 million in 2022 to 176 million in 2023, marking an 8.5-fold increase. Trading volumes similarly rosed from 9.69 million in 2022 to 24.56 million in 2023. We anticipate further detailed regulations and policies to be issued, refining the GEC scheme. We will continue to keep a close eye on these developments and provide updates as they unfold.