China to Invest $800 Billion in Power Grid Overhaul

27

China’s electricity grid is on the cusp of a monumental investment surge, with over $800 billion earmarked over the next six years to bolster its infrastructure in the face of a rapid transition from coal to renewable power sources.

In the first four months of this year alone, China allocated Rmb122.9 billion ($17 billion) to power grid projects—a 24.9% increase from the previous year. This stands in stark contrast to the $3.5 billion investment announced by US President Joe Biden’s administration last October, aimed at enhancing 58 projects across 44 states.

Follow us on Google News! ✔️


Forecasts from research group Rystad Energy indicate China’s capital expenditure on the grid will escalate from approximately $102 billion this year to $157 billion by 2030. However, despite this hefty spending, the distribution and transmission endures escalating pressures. Over the past year, more than 100 counties and cities across five provinces have halted new small-scale solar projects from connecting to distribution lines.

At least 12 of China’s 34 province-level regions have either incentivized or mandated solar operators to incorporate battery storage to mitigate grid burden, signaling that grid capacity has hit its limits in numerous areas.

Yunnan, a financially troubled southwestern province, is bracing for a potential 10% power shortfall despite doubling its renewable energy capacity last year. Similarly, Qinghai in the northwest faces significant wastage of daytime solar-generated power, compelling the province to buy coal-generated electricity from neighboring areas to meet evening demand.

“The current level of spending isn’t keeping pace with how fast China’s solar and wind capacity is expanding,” said Xuyang Dong, a China energy analyst at think tank Climate Energy Finance.

China has contributed over one-third of the world’s transmission grid expansion in the past decade, according to the International Energy Agency. The country boasts the highest proportion of transmission lines less than ten years old globally, including over 500,000 km of lines connecting resource-rich western and northern provinces with the major demand centers in the east.

Demand for electricity is surging, driven by needs for artificial intelligence, data centers, and electric vehicles, elevating electricity’s share of energy use from 12% in 2006 to 19% in 2023. The first four months of 2024 saw electricity demand growth at 7.4% year-on-year, outpacing first-quarter GDP growth of 5.2%.

“With electricity demand rising due to the ‘electrification of everything,’ it’s vital for China to prioritize upgrading and modernizing its power grid and deploying adequate battery storage capacity to plateau coal use soon,” Dong added.

In response, Beijing has ramped up its investment in grid hardware, software, and market systems to deliver power efficiently to its 1.4 billion people. President Xi Jinping has set an ambitious dual target of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060. Overcoming grid constraints is essential to meeting these goals.

Despite these efforts, Fitch Ratings warns that short-term solar and wind power curtailment rates in China are likely to rise as the pace of renewable energy additions surpasses system upgrades. In 2023, China accounted for 65% of global wind capacity and 60% of global solar capacity, according to Wood Mackenzie. Solar curtailment rates at a national level doubled to 4% in the first quarter of this year.

Ken Liu, head of China renewables, utilities, and energy research at UBS, emphasizes the need to improve the dispatch system that manages electricity flow to users. Liu estimates that up to 15% of China’s grid capital spending will go towards dispatch systems, another 15% to ultra-high voltage lines, 30% to local distribution systems, and the remaining 40% to building more transmission lines.

“The grid must be more advanced,” Liu said. “Electrification is happening faster than many expected, and AI development is advancing even faster.”

However, Liu also cautioned that China faces significant delays in securing transformers, critical equipment that adjusts voltage levels. The share prices of top companies in this sector, including Sieyuan Electric and Shanghai Huaming Power Equipment, have soared by over 600% and 300% respectively over the past five years.

A boom in energy storage, primarily through large battery packs for grid-level storage, is projected to alleviate the supply-demand imbalance over time. Goldman Sachs analysts predict a 70-fold increase in battery storage by 2030 from 2021 levels.

Dong noted a significant shift in the scale of solar operations last year, with utility-scale solar capacity rising to 120 GW from 36 GW the previous year, surpassing smaller rooftop solar installations, which grew to 96 GW from 52 GW. This shift is expected to relieve some pressure on local electricity distribution systems over time.