What Do the Data Reveal about China’s Evolving Energy System

Critical Questions by Ray CaiandJoseph Majkut

Published July 30, 2024

In a historic first, China identified emission reduction and climate change response as priorities at the recent Third Plenum of the 20th Party Congress. The scale of its energy system means that leaders around the world are keen to understand China's evolving energy strategy and assess whether the country can move from a carbon-intensive economic growth pathway to a new model of green development. In this analysis, CSIS experts examine recent trends reported in the Energy Institute's Statistical Review of World Energy to see if data can help develop an accurate picture of China's energy future.

Q1: What is the state of energy in China?

A1: China's energy consumption and emissions rebounded in 2023 as its economy continued to recover from the Covid-19 pandemic. Total energy consumption increased 6.5 percent year on year compared to the 10-year average of 3.4 percent, according to the Energy Institute. Electricity demand also outpaced GDP growth for the fourth straight year in 2023.

The end of extensive zero-Covid restrictions led to a spike in demand for fossil fuels. As travel resumed, demand for gasoline and diesel rebounded to levels 15 percent higher than in 2019. Jet fuel and kerosene consumption saw a 74 percent year-on-year increase but remained 14 percent below its 2019 level. Liquefied natural gas (LNG) imports increased 7 percent from 2022 as China regained its position as the world's largest importer. With imports increasing by 74.3 percent and consumption by 4.7 percent year on year, China also remained the largest importer and consumer of coal, responsible for 56 percent of total global consumption.

Renewables continued their prodigious growth in 2023, as China added more capacity than the rest of the world combined. With 216.9 gigawatts (GW) of new solar installations, China more than doubled the previous year's record of 87.4 GW in capacity added. Over 76.0 GW of new wind builds also came online, as China's total installed capacity surpassed that of North America and Europe combined. More than half of grid-scale storage systems installed globally in 2023 were in China, as its total capacity tripled from 2022 levels and reached 27.1 GW. Solar- and wind-generated electricity also saw significant year-on-year increases, at 36.7 percent and 16.2 percent, respectively. Hydro was the only renewable category to see a decrease in output (5.6 percent), though this is likely to change as drought conditions abate.

Despite a shaky macro environment and seasonal fluctuations, power consumption remained strong into 2024. Preliminary data from China's National Bureau of Statistics suggest an upswing in power demand (8 percent in Q1 2024) driven by momentum in the industrial and manufacturing sectors, which has offset a limited uptick in consumption and continued decline in construction activities. Renewables are, once again, supporting the bulk of growth in 2024, with solar generation alone reportedly seeing a 42 percent year-on-year increase in the first quarter. Oil demand growth trended downward, which some analysts expect to continue due to structural factors such as the proliferation of electric vehicles. The rebound in gas demand, on the other hand, is anticipated to persist for now, as the share of gas in the energy mix resumed growth after declining for two years from 2021 to 2023.

Q2: Should coal be a cause for concern?

A2: Despite strong renewable growth and Xi Jinping's 2021 pledge of a phasedown, coal's role in China's energy system has persisted. In 2023, China added 70 GW of coal-fired power installations, while 47 GW came online, which accounted for nearly 70 percent of new global operating capacity. This surge marked the fourth year in which coal capacity increased, a trend that seems to have continued into 2024, as more than 200 new thermal power plants are listed to be under development nationwide.

Energy security concerns and market design issues have prolonged China's reliance on coal. In 2021, for instance, the administratively set coal-fired electricity tariffs failed to adjust for rising coal prices caused by mining disruptions and import constraints; nearly 20 percent of China's total coal capacity was consequently offline in Q3 2021. In response, measures such as permitting expansion were sanctioned by the government to address power supply shortfalls. Similarly, record droughts and heat waves in the summer of 2022 came on the heels of heightened volatility in international commodities markets. As hydro output faltered, energy security concerns once again led the government to turn to coal to firm up supply. At the Two Sessions the same year, Xi stated that the energy transition should not be rushed and that renewables should be "firmly established" before fossil fuels can be "abolished," which has since been used to justify new coal installations as well as capacity payments that kept otherwise uncompetitive coal capacity online for grid reliability.

The coal spike, however, might be temporary, as grid-connected wind and solar capacity surpassed coal for the first time in history this month. While installations have increased, actual coal consumption might not follow suit due to low capacity factors. Measures shoring up coal may also eventually subside, as the government has continued its overall push to reconcile energy security and emissions reduction priorities. Just last week, the National Development and Reform Commission released an action plan for the "low-carbon retrofitting" of select coal-fired power plants using biomass, carbon capture, or green ammonia. Power market reforms, such as directives mandating that coal generators compete in wholesale markets and potential reiterations of the capacity payment system, could also shift coal away from the baseload provider position. In addition, programmatic policy support is poised to scale up the build-out of distributed capacity, long-duration storage, and high-voltage transmission lines; by mitigating intermittency and facilitating efficient power transfer between resource-rich regions and demand centers, these developments could help provide firm dispatchable capacity that diminishes coal's importance to grid reliability and energy security.

Taken together, these factors have allowed optimism about an eventual phaseout. Some analysts argue that coal consumption may have already peaked in 2023, for instance, while others forecast a peak by 2030 based on current trajectories. That said, the jury is still out and indicators such as permitting activities, installation volumes, capacity factors, and power market reforms will help paint a clearer picture of coal's future in China's energy system.

Q3: What trends should global policymakers be aware of?

A3: The fate of China's "Dual Carbon" ambitions, which target peak emissions before 2030 and carbon neutrality before 2060, will be decided by whether rising low-carbon capacity can reliably satisfy shifting energy demand.

On the one hand, structural forces such as tapering productivity gains, an anemic real estate sector, low consumer confidence, and demographic decline may lead to further deceleration in China's power and electricity demand growth. Meanwhile, policy support for low-carbon energy will likely persist. In 2023, renewables contributed a record $1.6 trillion to China's economy (up 30 percent from 2022) and, by some estimates, accounted for nearly 40 percent of total GDP growth. With the sector on a tear and in the absence of a fiscal stimulus, China appears committed to both the shift to a holistic emissions reduction approach as well as the expansion of industrial policy as a growth driver. Namely, the government has continued to promote "new productive forces" such as semiconductors, advanced manufacturing, and the "new three" industries of electric vehicles, batteries, and solar panels. Once again highlighted at the Third Plenum as a central component of China's overall strategic reorientation toward "high-quality development" to bolster economic resilience and hedge against geopolitical pressures, these industries could potentially change China's energy profile and lower the carbon intensity of the Chinese economy.

As China continues its build-out of renewables and other green industries, global stakeholders may need to contend with Chinese exports at below-market rates. Consistent monitoring of metrics such as output fluctuations, emission intensity, investment activity, and policy measures from relevant governing bodies (such as the Ministry of Ecology and Environment, Ministry of Commerce, and Ministry of Science and Technology) will help policymakers better understand both China's decarbonization progress and the broader implications of its green industrial policy.

Ray Cai is an associate fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Joseph Majkut is director of the Energy Security and Climate Change Program at CSIS.

CSIS Energy Security and Climate Change interns Nitika Nayar, Claire Zhao, and Yiming Zhong contributed research support.

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