"Going green" green energy certificates in China – A practical guide

Abstract

This article provides a brief overview of the background and basics of the Notice on Promoting the Full Coverage of Renewable Energy Green Electricity Certificates and Promoting the Consumption of Renewable Energy Electricity (Renewable Energy Notice) and how multinational corporations (MNCs) and other international parties may purchase and sell renewable green energy certificates in China.

Introduction

Increasing the proportion of renewable energy in the overall energy mix is a crucial step toward achieving a substantial reduction in global carbon emissions necessary to protect the environment and counter the effects of global warming and climate change. With the world’s second-largest population and the second-largest economy, China is home to a significant proportion of the manufacturing that supplies the MNCs that, in turn, supply the global economy. These MNCs, as well as other international investors and financial institutions, are increasingly focused on policies to ensure sustainability, carbon-neutrality, and good environment, social, and governance (ESG). In turn, they are increasingly requiring their suppliers in China to do the same.

In recent years, China has made significant strides in developing renewable energy and in reducing emissions from traditional coal-fired power generation and other sources of carbon emissions. China has also prioritised developing the domestic market for trading renewable energy certificates as a means to incent the development, dispatch, and use of renewable, clean energy while providing parties a means to offset the carbon emissions associated with the use of electric power from traditional producers by purchasing renewable energy certificates. To this end, several months ago, the Chinese government issued new regulations that unify and rationalise the trading of renewable energy green electricity certificates.

This document provides a brief overview of the background and basics of the Renewable Energy Notice and how MNCs and other international parties may purchase and sell renewable green energy certificates in China.

1. What types of green energy are recognised?

Both the market in China and Chinese regulations recognise as "green energy" electric power generated from renewable energy projects, such as onshore and offshore wind power, solar power, conventional hydropower, biomass power, geothermal power, and tidal power.

2. What is the current regulatory framework over green energy certificates?

In addition to favourable tax treatment, feed-in tariffs, and other policies, the Chinese government has sought to promote the development and utilisation of "green energy" through a regulatory framework to support the trading of green energy certificates. These certificates allow renewable energy producers to monetise their production while providing other consumers with a means to offset the use of electric power from traditional power producers.

China’s National Development and Reform Commission (NDRC), Ministry of Finance, and National Energy Administration (NEA) jointly issued the Renewable Energy Notice on July 25, 2023. The Renewable Energy Notice provides that Green Energy Certificates (GECs) are the only proof of the environmental attributes of green energy electricity and, as such, the only evidence for recognising the production and consumption of green energy electricity. One GEC unit corresponds to 1,000 KWH of green energy power. The NEA, as the key regulator, is responsible for the issuance and management of GECs.

Subject to the physical delivery of green electricity, GECs are either bundled with green electricity delivery or unbundled and thus traded independently of the actual green electricity. Limited by the geolocation of renewable energy projects, compared with direct consumption of green energy, it seems more convenient to use an independent GEC trading system for multinational companies or their suppliers to go green. That said, we do notice that some leading companies, such as Apple and Nike, are, in fact, investing in renewable energy projects directly, and Apple even goes further to launch a China Clean Energy Fund to support renewable energy projects nationwide.

3. Is the purchase of GEC mandatory?

Purchases of GECs are on a voluntary basis. However, for completeness, China has set mandatory compliance targets for state-owned power generation and distribution enterprises, which are implemented by provincial governments after considering actual power production and consumption in each province. To be compliant, such enterprises need to invest in and build green energy projects. For any shortfall to meet compliance targets, purchases of GECs are secondary options. There are no legal compulsory requirements with respect to green energy consumption for private enterprises.

4. Where are GECs traded?

According to the Renewable Energy Notice, GECs can be purchased only on three government-designated trading exchanges: the Green Energy Purchase Platform, the Beijing Power Exchange Centre, and the Guangzhou Power Exchange Centre. The Renewable Energy Notice does not permit buyers to enter into agreements with green energy producers for the purchase and sale of GECs outside of these three exchanges. Subject to the development of GEC trading, it is likely the Chinese government will authorise additional energy exchanges to participate in GEC trading.

5. May a foreign incorporated company purchase and retire GECs in China directly?

No. Only entities organised in the PRC are qualified to purchase GECs. This includes wholly foreign-owned enterprises (WFOEs) and Sino-foreign joint ventures. While our communication with the Green Energy Purchase Platform indicates that the platform may permit a foreign entity to register as a buyer, the foreign entity will not be able to make actual payments, as the platform only accepts a foreign individual to make payments via the China UnionPay system. The other two trading exchanges do not permit foreign incorporated entities to register as buyers on their exchanges.

Further, PRC companies are not permitted to purchase GECs on behalf of third parties, such as a subsidiary, a supplier, or a customer. Only the direct purchaser of a specific GEC is the legal owner who can retire the GEC. Therefore, for a foreign company to maintain a certain level of visibility and control over the purchase of GECs, it may request:

• its PRC subsidiary to enter into purchase agreements with green energy producers to purchase and retire GECs in its own name; or
• its PRC suppliers to purchase and retire GECs directly by providing proof, as each GEC has a unique serial number that is easy to verify its authenticity.

6. Can the parties freely negotiate purchase prices over specific GECs?

According to the Renewable Energy Notice, the parties are allowed to "freely negotiate the price" of specific GECs. However, based on our consultations with the exchanges, we note that there are indicative price ranges for each GEC. For example, the recommended price range for the Beijing Power Exchange Centre is RMB 30 to RMB 50 per certificate, while the price range on the Green Energy Purchase Platform is between RMB 30 to RMB 1,000 per certificate. If the parties trade certificates beyond such price range, such trades may be rejected by the trading exchange. Actual payments for the purchase of GECs can be settled online or offline.

7. Can a buyer re-sell a GEC?

No, according to the Renewable Energy Notice, GEC is only allowed for one-off trading so far and cannot be resold to any other parties.

8. Can companies purchase GEC and other international green energy certificates attributable to the same green energy?

No, according to the Renewable Energy Notice, the corresponding electricity used for the application of GECs cannot be used for the application of other certificates of the same attribute in the power field. According to the Renewable Energy Notice and our consultations with NEA, once a green energy producer obtains a GEC for a specific amount of green energy, it cannot apply for other similar green energy certificates, e.g. I-REC for the same green energy.

9. Can government-subsidised power producers sell GECs?

Yes, regardless of any subsidy by the central government, the green energy producers are allowed to sell GECs. However, such producers may need to give up a portion or all of their subsidy corresponding to the GEC value. The economic benefits or returns will be the driving force for such producers to decide their participation in GEC trading.

10. Will there be any interaction between GEC regime and other carbon emission reduction programs?

After almost six years of suspension, on 19 October 2023, China published new Interim Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction to regulate China Certified Emissions Reduction (CCER) programs. By definition, there will be some overlap of the GEC regime and the CCER programs. However, it is unclear at this point how or what interactions will occur over these regimes.

The market size and government determination of China in promoting clean energy is a key driving force to reduce global carbon emission. Following the decades only tradition from a pilot program to national-wide implementation, we believe the GEC market will gradually become a mature market for MNCs to go green by encouraging clean energy production.