By the end of 2017, China had 142 GW of coal-fired captive power plants, about the same size as the entire French power fleet and representing 13% of China's total thermal power capacity. In Xinjiang and Shandong provinces, in particular, captive power stations account for 49% and 30%, respectively, of provincial coal-fired power capacity. With much lower cost than grid-dispatched power, captive plants have been instrumental in the development of energy-intensive industries such as aluminum smelting and chemicals in these regions.

Figure 1: The End of Cheap Electricity: China's Government to take captive power away from big industries.

However, many captive plants skipped the proper approval process that public plants must follow and often do not meet the latest efficiency and emission standards. In addition, captive power is usually not centrally dispatched by the grid and does not provide ancillary services to help maintain grid reliability. Financially, they also do not pay the usual government fees and surcharge that a public coal plant operated by a power generation company must pay (and thus giving them a cost advantage).

Since 2015, the National Development and Reform Commission and the National Energy Administration have issued a series of policies to strengthen regulations on captive power and apply equal responsibility on captive power as its public counterpart. These include:

• Halting construction and approval of new captive projects;
• Shutting down illegal captive projects;
• Enforcing operational and emissions standards;
• Encouraging captive plants to be grid-dispatched and participate in public power trading;
• Retroactively collecting government fees and surcharge on captive power.

IHS Markit expects these policies to be implemented over time, which means that captive power will gradually lose its cost advantage for energy-intensive industries. At the same time, we also expect local governments to continue resisting these central policies, as they seek to protect local employment and taxes by these key industrial sectors, and thus prolonging the process of integrating captive plants into the grid.

Learn more about our coverage of the Greater China energy market through our regional power, gas, coal, and renewables service.

Dongjie Zhang is a Senior Research Analyst covering the power and coal market analysis on Greater China.
Posted 25 July 2018

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.