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Striding over the next hurdle in China’s transition to renewable electricity

Haitao Yin, Boyu Liu and Feng Wang

China is determined to achieve its carbon peak in 2030 and carbon neutrality by 2060. As energy consumption is the predominant source of carbon emissions, this ambitious goal means China must make a fundamental transition—from a fossil fuel–dominated system to one dominated by renewal energy. In January 2024, at the eleventh collective study session of the twentieth Political Bureau of the CPC, President Xi Jinping stated that ‘green development is a defining feature of high-quality development, and new-quality productive forces are essentially green productive forces’ (Xinhua 2024a). He emphasised the necessity to accelerate the transition to a green development model to support the goals of carbon peak and carbon neutrality, highlighting the importance of strengthening the green manufacturing industry, developing green services and expanding the green energy sector (Xinhua 2024a).

Following his important statement, in February 2024, the twelfth collective study session of the twentieth Political Bureau delved into the issue of electricity system restructuring, which is required to support China’s green development. President Xi stressed:

[E]nergy security is crucial to the overall development of the economy and society. Actively developing clean energy and promoting the green and low-carbon transformation of the economy and society have become a global consensus in addressing climate change. We must seize the momentum and redouble our efforts to drive the high-quality development of China’s new energy sector, provide a reliable energy guarantee for China’s modernisation and make greater contributions to building a clean and beautiful world. (Xinhua 2024b)

Electricity is the cornerstone of modern development. China’s electricity system must undergo a profound transformation to clean and low-carbon sources while ensuring safety and efficiency. The challenge has been much discussed. Traditionally, China’s electricity system is highly centralised, with grid operators carefully balancing supply and demand, which is possible because these can be reasonably predicted and therefore planned for. The penetration of renewable energy makes this quite challenging as electricity supply becomes much more volatile because of the instability of wind and solar power generation. This demands stronger capabilities to manage supply-side volatility and, at the same time, greater flexibility on the demand side, as well as enhanced resilience and efficiency in electricity distribution. To achieve this, a diversified energy supply structure, an efficient electricity market and the support of digital and intelligent technologies are indispensable.

This trend, while posing challenges, also provides great opportunities for innovation. First, on the supply side, breakthroughs in new energy and storage technologies are imperative to enhance the flexibility and resilience of the energy supply. Second, energy demand must become softer and more flexible. For this purpose, digital and intelligent technologies are required to improve demand-side management. Future intelligent energy management, enabled by advanced information technologies, focusing on data-based optimisation, scheduling and dispatch, rather than digital displays of energy consumption data, will become a core driver and safeguard of the future energy system. Third, an efficient and open electricity market is the core bridge to balance energy supply and consumption, while also providing additional business cases for investment in renewable energy and energy storage. Only through coordination of supply, configuration and demand can a clean and reliable energy system be sustainable. This will further facilitate China’s transition to a low-carbon society and economy—driving the formation of new productive forces and fostering high-quality development.

The rest of this chapter proceeds as follows. The next section will discuss the main hurdles to China’s transition to a renewable electricity system and therefore the key tasks on which it must work in the next five to 10 years. Section three provides an overview of the strategies that have emerged to help China stride over these hurdles, while section four concludes with a summary.

The key challenges in China’s transition to green electricity

A defining feature of the new electricity system is the gradual replacement of fossil fuels with non-fossil energy sources, which is essential for China to achieve its carbon goals. Zhang et al. (2022) and the International Energy Agency (IEA) (Lim and Hart 2021) investigated the electricity structure change required to ensure carbon neutrality by 2060. They agree that wind and solar power must provide 60–70 per cent of China’s total electricity generation by 2060—a shift from an electricity structure dominated by thermal power (nearly 70 per cent in 2020). Zhang et al. (2022) also estimated that total electricity production would increase from 7,511 terawatt hours (TWh) in 2020 to 15,100 TWh in 2060. Consequently, by 2060, the combined generation from wind and solar power must reach 8,700 TWh—far exceeding today’s current total electricity consumption. This grand transition must occur within 40 years.

This transition is further fuelled by the need to ensure national energy security. China has few reserves and little production of fossil fuels. This, and the fact that China’s economy is heavily reliant on fossil fuels for its energy needs, leads to an increasing dependence on international energy markets. In 2023, China’s crude oil consumption was 772 million tonnes, with imports accounting for 564 million tonnes, resulting in an external dependency rate of 73 per cent (NBS 2023, 2024; Fan et al. 2024). In 2021, President Xi emphasised that ‘as a major manufacturing country, China must hold its own energy bowl firmly in its own hands’ (Bai and Zhao 2024). Hence, fully utilising China’s abundant wind and solar resources to replace traditional fossil fuels is vital for enhancing China’s national energy security. Therefore, the transition to low carbon is necessary not only for sustainable development but also for ensuring energy security.

With strong political determination and policy support, China’s new-energy industry has become globally significant, with its wind and photovoltaic (PV) industries rapidly progressing from ‘followers’ to ‘leaders’. China now holds global leadership in new-energy technology and equipment manufacturing, having established the world’s largest and most comprehensive new-energy industrial chain and occupying a dominant position in the global market. According to China’s Energy Transition White Paper (NEA 2024a), by the end of 2023, the combined grid-connected installed capacity of wind and PV power had reached 1.05 terawatts (Figure 3.1), accounting for 36 per cent of the national total installed capacity. By the end of November 2024, China’s cumulative power generation capacity had reached 3.23 terawatts—a 14.4 per cent increase year-on-year, with photovoltaic and wind power capacities reaching 820 gigawatts and 490 gigawatts and year-on-year growth rates of 46.7 per cent and 19.2 per cent, respectively (NEA 2024a). China’s global leadership in PV and wind industries is rooted in its continuous innovations in new-energy technology, from the introduction of advanced foreign technologies to independent innovation. China’s remarkable achievements in new-energy technological innovation and industrial expansion have provided a strong impetus for the global green and low-carbon energy transition.

As a result of continued technological innovation and expansion of production capacity, the cost of wind and solar electricity generation has quickly declined. For instance, in 2024, the levelised cost of electricity generation from solar power was only RMB0.15–0.25 per kWh in northern China—a 90 per cent drop from 2010, and already cheaper than coal-fired electricity generation, which often ranges from RMB0.3 to RMB0.4 per kWh (Soochow Securities Research Institute 2024). As a result, the key hurdles to the transition to renewable electricity generation are no longer the manufacturing and operation of solar panels.

Figure 3.1: Installed capacity of wind and photovoltaic energy in China, 2010–24

Source: China Statistical Yearbooks (2010–24) (data.stats.gov.cn/english/).

The key hurdles for the future will be the integration of renewable electricity into the existing energy system. In China, the installed capacity of wind and PV power is growing at an unprecedented rate, placing significant stress on the grid. The inherent intermittency and volatility of renewable sources such as wind and solar exacerbate supply instability and regulatory pressure on the grid. For instance, wind power generation peaks at night when low-level airflow is stable and wind speeds are relatively high, while PV generation peaks at midday during summer, and therefore is often misaligned with the periods of peak electricity demand, leading to curtailment of wind and solar power. In 2023, provinces with substantial PV capacity, such as Henan and Shandong, frequently restricted PV grid connection during sunny periods, highlighting the absorption bottleneck. According to a report on the national new-energy grid connection and consumption in February 2024, the national PV utilisation rate dropped to 93.4 per cent—the first time it had fallen below 95 per cent (NEA 2024f). Data from the National New Energy Consumption Monitoring and Early Warning Centre (2024) show that, in the first four months of 2024, regions such as Gansu, Qinghai, Ningxia, Xinjiang and Tibet repeatedly saw renewable energy utilisation rates falling below 95 per cent, with PV utilisation rates in these regions dropping below 90 per cent in October. Notably, the PV utilisation rate in Tibet was only 71.8 per cent from January to April, further declining, to 65.5 per cent, in October—significantly lower than the national average of 90 per cent (National New Energy Consumption Monitoring and Early Warning Centre 2024). These figures indicate that the grid’s capacity to integrate renewable electricity is approaching its limit. As installed renewable generation capacity further increases, the power system must manage significantly larger generation fluctuations, increasing difficulty in balancing the system and risks to safe and stable operation (Guo 2023).

Under current circumstances, the primary challenge for the energy transition is no longer the production and installation of new-energy equipment, but the mismatch between the rapid expansion of new-energy generation capacity and the limited capacity of the grid to integrate it. If the mismatch persists or intensifies, further development of renewable generation capacity will be futile. This challenge was underscored in the CPC Central Committee’s decision on ‘Further Comprehensively Deepening Reform and Promoting Chinese-Style Modernisation’ (Xinhua 2024c), which emphasised the urgency of planning and building a new energy system that facilitates the utilisation of renewable electricity, and improving policies and measures for renewable energy consumption and regulation.

The Chinese Government has implemented several policy measures to ensure the efficient and sustainable development of the new-energy system, maintain safe and stable operations and enhance utilisation capacity. On 28 May 2024, the National Energy Administration of China (NEA 2024d) issued a notice that highlighted that addressing consumption is not only a critical link in the planning and construction of a new-energy system but also of great significance for increasing the proportion of new energy in consumption and achieving the ‘dual carbon’ goals. The challenge has become how to efficiently utilise and integrate renewable energy into the existing system. In response, the NEA outlined several measures, including accelerating the construction of new-energy–supporting grid projects, actively promoting system flexibility to enhance the coordinated development of load–network–source integration and leveraging the role of the power grid as a resource allocation platform. These measures aim to enhance the power system’s capacity to consume renewable energy, ensuring its effective integration and optimal distribution (NEA 2024d).

On 6 January 2025, the National Development and Reform Commission (NDRC) released the ‘Special Action Plan to Optimise Power System Regulation Capacity’. The plan set a goal for the period 2025–27 of the grid supporting an average annual increase of more than 200 gigawatts in new-energy consumption through capacity construction and optimisation, and ensuring a national new-energy utilisation rate of at least 90 per cent. This is the first time the state has set a clear target for the annual utilisation rate for renewable energy consumption (NDRC 2025). Considering the newly installed renewable generation capacity reached 373 gigawatts in 2024 and a 95 per cent utilisation rate, this action plan reveals a more prudent attitude to renewable electricity development, in better alignment with the grid’s capacity to accommodate it.

Strategies to enhance the utilisation of renewable energy

As the previous section revealed, the greatest hurdle for China’s energy transition is integrating renewables into the existing supply and consumption network. For this purpose, the coordinated efforts of the supply side, the demand side and the distribution network are essential. Energy system reform is a comprehensive and integrated project. It necessitates optimising the energy configuration side by restructuring the energy mix, while enhancing the adaptability of both the demand and the supply sides to develop a system that is cleaner, safer, more efficient and more resilient.

Supply side: Reducing the volatility of renewable electricity supply

As previously noted, on the supply side, China’s energy structure is undergoing a profound transformation. In recent years, great leaps have been made in the installed capacity of renewable energy. In 2024, China’s newly installed renewable energy capacity reached 373 gigawatts, representing a year-on-year increase of 23 per cent from 2023 and accounting for 86 per cent of the country’s total newly installed power capacity. The composition of the newly installed capacity was as follows: hydropower, 13.78 gigawatts; wind power, 79.82 gigawatts; solar power, 278 gigawatts; and biomass-generated power, 1.85 gigawatts (NEA 2024c).

However, despite the continued expansion of renewable energy installations, the intermittent and volatile nature of wind and solar generation has led to output instability, making it difficult to closely align with demand in the power system and thereby posing greater challenges for grid integration and consumption. To improve the controllability of electricity supply, the importance of energy storage systems is becoming increasingly evident. These can store excess energy during periods of surplus renewable generation and release it during shortages, effectively smoothing the output curve of renewable energy and significantly enhancing its scheduling and reliability. Thus, energy storage technology, as a core solution to this challenge, has garnered widespread attention from both industry and society.

Currently, the development of such technologies is primarily concentrated in the field of electrochemical energy storage. Among these, lithium-ion batteries, with their mature technology and broad range of applications, have emerged as the leading solution. By the end of 2023, lithium-ion battery energy storage constituted approximately 97.4 per cent of the newly installed energy storage capacity in China (NEA 2024b). However, there are several challenges to this type of storage. First, safety remains a critical issue for lithium-ion batteries. Under abnormal conditions such as overcharging or short-circuiting, lithium-ion batteries may experience thermal runaway, potentially leading to fires or even explosions. These incidents not only threaten equipment safety but also pose significant risks to the energy grid. Second, the rapid growth of electric vehicles and energy storage has increased global demand for lithium, cobalt and other heavy metals, exacerbating resource shortages and driving up costs. Finally, the issue of recycling decommissioned batteries is becoming increasingly urgent. The rapid advancement of new-energy vehicle technology has accelerated model turnover, and battery performance degrades with repeated charging. If retired batteries are not properly managed, they can cause serious environmental pollution. Currently, there are two main approaches for recycling decommissioned batteries: cascade utilisation and raw material recovery. Cascade utilisation involves disassembling and reassembling decommissioned batteries for use in energy storage applications with lower energy density requirements, while raw material recovery focuses on extracting valuable metals such as cobalt, nickel and lithium from scrapped batteries for recycling.

Electrochemical technology is more applicable to short-term energy storage. If the volatility of electricity generation must be smoothed out over months or seasons, or across regions, hydrogen storage seems to be more appealing. It enables energy storage and release through the production, storage and use of hydrogen. Electrolysis is used to convert surplus or low-cost renewable electricity into hydrogen, which can then be transformed back into electricity or heat via fuel cells when needed or when demand and electricity prices are high. This process alleviates supply-side pressures associated with intermittent renewable energy. A notable example is the power-to-gas project in Prenzlau, Germany, where excess wind power is electrolysed into hydrogen for storage, power generation, heating and powering fuel cell vehicles.

The development of hydrogen energy storage technology has created a new pathway for the broad application of clean energy, enabling renewables to be utilised in various sectors. This not only accelerates the transition from traditional fossil fuels to clean energy but also offers several core advantages. Hydrogen energy storage is suitable for both short-term and long-term storage, has minimal dependence on external environmental conditions and allows for flexible site selection with a small environmental impact. Compared with conventional technologies such as pumped storage and compressed air storage, hydrogen is more competitive and can meet the needs of large-scale, long-duration storage, making it particularly suitable for energy storage that spans seasons. It also supports a variety of flexible storage and transportation methods, such as pipeline transport and blending with natural gas, and can be closely integrated with clean energy generation systems to form a complementary energy supply network. By storing hydrogen during periods of excess renewable energy generation and generating electricity via fuel cells during peak demand, hydrogen storage significantly enhances the flexibility and stability of the energy system.

However, hydrogen storage has its own significant challenges. First, the high costs of large-scale electrolysis make its widespread adoption difficult. Meanwhile, hydrogen’s low density, leakage risks and flammability complicate storage and transportation, with current methods including high-pressure gas, liquid hydrogen and solid-state storage each having limitations. Moreover, hydrogen storage currently exhibits lower energy conversion efficiency and higher costs than other storage technologies, posing barriers to commercial viability.

To address these challenges, the Chinese Government has implemented several supportive policies. The NDRC and the NEA released a plan for the development of a hydrogen energy industry in March 2022, underscoring hydrogen’s role as a crucial component of the future national energy system. The plan proposes the establishment of a supply system based on hydrogen as an industrial by-product and locally utilised renewable hydrogen production during the Fourteenth Five-Year Plan period (NDRC 2022). This provides policy support and a clear direction for the development of hydrogen energy storage technology. On 31 December 2024, the General Office of the Ministry of Industry and Information Technology, the General Office of the NDRC and the General Department of the NEA issued ‘The Implementation Plan for Accelerating the Application of Clean and Low-Carbon Hydrogen in the Industrial Field’ (State Council 2024). This plan highlights that accelerating the application of clean hydrogen, such as industrial by-product hydrogen and hydrogen produced from renewable electricity, is a vital for promoting high-quality development and productivity in the hydrogen energy industry. It is also a core pathway for promoting energy conservation, carbon emission reduction and new industrialisation. These policy initiatives have provided robust support and clear guidance for the advancement of hydrogen energy storage technology.

The propeller for hydrogen energy development is twofold. First, China needs a large-scale energy storage approach to smooth the seasonal fluctuations in wind and solar power. Second, it needs a large-scale energy storage approach that can turn otherwise wasted wind and solar power into useable resources. The momentum for hydrogen development will not dwindle unless other technologies that can meet these two needs emerge and mature. Of course, the challenges with hydrogen energy must be addressed. The US Department of Energy (DOE 2022) published its National Clean Hydrogen Strategy and Roadmap in 2022, setting a goal of reducing the production cost of renewable hydrogen to US$1 per kilogram. In 2024, China had already witnessed a sharp decline in this cost.

Meanwhile, the challenges associated with hydrogen storage and transportation have spurred the development of hydrogen-based fuel synthesis technology, which involves combining hydrogen with carbon dioxide captured from the atmosphere to produce methanol, ammonia and ether-based fuels. This not only addresses hydrogen storage and transportation issues but also enables carbon recycling, offering substantial environmental and economic benefits. On 9 September 2024, the NEA Party Leadership Group published a signed article in the People’s Daily that proposed satisfying terminal energy consumption with diversified clean alternatives, including electricity, hydrogen and ammonia (People’s Daily 2024). Previously, only electricity had been mentioned. The addition of hydrogen and ammonia was new. This statement not only affirms the development trend towards hydrogen-based fuel synthesis but also outlines the direction for future energy transformation.

Hydrogen-based fuel synthesis has made notable progress. For example, the Carbfix project in Iceland has successfully produced methanol by capturing atmospheric carbon dioxide and combining it with hydrogen generated through water electrolysis (using geothermal power) for local transportation and industrial use. Additionally, Australia’s Fortescue Future Industries is developing several green ammonia projects, which plan to use renewable energy to produce hydrogen and combine it with atmospheric nitrogen to synthesise ammonia. ‘The Implementation Plan for Accelerating the Application of Clean and Low-Carbon Hydrogen in the Industrial Field’ (State Council 2024) states that, by 2027, significant progress will be made developing the equipment and technology for clean and low-carbon hydrogen in industries such as metallurgy, ammonia synthesis, methanol synthesis and refining. Demonstrations will be carried out of industrial green microgrids, shipbuilding, aviation and rail transit, forming several commercial application models for hydrogen energy in transportation, power generation and energy storage. These advancements demonstrate that hydrogen-based fuel synthesis is not only theoretically feasible but also holds prospects for broad practical application.

Energy storage and hydrogen-based fuel synthesis technologies (also as an approach for energy storage) are key to promoting the construction of a clean energy structure on the supply side, consuming excess renewable electricity that would otherwise be wasted and fostering sustainable development. Energy storage technology effectively mitigates the intermittency and volatility of renewable energy generation, enhancing supply stability and reliability. Hydrogen-based fuel synthesis addresses hydrogen storage and transportation challenges while enabling carbon recycling, offering significant environmental benefits. With continuous technological progress and policy support, clean energy industries such as energy storage and hydrogen energy will provide solid support for the energy transition, accelerating the shift from traditional fossil fuels to clean energy.

Demand side: Smart energy construction

The demand side plays a crucial role in improving the utilisation of renewable electricity and therefore increasing the penetration of renewables into China’s power mix. Energy-consuming enterprises, through energy-saving measures and renewable energy substitutions, can not only effectively reduce their reliance on high-polluting energy sources, but also, more importantly, alleviate the burden that renewables’ intermittency places on the grid, and even improve the grid’s capacity to accommodate the penetration of renewables through demand-side management. Among these initiatives, the development and application of microgrid technology have emerged as vital means of enhancing renewable energy consumption on the demand side. Demand-side energy transformation, supported by digital and intelligent technologies, not only optimises energy efficiency but also provides robust support for the safe and stable operation of the power system. For instance, when renewable energy generation on the supply side is insufficient due to weather, the demand side can reduce electricity load through flexible responses and even convert energy storage resources (including electric vehicles) into power suppliers. Demand-side smart energy systems are a core strategy to enhance the utilisation of renewable electricity, with four main directions warranting further exploration.

Intelligent microgrids

The development of microgrids, underpinned by digitalisation and intelligent technologies, will be a cornerstone of smart energy solutions on the demand side. As defined by the NDRC and the NEA, a microgrid is a localised power distribution system with energy storage and monitoring and protection capabilities. It primarily utilises locally generated renewable energy to directly serve end users (NDRC 2021). On the demand side, microgrids can dynamically meet energy supply needs and optimise energy usage through advanced big data analytics and intelligent management. This enhances local voltage stability, reduces energy consumption and mitigates supply shortages. For the broader power grid, microgrids function as agile power units, capable of rapidly addressing internal and external transmission requirements. The exchange of energy between microgrids and the main grid significantly improves the overall stability of the power system. As more enterprises integrate distributed energy resources and transition towards combined energy production and consumption models, microgrids that incorporate local renewables, storage, load equipment and energy management are becoming essential infrastructure. Under the new power system architecture, local electricity needs will be met locally and the reduced power exchange between microgrids and the national grid will ease the burden of renewable electricity integration.

China’s microgrid demonstration projects—such as the Xiapu Microgrid Demonstration Project in Ningde, Fujian Province, and the Cixi hydrogen-electric coupled DC microgrid project in Ningbo, Zhejiang Province—have been instrumental in driving the high-quality development of renewable energy and enhancing the power system’s capacity to absorb new energy in these areas. Thus, the development and operation of microgrids are critical for renewable energy consumption. On 9 October 2024, the NEA released for public comment the ‘Management Measures for the Development and Construction of Distributed Photovoltaic Power Generation’. The draft stipulated that ‘the electricity generated from large-scale industrial and commercial distributed solar projects must be consumed locally and are not allowed to be fed into the grid’ (NEA 2024e). Under this regulation, large-scale industrial and commercial distributed PV projects exceeding 6 megawatts will no longer be able to operate under the traditional model in which surplus electricity is fed into the grid. The ‘6-megawatt’ threshold is expected to be lowered in the future. This sends a signal that future industrial and commercial distributed PV projects must operate self-sufficiently, precluding the option of feeding surplus electricity into the grid. While this will help to mitigate the impact of distributed generation on the power grid and is a significant measure to address renewable energy consumption challenges, it also means that project owners must establish an intelligent operating system that covers PV power generation capacity, storage, load adjustment and the charging/discharging of electric vehicles to ensure system stability and cost optimisation. In essence, this will drive the development of demand-side microgrids, which face numerous management issues (Xu et al. 2021).

From a technical perspective, intelligent microgrids must be supported by advanced information, communication and control technologies. In its opinions on ‘Accelerating the Development of Digital and Intelligent Energy’, the NEA clarified the development direction for microgrids. It proposed using digital and intelligent technologies to accelerate the clean energy transition, expedite the development of new-energy microgrids and high-reliability digital distribution systems and enhance the configuration and operation of demand-side distributed power supplies and new-energy storage resources (Energy Bureau 2023). This indicates that the government is placing significant emphasis on the intelligent and digital development of microgrids, aiming to achieve modernisation and upgrading of the energy industry through technological progress.

Microgrids, state grid ancillary services and virtual power plants

The significance of smart microgrids could go beyond realising local self-sufficiency in electricity needs and reducing dependence on the central grid. Leveraging agile operational control and energy management capabilities, smart microgrids can rapidly respond to supply fluctuations and emergencies on the energy production side, ensuring continuous and reliable power supply and improving grid capacity that integrates renewables.

In essence, as a critical component of the energy transition, microgrids can significantly bolster the grid’s ancillary service capabilities through demand-side management, including frequency regulation and peak–valley load balancing, thereby enhancing grid stability and reliability. In demand-side management, microgrids can utilise technologies such as artificial intelligence (AI) to optimise the allocation and consumption of power and improve energy efficiency. This includes the possibility of maintaining supply–demand balance through the precise control of demand-side electricity needs. Based on the principle of minimising net load, the power system can align the load curve with the renewable energy generation curve through demand-response technology, utilising load and energy storage resources to consume excess renewable energy when it is abundant and reduce electricity consumption when renewable generation is insufficient, or even supply electricity back to the grid. This interaction between microgrids and distribution networks will support the operational optimisation of the power system and play a vital role in enhancing renewable energy utilisation capacity, the energy structure and energy efficiency.

As a distributed energy aggregator, microgrids can become a core component of virtual power plants in the future, participating in grid scheduling and enhancing the grid’s renewable energy utilisation capacity. With this consideration, the Fourteenth Five-Year Plan for Modern Energy System (State Council 2022) underscores the importance of actively developing smart microgrids, highlighting their role in innovations in grid structure and operation to advance the construction of new power systems. The plan emphasises the core role of microgrids in diversifying and evolving energy systems, particularly in improving renewable energy efficiency and reducing costs. The NDRC and the NEA published a guide on ‘Accelerating the Development of Virtual Power Plants’, which sets a goal for the dispatch capacity of virtual power plants to reach 20 gigawatts by 2027 and 50 gigawatts by 2030. To enhance the grid’s capacity to accommodate unstable renewables generation, the development of virtual power plants has been fast-tracked (NDRC and NEA 2025).

Participation in grid ancillary services and virtual power plants necessitates robust digital and intelligent technology capabilities. In its ‘Opinions on Accelerating the Development of Digital and Intelligent Energy’, the NEA emphasised the pivotal role of these technologies in upgrading the energy industry’s foundations and modernising the industrial chain (Energy Bureau 2023). Through the application of digital and intelligent technologies, microgrids can more effectively participate in grid ancillary services and virtual power plant development, enhancing overall grid performance and efficiency and providing solid support for the development of a clean, low-carbon, safe and efficient energy system.

Microgrids engaging in the power spot market through demand-side optimisation

In 2023, the NDRC and the NEA issued a notice on ‘Accelerating the Construction of the Power Spot Market’, which required regions with a relatively high installed capacity of distributed renewable energy to encourage generators to participate in the electricity market. Time-of-use electricity would send market price signals to guide renewable generation and encourage new entities such as energy storage systems, virtual power plants and load aggregators to participate in peak shaving and valley filling, optimising supply quality and exploring innovative models such as ‘renewable energy plus energy storage’ (NDRC 2023a).

In the electricity spot market, as illustrated in Figure 3.2, electricity prices fluctuate in real time according to market supply and demand. With the increasing proportion of renewable energy, favourable wind and solar conditions can lead to an excess of renewables generation, resulting in negative electricity prices. Conversely, unfavourable wind and solar conditions can lead to insufficient generation, causing electricity prices to soar. If a demand-side entity based on a distributed microgrid has developed renewable energy generation forecasts and flexible load adjustment capabilities, it can capitalise on these price fluctuations by purchasing electricity during negative price periods and selling it during high price periods, thereby achieving arbitrage. This not only diversifies the profit models for distributed energy owners, but, more importantly, also creates market incentives to enhance the utilisation of renewables and support the stable operation of the power grid as the penetration rate of renewables continues to increase.

Figure 3.2: Real-time trading price data for Shandong electricity spot market on 1 May 2023

Source: Shandong Electricity Spot Market.

As a platform for demand-side energy optimisation, microgrids can enhance their intelligence levels through digital technology and participate in the power spot market, thereby improving market competitiveness and achieving efficient energy allocation. This model has been successfully implemented in several regions, particularly in the integrated smart energy projects of the State Power Investment Corporation. The demand-side optimisation in these projects has demonstrated the potential for participation in the power spot market. For instance, 12 of the State Power Investment Corporation’s smart energy projects were selected for the 2023 ‘Smart Energy Projects Excellent Project Case Collection’ (CCPITEP 2023), including industrial parks and cluster building models. These projects showcase the corporation’s demand-side optimisation and participation in the electricity spot market. For example, the integrated smart energy demonstration project in Beijing’s Future Science City business park has achieved an 18 per cent self-sufficiency power supply rate for enterprises through the installation of rooftop PV systems, ground-mounted PV arrays, small wind turbines and energy storage systems. This not only improves energy efficiency but also maximises the economic benefits through participation in the electricity spot market. These projects highlight the importance of demand-side optimisation in spot markets and the dual value of microgrids in promoting the energy transition and enhancing economic efficiency. Of course, efficient participation in the electricity spot market by intelligent microgrids, supported by advanced information, communication and control technologies, is also crucial.

Integration of electric vehicle charging infrastructure with the power grid

In recent years, there has been rapid growth in the uptake of electric vehicles (EVs) in China (Figure 3.3). The onboard batteries of EVs, acting as a form of energy storage, can participate in grid operations through intelligent charging and discharging technologies. Based on vehicle-to-grid charging strategies, EV charging networks can enhance renewable energy absorption, effectively coordinate and optimise EV–grid interactions and optimise grid loads. Studies show that, by flexibly regulating EV charging loads, the power system can alter the spatiotemporal distribution of those loads while fully meeting demand. This process can shift some electricity originally dependent on thermal power to renewable energy generation, thereby increasing local renewable energy consumption and reducing overall carbon emissions of the coupled network (Ye et al. 2023). This optimisation not only improves energy efficiency but also contributes positively to carbon emission reduction.

In response to these developments, in December 2023, the NDRC issued its opinions on strengthening the integration of and interactions between new-energy vehicles and the power grid (NDRC 2023b). It described the future development of the charging network, aiming to tap into the regulatory potential of batteries as load control or mobile energy storage. By establishing an information and energy exchange system between new-energy vehicles and the power supply network, the policy provides strong support for the efficient and economical operation of new power systems: charging vehicle batteries when renewable generation is abundant while feeding the battery power to the grid when electricity on the grid is in short supply. According to statistics from the NEA, from January to September 2024, the number of EV charging facilities in China increased by approximately 2.837 million units. By the end of September 2024, the total number of EV charging facilities in China reached 11.433 million units—a year-on-year increase of 49.6 per cent. Among these, 3.329 million were public and 8.104 million were private charging facilities (Dai 2024). This trend indicates the significant potential of the EV charging network to help adjust power loads, helping smooth the fluctuation of renewable generation.

Building on this foundation, some leading charging station enterprises, such as TELD, are using charging networks, microgrids and energy storage networks to build virtual power plant platforms. By aggregating resources such as EV charging, PV microgrids, mobile energy storage and cascade energy storage, these platforms can achieve functions such as frequency modulation, peak regulation, demand-side response, aggregated electricity sales, green electricity consumption and carbon trading. These platforms directly provide ancillary services for the power grid, thereby enhancing the grid’s capacity to accommodate renewable energy consumption.

Figure 3.3: Sales volumes of electric vehicles in China, 2011–24

Source: China Association of Automobile Manufacturers (en.caam.org.cn/Index/lists/catid/78.html).

These four components form a comprehensive development strategy that uses digitalisation and intelligent operations of the demand-side energy system to advance the power system’s capacity to accommodate renewable electricity. This is instrumental for a cleaner, safer, more efficient and resilient electricity system.

Distribution side: Smart grid development

Energy distribution is the complex and critical task of efficiently and safely transporting electrical energy from the source to the load. Traditionally, grid operators rely on a centralised planning and dispatch system to make sure supply meets demand. This is achievable when electricity demand and supply are predictable; however, it is difficult, if not impossible, in a power system that is predominantly sustained with renewable energy. The reason, again, is the intermittency and fluctuation in solar and wind generation.

As the linkage between power generation and consumption, distribution methods and grid structure play a decisive role in the grid’s capacity to accommodate renewable generation. The key challenge is to enhance the flexibility and resilience of the entire energy system through optimal scheduling and intelligent management. There are three major development trends on the distribution side: flexible and adjustable infrastructure, digital and intelligent capability and the development of an open and diversified power market.

The infrastructure component focuses on adjustable and flexible loads

Flexible loads are those that can adjust their use patterns according to system requirements and market signals. For example, due to their high adjustability, heating, ventilation and airconditioning systems and charging piles allow the power grid to flexibly adjust load power without affecting user experience, thereby balancing electricity supply and demand and optimising energy costs. Additionally, the application of flexible load technology can mitigate the peak–valley differences in the power grid and enhance its operational efficiency and reliability. With continuous technological advancements, the application scenarios for flexible loads continue to expand. For instance, charging piles can flexibly adjust charging power based on the state of the grid and optimise charging times. Distributed energy sources, such as small-scale solar and wind power, can generate electricity locally, reducing dependence on the grid. The Chinese Government is actively promoting the development of flexible loads through various policies. On 17 January 2025, the NEA issued new administrative measures to regulate the ‘Development and Construction of Distributed Photovoltaic Power Generation’, solve grid accommodation issues, protect user rights and foster the sustainable development of the distributed PV industry (NEA 2025).

Energy digitalisation is also a core technological trend on the distribution side

Within the smart grid framework, an optimised scheduling system, built on big data and AI technologies, can accurately forecast power loads and achieve intelligent power scheduling. This system effectively links the supply side with the demand side, ensuring the efficient and stable operation of the power grid. Using real-time collection and analysis of grid operation data, the system can automatically adjust power distribution according to demand and supply, thereby maintaining the stability of the entire grid. Device status monitoring and predictive scheduling functions are also crucial. By monitoring equipment status in real time and predicting operational demand, energy management systems can pre-emptively adjust energy distribution, optimise equipment operation, reduce failures and enhance the reliability of energy supply. An intelligent energy management system can help enterprises monitor their energy use in real time, control costs, improve energy utilisation efficiency and provide strong support for the stable operation of the power grid.

Moreover, the digitalisation of energy also provides vast potential for the development of virtual power plants. As a novel type of management system, virtual power plants achieve coordination and optimisation of the power supply, energy storage, load and charging piles through the Internet of Things and other technologies. They integrate distributed energy resources and use advanced algorithms to optimise energy allocation and scheduling. On 24 September 2024, the NEA’s ‘Basic Rules for the Registration of the Electricity Market’ clarified the regulations for market access for virtual power plants (NEA 2024g). Policy support at both national and local levels provides a clear direction and strong support for the development of virtual power plants as part of smart grids. In the future, with the continuous maturation of technology and policy, virtual power plants are expected to become vital in promoting the energy transition and achieving China’s dual carbon goals.

The electricity market is a crucial development on the distribution side

The electricity market functions as an economic system that allocates power resources through market mechanisms. Within this framework, market entities such as power generation companies, users, grid enterprises and trading institutions engage in trading activities for electricity and related products through negotiation, bidding and other means to determine prices and transaction volumes. As the electricity market gradually opens and diversifies, both the supply side and the consumption side can participate more flexibly in a variety of market activities, including medium and long-term power trading, power spot trading, demand-side response ancillary services, green electricity trading and carbon trading. This flexibility not only enhances the overall efficiency of the energy market but also creates more opportunities for the consumption of renewable energy.

On 12 October 2023, the NDRC and the NEA issued their notice on ‘Further Accelerating the Construction of the Power Spot Market’. This notice clarified five core tasks: accelerating the construction of new-energy projects supporting the power grid, promoting the system’s adjustment capacity and coordinated development of network sources, fully leveraging the role of power grid resource allocation platforms, scientifically optimising new-energy utilisation targets and ensuring the statistical management of new-energy consumption data (NDRC 2023a). On 28 May 2024, the NEA issued a notice on ‘Doing a Good Job in the Absorption of New Energy to Ensure the High-Quality Development of New Energy’, re-emphasising the urgency of these five tasks and highlighting the pivotal role of the power market in building a new-energy system and addressing the challenge of consumption (NEA 2024d).

These three development strategies are essential to improve energy consumption from the distribution side. Flexible and adjustable infrastructure adapts to the intermittency and volatility of renewable energy generation by creating a flexible grid architecture and equipment. Intelligent digital construction, supported by advanced information technology, achieves precise regulation and management of the energy system. The construction of an open and diversified power market introduces market competition mechanisms to promote the efficient allocation of resources and the consumption of renewable energy. Only through continuous efforts and improvements in these three areas can the energy distribution side effectively link the demand side and the supply side, build a new-energy consumption system and drive the entire energy system towards being clean, efficient, green and safe.

Conclusion

The most significant challenge in the transition to renewable electricity in China is not the production and installation of solar panels or wind turbines, but the mismatch between the rapid growth of renewable energy generation capacity and the limited capacity of the grid to accommodate it. Because of the intermittency and volatility of wind and solar generation, the rapid expansion of capacity has posed critical challenges to the safe operation of the grid. Therefore, future efforts must centre on improving the utilisation of renewable electricity through the supply, distribution and demand sides of the electricity market and delivering on security, economic and environmental values.

From a security perspective, the future energy system could achieve precise load management and risk prediction through a multi-source structure, virtual power plants and smart energy systems, even with intermittent and unstable renewable electricity as the predominant energy source. This will ensure the stability of energy supply and enhance system security. On the supply side, the large-scale adoption of energy storage technology would help address the intermittency and volatility of renewable energy generation, ensuring stable supply. On the distribution side, virtual power plants leverage the Internet of Things and big-data technologies to monitor and optimise the scheduling of distributed energy in real time, quickly identifying and responding to potential risks. On the demand side, the use of big data and algorithms would advance demand-side management: forecasting energy demand and achieving accurate load regulation. Precise load management can help match fluctuating electricity supply. Stored energy can serve as baseload power when renewable generation cannot meet demand, thereby ensuring the stability of energy supply and enhancing the security of the entire energy system.

In terms of economic significance, the renewable energy consumption system enhances energy utilisation efficiency, reduces energy waste and costs through energy complementarity, intelligent scheduling and precise management, and secures economic benefits by engaging in market transactions. On the supply side, the multi-source system integrates diverse energy resources to achieve complementarity, reduce waste of renewable generation capacity and cut supply costs. The virtual power plant on the distribution side boosts energy efficiency and cuts consumption via intelligent scheduling and optimised management. On the demand side, smart energy systems identify and reduce energy waste, improve efficiency and lower costs through meticulous management. Meanwhile, accurate measurement and control empower users to actively participate in renewable energy market trading, secure additional economic benefits through arbitrage and enhance the overall economic performance of the energy system.

From an environmental perspective, the improved utilisation of renewable electricity helps reduce dependence on traditional fossil fuels, lower carbon emissions and combat global climate change. On the supply side, the multi-source structure optimises the energy mix by integrating more renewable energy sources, thereby reducing carbon emissions. The virtual power plant on the distribution side enhances the utilisation of renewable energy through intelligent management and optimal scheduling, reducing the curtailment of wind and solar power. On the demand side, smart energy systems further reduce carbon emissions by optimising energy use and minimising unnecessary consumption. The goal of all the discussed efforts is to ensure renewable electricity, as much as possible, is used to meet energy needs. This system would provide strong support for achieving carbon neutrality and promote the development of a green, low-carbon energy system.

This chapter reviews how the supply, distribution and demand sides of China’s energy system could evolve in the future. Developments will centre on how to stride over the key hurdle to China’s transition to renewable electricity—that is, making sure that renewable generation capacity can be utilised to the largest extent to meet energy demand. We identify several areas that hold high potential: energy storage, including electrochemical battery storage, hydrogen and hydrogen-based fuels, microgrid development and its roles in providing grid ancillary services; virtual power plants and their role in providing grid ancillary services; development of electricity spot markets; and digital and intelligent infrastructure for precise load management and optimal scheduling of power generation and dispatch. The success of China’s transition to renewable electricity hinges on the development of these areas, and technological and managerial breakthroughs in these areas will provide social and economic rewards.

Acknowledgement

Financial supports from the National Social Science Foundation of China (23&ZD095 22VRC180) are greatly appreciated.

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