Can Global Companies Increase Renewables Use in Chinese Supply Chains?Xiaochen Zhang & Dunstan Allison-Hope
National climate change plans being published ahead of the COP21 negotiations in Paris signal important opportunities for a new era in company action on climate change: renewable-energy procurement in supply chains, especially in China.
A significant portion of many companies’ greenhouse gas (GHG) footprint occurs not in their own operations, but in the supply chain. For example, HP estimates that 41 percent of its GHG footprint resides in the supply chain, while Apple estimates that manufacturing accounts for 72 percent of its footprint.
In the United States, more companies are using renewable-energy procurement to reduce these emissions. Rocky Mountain Institute research identified nearly 1,400 megawatts of new renewable-energy procurement (such as power-purchase agreements, green-power purchases, and outright project ownership) in the first half of 2015 alone—that’s compared to 600 megawatts in 2013 and 100 megawatts in 2011.
Most of these efforts have focused on the companies’ own operations. To procure renewables and reduce GHG emissions in the supply chain, companies will need to take innovative approaches, especially in China.
The Chinese energy market is very different from the American one and is regulated in ways that leave limited room for companies to purchase renewable energy. The State Grid Corporation of the China National Grid and the China Southern Power Grid Company dominate the power supply and because there’s no competitive market, renewable-energy procurement is much more challenging.
However, recent changes in China’s climate change strategy and energy policy are creating new opportunities for renewable-energy procurement.
China’s recently submitted “intended nationally determined contribution” (the climate plan all countries must submit to the UNFCCC) includes a commitment to increase the share of non-fossil fuels in primary energy consumption to 20 percent by 2030. It also seeks to achieve 200 gigawatts of installed wind-power capacity and 100 gigawatts of solar power by 2020.
Moreover, to encourage competition and revamp the power-pricing system, China has instituted a number of energy-sector reforms over the past three years.
For example, since 2013, China has scaled up a pilot for direct renewable-energy purchases for large consumers. Though the details of the national policy are yet to be developed, existing businesses whose energy consumption is above 110 megawatts and new businesses whose consumption is above 35 megawatts will likely become eligible to purchase renewable energy directly from power plants or electricity retailers.
And in the pilot Chinese provinces that are more prepared for the new energy market, direct-power purchases can be made by smaller energy users, existing businesses whose energy consumption is above 35 megawatts, or new businesses whose energy consumption is at least 10 megawatts.
It is also noteworthy that since China’s energy-reform plans were released by the Central Committee of the Communist Party and the State Council in March this year (see “Document No. 9: Deepening the Energy-Sector Reform”), more than 100 new electricity-retailing companies have been established in China, bringing the potential to increase competition.
Businesses with footprints in China now have the opportunity to reduce their GHG supply chain emissions and contribute to China’s increasingly ambitious climate goals. Achieving this in practice will likely entail large-scale, direct renewable-purchase agreements involving three to four parties, such as an energy supplier, an electricity-retailing company, a developer, and a financier.
There is an additional hurdle, however. The recent surge in renewable-energy procurement in the United States has focused on companies’ own operations, such as offices and data centers, and not on the operations of its suppliers.
For this reason, companies seeking to reduce their supply chain GHG emissions by procuring renewable energy will need to help their suppliers enter into direct-purchasing agreements. This could include helping suppliers enter into collective-purchasing agreements as a combined purchasing consortium, or helping larger suppliers enter their own direct-purchasing agreements.
It may take time for new business models to surface and for their effectiveness to be tested. However, both alone and through the We Mean Business Coalition, we look forward to helping companies reduce their supply chain GHG emissions by supporting renewable-energy procurement in China.