After I-REC’s Exit: What’s Next for Renewable Energy Procurement in China?

The International Renewable Energy Certificate (I-REC) has recently announced its exit from the Chinese market amidst sweeping policy changes, ushering in a new era for corporate renewable energy procurement.

The International Renewable Energy Certificate (I-REC) is a globally recognised standard designed to track and verify the consumption of renewable energy. It provides a transparent and reliable framework for organisations to certify their use of green energy, aligning with international sustainability standards. I-RECs in China have been a major instrument for corporates – especially those driven by foreign investment – to demonstrate their commitment to reducing their carbon footprint. As of 2022, over 30 million I-RECs were redeemed by energy users in China¹ .

The I-REC Standard came to a halt in China in September 2024, as Chinese regulators made sweeping changes to the country’s green power certification scheme. In August, China’s National Energy Administration released the Issuance and Trading Rules of the Chinese Green Electricity Certificates (GEC), cementing GEC’s role as the singular instrument for tracking environmental attributes in China.

The departure of I-RECs from China has ushered in a new era for corporates pursuing renewable energy targets. This seismic shift has compelled companies – especially those previously relying exclusively on I-RECs to reduce Scope 2 emissions – to reevaluate their strategies and explore alternative avenues for sustainable energy procurement. As the world's largest energy consumer and carbon emitter, China's renewable electricity market holds significant implications for global Net Zero efforts.

In a post-IREC Chinese market, the key questions for corporates striving towards greater climate action are:

1. What are the viable alternatives for renewables procurement in China?
2. Will these procurement efforts be recognised as credible on a global stage?
3. More importantly, what are the opportunities to achieve cost reductions?

Figure 1: I-REC versus GEC issued volume, 2017-2024

Note: 2024 data are until August.

Source: International Tracking Standard Foundation (I-TRACK), National Energy Administration, China Chemical Industry News

China's Green Electricity Certificates: A Promising Yet Volatile Alternative

In the wake of I-REC's exit, GEC has presented itself as the only viable alternative. Chinese regulators have in the past year refined relevant policies to address previous concerns about double-counting of attributes, such as through issuing GECs to all eligible renewable generators’ generation by default and explicitly banning the practice of renewable generators issuing both GEC and CCER (i.e., “China Certified Emission Reduction” credits used in the carbon market). We expect relevant international standards to catch up with Chinese policy development in the near future.

However, the market has experienced considerable turbulence, characterised by price volatility and uncertain dynamics. Since August 2023, the GEC scheme has been revised to make a greater number of renewable generators eligible (previously only utility-scale solar PV and wind projects were eligible), resulting in greater supply of certificates into the market. Additionally, the validity of vintages allowed to be used for claims are now limited to two years, resulting in certificates with older vintages being dumped and depressing the overall market price. As of September 2024, the monthly traded price was at 6.3 RMB per certificate, down from 31.7 RMB per certificate a year ago.

The GEC market's future trajectory remains ambiguous, influenced by regulatory shifts and fluctuating demand. For businesses, this uncertainty necessitates a nimble approach, requiring constant market monitoring and strategy recalibration to capitalise on emerging opportunities.

Figure 2: GEC historical price, August 2023 – September 2024

Note: Prices shown in nominal value including VAT.

Source: China National GEC Trading Platform; AFRY analysis

The Rise of Bundled Green Power Trading

A notable trend in the evolving landscape is the shift towards bundled green power trading. This approach, which combines GECs with electricity through Power Purchase Agreements (PPAs), offers enhanced credibility and potential cost advantages compared to unbundled purchases.

Bundled green power trading provides a dual benefit: it ensures a stable renewable electricity supply while potentially mitigating exposure to market fluctuations. This strategy not only bolsters a company's sustainability credentials but also facilitates long-term financial planning by securing predictable energy costs.

As an example, in Guangdong, one of China’s most economically prosperous regions with robust green power demand, the cost-reducing benefit of bundled trading already materialised. Currently commercial and industrial (C&I) energy users can either procure electricity through the grid company as a retail agent (“grid as agent”), or voluntarily enter into the market by participating in either the mid-to-long-term (M2LT) market or the green power market. In Guangdong, the monthly average grid-as-agent price was consistently higher than annual traded market prices from 2022 to 2024, suggesting that there is a premium for staying with the grid for electricity procurement over procuring green power from the market. It is worth noting, however, that the M2LT market currently trades thermal power (e.g., coal-fired, gas-fired, and nuclear) only, and in comparison, green power trading still commands a premium over market traded thermal power.

Figure 3: Guangdong historical power prices, 2022-2024

Note: 2024 prices are as of first half of the year

Source: Guangdong Power Exchange

In contrast, for corporates looking to comply with renewable energy procurement targets, unbundled purchase of GECs still represents an add-on cost to their electricity cost. Driven by the price signals, and as the green power market itself undergoes continuous refinement of the trading rules, bundled trading grow in popularity quickly as seen in Figure 4, representing 54% of the overall GECs traded in 2024.

Figure 4: Unbundled versus bundled GEC traded volume, 2022-2024

Source: National Energy Administration

Existing and Emerging Practices of Power Purchase Agreements (PPA)

In China's burgeoning green power market, corporate power purchase agreements (PPAs) are gaining traction. The dominant practice involves annual contracts that peg green power prices to thermal power rates. Typically, corporations partner with power retailers, relying on thermal sources to bridge any gaps in hourly demand. An emerging alternative benchmarks prices against a renewable project's levelised cost of electricity (LCOE). These contracts, often with longer tenors, require energy users to manage their demand against supplied volumes. Amidst a lack of market consensus on renewable energy's value, these models offer corporates a foundational approach to renewable procurement.

Figure 5: Typical PPA structures in China

Source: AFRY analysis

Whereas elsewhere in the world, financial PPAs (otherwise known as “virtual PPA”) thrive amid volatile pricing of electricity, in China’s evolving power market, which is under continuous reform efforts to become more liberalised, this is not the case. China's forward market remains constrained by price collars, and additionally significant power generation (at least for renewables) is still under grid offtake contracts at regulated prices, limiting incentives for generators. However, as the market matures and price restrictions ease, the appeal of financial PPAs is expected to grow for generators looking to mitigate wholesale price risks. Conversely, for power users to looking to secure supply of green attributes, long-term financial PPAs may also be a solution soon.

The 24/7 Green Energy Paradigm: A New Frontier

The concept of 24/7 green energy, pioneered by tech giants such as Google, is gaining momentum in recently. This approach emphasises continuous renewable energy supply, matching every hour of consumption with green energy production. Additionally, the matching should be done on a locational basis to give a clear demand signal on where carbon-free electricity is needed.

Implementing a 24/7 green energy strategy demands substantial investments in grid flexibility and supply-demand balancing. This paradigm shift is catalysing innovation in business models and technologies, including advanced energy storage solutions across durations and sophisticated demand response systems.

Beyond individual corporate benefits, the 24/7 green energy model contributes significantly to grid stability and broader sustainability goals. By aligning energy consumption with renewable production, corporates can play a pivotal role in accelerating the transition to a low-carbon economy. The Climate Group, the same organisation that spearheads RE100, launched the 24/7 Carbon-Free Coalition in September 2024, aiming to revolutionise corporate electricity procurement and thereby accelerating the decarbonisation of global electricity grids.

Strategic Imperatives for Corporate Energy Procurement

In this dynamic landscape, corporates must adopt a multifaceted approach to renewable energy procurement:

1. Market Intelligence: Maintain vigilant monitoring of market trends and regulatory developments to inform agile decision-making.
2. Diversification: Explore a mix of procurement strategies, including GECs, bundled green power trading, and advanced PPAs, to optimise risk and cost management.
3. Innovation Leadership: Embrace cutting-edge concepts like 24/7 green energy, positioning the organisation at the forefront of sustainability efforts.
4. Collaborative Engagement: Foster partnerships with energy providers, policymakers, and industry peers to drive market maturation and policy advancement.
5. Long-term Vision: Align renewable energy procurement strategies with broader corporate sustainability goals and long-term business objectives.

Conclusion: Navigating the Path Forward

The exit of I-REC from China has catalysed a transformative period in renewable energy procurement. While challenges persist, this transition also presents unprecedented opportunities for corporates to redefine their approach to sustainable energy.

By embracing innovative procurement strategies and maintaining adaptability in the face of market evolution, businesses can not only achieve their renewable energy targets but also contribute significantly to China's broader energy transition and global carbon reduction imperatives. In this new frontier of renewable energy procurement, strategic foresight and agile execution will be the hallmarks of corporate leadership in sustainability.

Written by Peipei Gao and Roman Chen