The Energy Regulation and Markets Review: China

Overview

Energy regulation in China involves a number of stakeholders, including various government authorities that heavily regulate the energy sector, monopolistic state-owned enterprises (SOEs), private companies that are trying to catch up, foreign companies that have had varying degrees of success and a vast number of consumers. Currently, and for the foreseeable future, energy regulation is anchored in China's ambitious economic restructuring agenda.

The main priority in China's economic reform plan is the environment and the deployment of cleaner energy. The 'energy revolution' proposed in the 14th Five-Year Plan for National Economic and Social Development (2021 to 2025) is to establish a modern energy system of a clean, low-carbon, safe and efficient nature, and to enhance the capacity in energy supply. China also committed to reaching a carbon emissions peak by 2030 and carbon neutrality by 2060 in the speech by President Xi Jinping at a UN General Assembly in September 2020. The energy sector's transition to low-carbon methods will be a key focus in the coming decades.

China, as one of the world's largest economies, is deeply embedded in the global energy value chain. The effects of China's energy consumption and production extend well beyond its borders.

China's prominent role in the global energy market underlines the importance of understanding the domestic energy regulation regime and its market structure. This chapter aims to provide an overview of these, with a focus on oil and gas, power and renewable energy from a foreign investment perspective. The authors have endeavoured to state China's energy regulation and practice on the basis of the materials available as of April 2021.

Regulatory regime

i The regulators

Oil and gas

The National Development and Reform Commission (NDRC) is in charge of setting out and implementing policies in respect of the oil and gas sector. It is also responsible for approving certain investment projects. The National Energy Administration (NEA) is established under the NDRC, with broad duties ranging from drafting energy strategies, proposing reform advice and implementing the management of the various energy sectors.

In the upstream sector:

  1. the Ministry of Natural Resources (MNR) is responsible for the supervision and administration of the exploration and exploitation of mineral resources throughout China. It has the authority to grant the licences required for the exploration and production of crude oil and natural gas. It also has a role in the examination and approval of blocks open to private and foreign investment;
  2. the NEA was previously charged with the authority to examine and approve the overall development plans for individual upstream oil and gas projects; however, in February 2019, the approval requirements for overall development plans were officially removed, and replaced with a record filing procedure and continuing, post-event supervision by the NDRC and the NEA; and
  3. the Ministry of Commerce (MOFCOM) was previously in charge of review and approval of entry into and amendments of all production sharing contracts (PSCs). This approval is no longer applicable and was replaced in 2013 with a requirement to file records at MOFCOM.

In the midstream and downstream sectors, the NDRC is responsible for price regulation and MOFCOM is responsible for licensing in certain categories of trading businesses.

Power

The NDRC and the NEA (which took over from the State Electricity Regulatory Commission in 2013) regulate the power industry. They are responsible for the enactment and enforcement of regulations and for granting power business permits to power companies.

Others

Other regulators include:

  1. the Ministry of Ecology and Environment, which is in charge of administering and enforcing environmental protection and climate change-related matters in China;
  2. the National Nuclear Safety Administration, an authority under the Ministry of Ecology and Environment that acts as the central government agency responsible for regulating nuclear safety and supervising all civilian nuclear infrastructure in China. It also inspects nuclear safety activities and regulates the project approval mechanism; and
  3. the Ministry of Emergency Management, which is responsible for overseeing and administering safety at work nationwide.

ii Laws and regulations

The principle laws and regulations governing the energy sector include the following.

Oil and gas

  1. The Mineral Resources Law (1986, amended 1996 and 2009) and its Implementation Rules (1994) establish the basic legal framework under which exploration and production activities (including oil and gas development) are to be carried out.
  2. The Oil and Natural Gas Pipeline Protection Law (2010) provides for the security requirements for the construction and operation of pipelines.
  3. The Regulation on Registration of Exploitation of Mineral Resources (1998, amended 2014) provides detailed requirements on the registration of mineral resources exploitation and the issuance of exploitation licences.
  4. The Measures for the Administration of Transfer of Mineral Exploration Rights and Exploitation Rights (1998, amended 2014) regulate the transfer of exploration rights and exploitation rights.
  5. The Regulation on Sino-foreign Cooperation in the Exploitation of Onshore Petroleum Resources (1993, amended 2001, 2007, 2011 and 2013) is the basis for foreign companies to participate in the exploration and exploitation of onshore blocks in China through PSCs.
  6. The Regulation on Sino-foreign Cooperation in the Exploitation of Offshore Petroleum Resources (1982, amended 2001, 2011 and 2013) is the basis for foreign companies to participate in the exploration and exploitation of offshore blocks in China through PSCs.
  7. The Measures for the Administration of Natural Gas Pipeline Transportation Prices (for Trial Implementation) (2016) provide that the pipeline transportation price is determined by the price administration department under the State Council following the principle of 'allowed cost plus reasonable profits'.
  8. The Measures for the Supervision and Review of Natural Gas Pipeline Transportation Pricing Costs (for Trial Implementation) (2016) provide that the price administration department under the State Council shall be in charge of the supervision and review of pipeline transportation pricing following the principles of legality, relevance and rationality.
  9. The Guiding Opinions on Strengthening Regulations over the Gas Distribution Price (2017) provide that gas distribution prices shall be determined and reviewed separately, following the principle of 'allowed cost plus reasonable profits'.
  10. The Opinions regarding Further Reform of Oil and Gas Regime (2017). This document was issued by Central Committee of the Chinese Communist Party and the State Council, and was long expected to set out a road map for the next phase of reform in the oil and gas sectors. However, the full text of the document is not yet in the public domain.
  11. The Regulations on the Administration of Grant of Mining Right (Draft for Comment) (2019). This draft regulation was issued by the MNR, emphasising the decisive role of the market in the grant of mining rights.
  12. The Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Facilities (2019) provide the access regime that allows third parties to use the surplus capacity of pipeline facilities.

Power

  1. The Electric Power Law (1996, amended 2009, 2015 and 2018) is the main legislation governing the electricity sector.
  2. The Circular on the Power Industry Institutional Reform Plan (2002) initiated reform across the industry with a focus on the unbundling of power generation and power transmission.
  3. The Circular on the Reform Plan for Power Prices (2003) sets out the targets for the reform of power prices and is followed by the Regulation on Feed-in Tariffs (2005), the Regulation on Power Sales Price (2005) and the Regulation on Transmission and Distribution Price (2005).
  4. The Regulation on Electricity Regulation was issued in 2005 to strengthen and improve electricity regulation, including a permitting regime for power businesses, focusing on maintaining the order of electricity markets and promoting the development of the electric power industry. The Measures on Electricity Market Regulation (2005) clarified the types of market players in the electricity sector, which include power generation, transmission and supply companies, electricity users and government authorities.
  5. The Administrative Regulation on Power Industry Business Permits (2005) sets out the types of power generation, transmission and supply companies subject to a permitting regime and the conditions and procedures for acquiring those permits.
  6. The Opinions regarding Further Reform of the Electric Power Regime (2015) set out the plan for further reform, which mainly aims to open up sales of electricity, develop the electricity market and establish market-oriented prices for electricity.
  7. The Circular by the NDRC and NEA on Issuing Supporting Documents for Power Industry Institutional Reforms (2015) provides six implementation measures for the reform of the power regime, covering the areas of power distribution price, power market development, power trading centre, power planning, power sales reform and coal-fired captive power plant.
  8. The Measures on the Supervision and Examination of the Cost of Power Transmission and Distribution (2015, amended in 2019) sets out rules for determining the costs of power transmission and distribution.
  9. The Circular by the NDRC and NEA on Issuing Administrative Measures on Electricity Companies' Entrance and Exit and the Administrative Measures on Orderly Derestriction of the Electricity Distribution Network Business (2016) provide opportunities for social capital to enter into the electricity distribution industry.
  10. The Circular by the NDRC and NEA on Orderly Derestriction of the Power Generation and Consumption Plans (2017) provides plans for promoting electricity traded through market-based transactions.
  11. The Circular by the NDRC and NEA on Actively Promoting Market-oriented Power Transactions and Further Improving the Trading Mechanism (2018) sets out the road map to remove restrictions on market players in respect of their participation in seeking market-oriented power transactions.
  12. The Circular by the NDRC on Fully Liberalising Power Generation and Consumption Plans for Commercial Power Users (2019) deregulates power generation and consumption plans for commercial users.
  13. The Measures for Transmission and Distribution Prices for the Provincial Network (2020) and the Measures for Transmission and Distribution Prices for the Regional Network (2020) provide further detailed rules regarding the calculation of transmission prices.
  14. The General Rules for Mid-Long Term of Electricity Sales (2020) set out rights and obligations of power generations companies, grid companies, distribution companies, trading agencies, power dispatching agencies, power users and storage companies in the mid to long-term trading of power as well as relevant rules for trading.
  15. The Measures for Information Disclosure of the Power Spot Market (For Trial Implementation) (2020) require power generations companies, sales companies, users, grid companies, trading agencies and dispatching agencies to disclose information in order to facilitate trading in the power spot market.

Renewables

  1. The Energy Conservation Law (1997, amended 2008, 2016 and 2018) aims to promote energy conservation.
  2. The Renewable Energy Law (2005, amended 2010) sets outs general principles on renewable energy.
  3. The Guiding Opinions on Facilitating the Development and Utilisation of Geothermal Power (2013) aims at promoting the development and utilisation of geothermal power.
  4. The Administrative Regulation on Guaranteed Purchase of Renewable Energy-generated Power in Full Amount (2016) sets out detailed rules to guarantee the purchase of power generated by renewable energy.
  5. The Rules for Issuance and Voluntary Subscription of Green Power Certificate (for Trial Implementation) (2017) provide for the regime of issuing and free trading of green power certificates.
  6. The NDRC Notice on the Program for the Establishment of a National Carbon Emissions Trading Market (Power Generation Industry) (2017) sets out detailed plans for promoting the establishment of a national carbon emissions trading market based on the current regional carbon trading pilots regime.
  7. The Circular by the NDRC and NEA on Positively Promoting the Work on Subsidy-free Grid Price Parity for Wind Power and Photovoltaic Power (2019) aims to implement a subsidy-free policy to reduce subsidies in the solar and wind sectors.
  8. The Circular by the NDRC on Improving the Feed-in Tariff Mechanism for Photovoltaic Power Generation (2019) and the Circular by the NDRC on Improving the Feed-in Tariff Mechanism for Wind Power Generation (2019) set guidance prices for solar and wind power feed-in tariffs (FITs).
  9. The Circular by the NDRC and NEA on Establishing and Improving the Mechanism to Guarantee the Consumption of Electricity from Renewable Energy Sources (2019).
  10. The Opinions on Promoting the Healthy Development of Non-hydro Renewable Energies (2020) set out broad policy guidance, including to develop green power certificate trading under a quota regime, the objective to decrease FITs for renewable energy and the development of distributed photovoltaic solar power generation in residential areas.
  11. The Circular on Guiding and Increasing Financial Support to Promote Sound and Orderly Development of Wind Power, Photovoltaic Power and Other Industries (2021) encouraged financial institutions to provide loans and extension of loans and promote the use of green certificates to support the development of renewable projects.

In addition, there are numerous regulations and rules enacted by various administrative authorities to define specific procedures or particular issues with respect to the electricity sector under the framework of the principle law and regulations.

iii Ownership and market access restrictions

General foreign investment regime

China's new foreign investment regime is introduced by the Foreign Investment Law (2019 Edition) (the FIL 2019) and corresponding Implementing Regulation for Foreign Investment Law. The FIL 2019 formally adopts a 'national treatment and negative list' approach nationwide that offers more clarity to foreign investors in respect of market access. Foreign investments are given the same level of market entry as domestic investors, subject to specified exceptions in consolidated lists.

China periodically updates the Special Administrative Measures for Access of Foreign Investment (the Foreign Investment Negative List). These catalogues are typically the first regulatory guides to look at when making investments in China. The most updated ones are (1) Special Administrative Measures (Negative List) for Access of Foreign Investment (2020 Edition), which applies nationwide to all foreign investments (other than free trade zones) and (2) Special Administrative Measures (Negative List) for Access of Foreign Investment in Pilot Free Trade Zones (2020 Edition), which is less restrictive and applies to foreign investments in free trade zones only. Under the Foreign Investment Negative List, the prohibited items are entirely closed to foreign investment, while the restrictive items typically impose one or more restrictive measures on foreign investments, such as maximum limits for shareholding by foreign investors.

Certain sectors and businesses are specified as those in which foreign investment is encouraged, and additional incentives are provided. Similar to the Foreign Investment Negative List, China periodically updates catalogues of these 'encouraged' sectors, the latest version of which, published by the NDRC and MOFCOM in December 2020, is the Catalogue of Industries for Encouraged Foreign Investment (2020 Edition) (the Foreign Investment Encouraged List).

The FIL 2019 has also strengthened the role of the national security review regime. The national security review regime was previously established under the Anti-Monopoly Law in 2007 and updated by the Measures on Foreign Investment Security Review in 2020. Investment resulting in 'actual control' of important areas that concern national security (including important energy and resources, infrastructure, transportation services) shall comply with mandatory filing requirements, although the scope of 'actual control' is not crystal clear. A foreign investor may consult the 'Working Office' if it is not certain whether its investment triggers the mandatory reporting requirement.

Oil and gas

The state has ownership of all mineral resources within the territory of China. Pursuant to the Mineral Resources Law, a licensing regime has been adopted and the MNR has the authority to grant exploration licences and production licences.

For a long time, foreign investment in oil and gas exploration and production activities has been restricted to joint ventures or cooperation with Chinese companies. In practice, the national oil companies (NOCs) (i.e., China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC)) hold the licences, and foreign companies need to partner with an NOC through a PSC arrangement to invest in onshore and offshore exploration and production in China.

However, the door has gradually been opening wider. The first step was marked by shale gas being recognised as 'unconventional gas' in 2011, for which two rounds of exploration licence tenders were held. Private investors (domestic or foreign) were eligible to participate in the tender; however, foreign investors could only participate by incorporating a joint venture with majority interests controlled by Chinese investors. In 2017, the 'joint venture or cooperation' requirement was removed in respect of oil shale, oil sands and shale gas. In July 2019, the restriction was removed in respect of conventional oil and gas (including coal-bed gas). In December 2019, the MNR issued a new Opinion on Several Matters Concerning Promoting the Reform of Mineral Resources Administration (for Trial Implementation), which is effective from 1 May 2020. It is provided that all companies incorporated in mainland China (either domestic or foreign invested) with net assets of at least 300 million yuan shall be qualified to apply for oil and gas mining rights. Owing to the continuing efforts of deregulation, future opportunities are expected to be available for foreign investors in the upstream oil and gas sector.

The midstream oil and gas industry used to be dominated by the NOCs. However, the incorporation of China Oil and Gas Pipeline Network Group Limited (PipeChina) in December 2019 has largely reshaped the midstream market. NOCs have already transferred ownership and operatorship of a large portion of midstream infrastructure to PipeChina, while the transfer of provincial pipeline networks is still ongoing to facilitate the interconnection between different networks. It is intended that the incorporation of PipeChina will unbundle midstream assets (including pipelines, LNG terminals, and gas storage facilities) from upstream and downstream assets, and at the same time, make access to the midstream infrastructure available to more market players. PipeChina will not participate in competitive businesses, such as oil and gas upstream exploration, exploitation, import/export or trading activities. The NOCs and some provincial gas companies still own and operate local pipelines, but more diversified investors (such as private and foreign ones) are involved in LNG terminal business.

The downstream oil sector, including refineries, petrochemical production and gasoline retail businesses, is still dominated by the NOCs, although it is generally open to both private and foreign investment, subject to ordinary permitting procedures. The downstream gas sector (including distribution of gas utilities) is much more diversified. For city utility businesses, there are many private investment players (such as ENN and Guanghui), and SOE conglomerates (such as China Resources). In March 2021, Total and Shenergy (a provincial SOE) announced their partnership to expand LNG business in China, which marks a unique entry point into the downstream LNG market in China. It is expected that more and more foreign investors may look into downstream opportunities.

Power

The main market players in the power industry include generation companies (among which the five large state-owned generators are China Huaneng Group, China Datang Corporation, China Huadian Corporation, State Energy Investment Corporation and State Power Investment Corporation, two grid companies (namely, State Grid Corporation of China and China Southern Power Grid Co) and companies engaged in power engineering and construction business (such as China Energy Engineering Group Co and Power Construction Corporation of China).

The power generation sector is generally open to all (foreign or domestic) investors. However, the main opportunities for foreign investors remain in the construction and operation of power stations with pioneering technologies and in the renewable energy sub-sector.

Electricity transmission and distribution networks in China are owned and operated by State Grid and China Southern Grid in their respective territories. It is also worth noting that, since 2018, State Grid has initiated a 'mixed ownership' reform pilot where the regional subsidiaries of State Grid would establish joint ventures with private investors for specific assets and businesses.

China is encouraging investments into 'new infrastructure' to stimulate its economic recovery from the coronavirus pandemic and boost sustainable growth and innovation. Power transmission lines with 1000kV AC or 800kV DC or above (ultrahigh-voltage (UHV) transmission) is one of the seven sectors leading the country's next-generation development. So far private investors have been invited to invest in two UHV transmission projects (the Baihetan-Zhejiang 800kV direct current project and Qinghai-Henan 800kV direct current project).

With reforms continuing to open up the power sales businesses and develop a competitive power market, more and more power sales companies have been registered at the power trading centres. In 2019, the NDRC announced that the control over power generation and consumption plans for commercial users would be lifted. Commercial users are encouraged to freely negotiate power purchase prices with power generation companies. It is expected that this policy will further boost a dynamic power market and strengthen the role of power sales companies and direct purchase users as emerging market players.

iv Regulated activities

Oil and gas

Upstream oil and gas exploration and production activities are subject to exploration and exploitation licences issued by the MNR. In the upstream oil and gas sector, foreign companies typically partner with and enter into PSCs with legally designated national oil companies. However, China is pushing for deregulation in this regard (as noted in Section II.iii).

In respect of importation, state trading enterprises and non-state trading enterprises may engage in the importation of crude oil and refined oil. MOFCOM publishes a list of state trading enterprises, and companies not included on that list may become a non-state trading enterprises if they:

  1. have a foreign trade business qualification;
  2. satisfy the requirements published by MOFCOM; and
  3. register with MOFCOM.

Both state trading enterprises and non-state trading enterprises must obtain an import licence issued by MOFCOM. However, non-state trading enterprises shall be subject to import quotas. This quota for the year 2021 is 243 million tonnes for crude oil. In 2015, MOFCOM issued a notice setting out the detailed requirements for refineries to import crude oil, including requirements regarding equipment, product quality, safety management and personnel. In 2018–2019, MOFCOM issued notices regarding the qualifications and process for companies registered in Zhejiang, Fujian and Shanghai free trade zones to import crude oil, which provide for fewer restrictions.

Use of imported crude oil was previously limited to the NOCs. In February 2015, the NDRC issued a notice breaking the monopoly. Local refineries can now apply to use imported crude oil if they meet certain requirements, including requirements regarding equipment, product quality and safety management. Forty refineries have obtained a permit from the NDRC to use imported crude oil as of November 2018.

There is no market entry restriction on the importation of gas or LNG.

Pipeline design and construction activities are subject to government review based on criteria relating to safety, environmental protection, optimal land use and economic feasibility. The construction of oil and gas pipeline networks must be approved by the NDRC or its local branches. The qualifications of the enterprises and personnel engaged in the design, installation, use and inspection of pipelines must be accredited by the General Administration for Market Regulatory or its local branch, as the case may be.

For regulated activities in downstream oil and gas sector, see Section IV.ii.

Power

Power companies are required to obtain electric power business permits issued by the NEA. There are specific permits for different types of businesses: (1) a power generation permit for power generation companies; (2) a power transmission permit for power transmission companies; and (3) a power supply permit for power supply companies (power supply business is defined to cover both distribution and sale of power).

A company applying for an electric power business permit must demonstrate that it has the financial capability and personnel with the required experience. In addition, power companies must obtain approval for each specific power project from relevant authorities and comply with the environmental regulations issued with the electric power business licence.

Through an NEA notice issued in April 2014 and according to further notices issued in December 2016 and in March 2020, the following types of generation projects enjoy a general exemption for a power generation licence:

  1. distributed generation projects registered or approved by the NEA;
  2. small hydropower stations with single-station generating capacity below 6MW;
  3. renewable energy generation projects (such as solar, wind, biomass (including waste-to-power), ocean power and geothermal power) with generating capacity below 6MW;
  4. projects with comprehensive use of heat, pressure and gas by-products and coal mine gas power generation with generating capacity below 6MW; and
  5. captive power plants (excluding coal-fired plants) connected to the grid, and captive power plants with all power generated for self-use.

In addition, companies that undertake the installation, reparation or commissioning of electricity facilities shall obtain a permit for those businesses accordingly.

For regulated activities in downstream power sector, see Section IV.ii.

v Transfers of control and assignments

The transfer of exploration rights and exploitation rights for mineral resources (including oil and gas) is subject to the approval of the MNR, provided that the following conditions are satisfied:

  1. two full years have passed since the issue of the exploration licence, or the discovery of the mineral resources available for further exploration or exploitation in the exploration zone,2 or one full year has passed since the exploitation enterprise began exploitation;
  2. the specified minimum input for exploration has been fulfilled;
  3. no disputes have arisen regarding the ownership of the exploration rights and exploitation rights;
  4. the exploration right usage fees, exploitation fees or any price for the exploration and exploitation rights have been paid; and
  5. a transferee of mineral exploration rights or exploitation rights should meet the qualifications of a mineral exploration right applicant or exploitation right applicant prescribed in the Measures for Area Registration Administration of Mineral Resources Exploration and Survey or the Measures for the Registration Administration of Mineral Resources Exploitation.

The MNR will determine whether to approve the transfer within 40 days of receipt of the application. The transfer will take effect as of the day of approval.

As mentioned above, in most cases, the rights for exploration and exploitation of oil and gas are held by the three NOCs, with whom the foreign investors would enter into a PSC. There is no regulatory requirement for the transfer of a participating interest under a PSC. Previously, any amendments to a PSC were required to be approved by MOFCOM. This requirement was abolished in 2013 and now only record filing with MOFCOM is required. In terms of operatorship, Chinese PSCs often provide that the consent of a foreign investor is required if the NOCs propose to take over the production operations before the foreign contractor's full recovery of the development costs. After the full recovery of the development costs incurred in accordance with the overall development plan of any oil or gas field within the contract area, the NOCs may, at any time, have the right to take over the production operations by giving written notice to the foreign contractor.

The transfer of power generation units in operation requires a change to the power business permit, which needs to be approved by the NEA. The NEA will review whether the requirements for granting the relevant permits are still satisfied.

Transmission/transportation and distribution services

i Vertical integration and unbundling

The State Grid and China Southern Grid control the electricity transmission and distribution networks in China, and are used to monopolise the supply of electricity by purchasing power from power generators at regulated FITs and sell power at the regulated power sales prices.

The current power price reform, however, aims to separate the sale of power from grid companies. The Opinions regarding Further Reform of the Electric Power Regime (2015) and the Circular by the NDRC and NEA on Issuing Supporting Documents for Power Industry Institutional Reforms (2015) provide that power generators will enter into agreements directly with retailers or users with term contracts or spot trades, with the power price being freely negotiated between the parties. The transmission and distribution tariff will be regulated by the government on the basis of 'cost plus reasonable profits'.

Since 2009, the user-generator direct trading system has been trialled in more than 20 provinces. Companies with high electricity consumption (such as aluminium electrolysis and steel plants) can purchase electricity directly from generators. The price paid by these consumers is composed of the power purchase price negotiated between the generator and the consumer (under a power purchase contract), the transmission and distribution price paid to the grid company (under a service contract) and government surcharges. The Opinions regarding Further Reform of the Electric Power Regime (2015) also set out further goals for the development of this user–generator direct trading system.

ii Transmission/transportation and distribution access

Oil and gas

China's midstream oil and gas infrastructure ownership and operations have been dominated by SOEs, which has hindered market liberalisation of the petroleum and energy value chain.

Following a five-year trial starting in 2014, China introduced the Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Facilities in May 2019. This regulation emphasises that operators of oil and gas pipelines and facilities within China are obliged to grant third-party users 'fair and open access' to their facilities, and provides for new principles and policies to support this access. Conditions and the process for access, metering, pricing related requirements are also provided in this new regulation. It is expected to provide a more integrated and detailed legal framework to support further development of a fair and open access regime in China in the next five years.

Notably, a separate national pipeline network company, PipeChina, was incorporated in December 2019, and started operation in the fourth quarter of 2020. It will be playing a central role in providing open access to the third party in the midstream gas sector.

Power

A grid operator must ensure non-discriminatory and fair access of its grid to qualified power plants and disclose the following information to power plants within its network:

  1. grid structure and line layouts;
  2. amount and status of transformation facilities;
  3. total installed capacity;
  4. power supply and demand and transmission capacity of major lines and outgoing lines; and
  5. tariffs and prices for inter-provincial power transactions and direct trading.

An interconnection agreement will be entered into by the grid operator and the power generator, specifying terms and conditions, including capacity and FIT.

Grid companies must ensure non-discriminatory and fair access to their grid to qualified power plants. The NEA issued a draft Measures for Regulation of Fair Access to Power Grids for public comment in 2019, which provides a more detailed regime for securing non-discriminatory and fair access to power grid.

For renewable power generation (RPG) enterprises, the grid operators are required to:

  1. build and manage the interconnection system for qualified RPG projects;
  2. enter into grid connection agreements with qualified RPG enterprises; and
  3. purchase all the on-grid power generated by RPG projects subject to safety requirements.

iii Rates

Oil and gas

According to Measures for the Administration of Natural Gas Pipeline Transportation Prices (for Trial Implementation) (2016) and Measures for the Supervision and Review of Natural Gas Pipeline Transportation Pricing Costs (for Trial Implementation) (2016), inter-provincial pipeline transportation tariffs are regulated by the NDRC on the basis of 'allowed cost plus reasonable profits'. The NDRC completed the costs assessment of 13 interprovincial pipeline systems in August 2017 and published reduced tariffs effective from September 2017. These tariffs were adjusted in March 2019 to reflect the reduced rates of value added tax. Intra-province pipeline transportation tariffs are regulated by local development and reform commissions and are reported to the NDRC annually.

According to the Circular by the NDRC on Issuing the Guiding Opinions on Strengthening Regulations over the Gas Distribution Price (2017), local gas distribution prices shall be determined and reviewed separately, following the principle of 'allowed cost plus reasonable profits'. This marks a further big step by the state to achieve the goal of 'regulating the midstream and opening up the upstream and downstream'.

Power

Power transmission prices are regulated by the government. The Measures for Transmission and Distribution Prices of the Provincial Network and the Measures for Transmission Prices of the Regional Network issued in early 2020 improved and clarified pricing mechanisms in power transmission and distribution. Different tranches of transmission prices were established and approved for different types of users (including large industrial users, general industrial and commercial users, other users, residential users and agricultural users) and different voltage levels of power transmission.

iv Security and technology restrictions

Oil and gas pipeline owners and operators have obligations under the Oil and Natural Gas Pipeline Protection Law, including those to patrol, inspect and maintain the pipelines; to upgrade, transform or stop using those pipelines that do not satisfy the safe use requirements in a timely manner; to post, repair or change signs related to the pipeline; and to take effective safety protection measures for a pipeline not in operation.

As gas pipelines are considered to be 'specialised equipment' under the specialised equipment regulatory regime, a pipeline operator is required to hold a Specialised Equipment Registration Certificate. In addition, both natural gas and gas pipelines are considered to be 'hazardous material' under the hazardous material regulatory regime. The 'producer' of hazardous material is required to hold a Production Safety Permit and the 'trader' of hazardous material is required to hold a Hazardous Material Operation Permit. However, it is not clear whether the pipeline owner and operators will be considered producers or traders of hazardous material.

In addition, under the new national security review regime, investments in midstream projects, especially in pipelines that are interconnected with the integrated national pipelines, are highly likely to be regarded as 'important energy and resources' or 'important infrastructure' categories and thus be subject to national security review if the investment results in 'actual control' of the foreign investor.

Power grid operators also have security obligations under the Electricity Law. The power grids shall be operated in accordance with the principles of safety, high quality and economy. Power grid operations must be maintained in an uninterrupted and steady way, with a stable supply of electricity guaranteed.

Separately, China has introduced a new cybersecurity protection regime since the Cybersecurity Law entered into force in 2017. As a general requirement, network operators shall take various cybersecurity protection measures, including formulating an internal cybersecurity management guide and operating rules, adopting technical measures to prevent viruses or network attacks, categorising data, backing up and encrypting important data etc. In addition, operators of critical information infrastructures (CII operators) shall bear stricter cybersecurity protection obligations. Specifically, any purchase of network products and services by CII operators should be subject to cybersecurity review by the Cybersecurity Review Office established under Cyberspace Administration of China. CII operators shall also keep personal information and important data collected and produced during their operations stored within the territory of China, unless provision of such information or data to an overseas recipient is necessary and has passed the security assessment by regulatory authorities.

The scope of CII or CII operators is not clear under the relevant laws and regulations. However, it is generally highlighted that network operators in the energy industry could probably be deemed CII operators. Given that relevant laws and regulations are under rapid development, it is highly recommended for operators in oil, gas and power sectors to follow the developments closely in order to ensure compliance.

Energy markets

i Development of energy markets

For a long time, the NOCs dominated the entire gas industrial chain from upstream to downstream, including production or importation of gas, and sale of such gas to local utility companies at regulated prices. In some cities, trading is actually conducted within the NOCs' group, because the local utility companies are themselves controlled or invested in by the NOCs. As a result, downstream utility companies can hardly negotiate with the upstream suppliers.

Currently, China is adopting various measures to reform the gas sector and develop a gas market, such as unbundling of midstream facilities, opening up of the downstream sector and deregulation of gas prices. The Several Opinions on Deepening the Reform of Oil and Gas System (2017) promotes marketisation of non-residential gas prices, establishing oil and gas trading platforms and encouraging a more competitive market. As of April 2021, China has set up six gas trading platforms, with increasing volume being traded on such platforms in recent years. Participants of gas trading are mainly local gas utility companies and big industry users who buy gas, and upstream suppliers who sell gas. With the open access of midstream infrastructure, more international upstream suppliers will be provided with the opportunities to participate in China's gas trading market. For example, BP has signed gas supply agreements with ENN Group and Foran Energy for the delivery of pipeline gas, re-gasified from LNG delivered at the Shenzhen Dapeng LNG terminal.

In respect to electricity, under the current regime to a large extent grid companies purchase power from power-generation companies at regulated fixed prices and sell power to customers at regulated fixed prices. Generation is dispatched on a fair and equal basis. Under the current power price reforms, the Chinese government is exploring the possibility of opening up electricity markets, including a plan to continue the deregulation of power generation and consumption. The aim at this stage is to establish a medium to long-term market and spot market.

ii Energy market rules and regulation

Oil and gas

To engage in the retail business of refined oil, a specific business permit issued by local government is required. There are certain requirements for applicants to obtain such a business permit, including a certain amount of registered capital, long-term supply agreements, and stable sales channels and facilities. Foreign-invested enterprises may also apply for permits.

The storage and domestic trading of crude oil, storage and domestic wholesale of refined oil products were previously subject to similar specific business permits but have been gradually liberalised since 2019.

In addition, trading of oil and gas requires safety permits under, for example, the hazardous material regulatory regime. The trading and sale of gas or LNG as a type of burning fuel requires a fuel gas business permit.

Power

Sale of power to customers has been largely controlled by the State Grid and China Southern Grid through their subsidiaries. Under the power sector reform, however, more participants are expected to come on the market. Apart from the user–generator direct trading system, the Circular by the NDRC and NEA on Issuing Supporting Documents for Power Industry Institutional Reforms (2015) also allows independent power supply companies to participate in the market provided that certain conditions, including on total assets, equipment and expertise, and the electric power business licence issued by NEA, are met.

iii Contracts for sale of energy

Oil and gas

There are two types of government regulated prices:

  1. government fixed price; and
  2. government guidance price.

The former is fixed and there is no flexibility, while the latter is more flexible. Government guidance price can be in the form of:

  1. a benchmark price with a float range;
  2. maximum price;
  3. minimum price;
  4. the rate of price difference; and
  5. the profit rate.

When a foreign company invests in upstream oil and gas through the PSC regime, parties would normally agree in the PSC that the NOC will sell the foreign investor's share of oil and gas on its behalf. Usually the price is determined by reference to the prevailing price in an arm's-length transaction for a long-term sales contract of similar quality of crude oil in the main world oil markets with adjustment to be made for quality, delivery, transportation, payment and other terms, and expressed as a 'free on board' price at the delivery point in China.

Upstream crude oil prices and gas prices are not regulated, while refined oil prices are subject to government regulation:

  1. the retail and wholesale of gasoline and diesel, and the sale of gasoline and diesel to wholesale businesses, railway customers and transportation customers are subject to the government guidance prices; and
  2. the supply of gasoline and diesel for state reserves or Xinjiang Production and Construction Corps, and the factory price of aviation gasoline, are subject to government (fixed) pricing.

The price of gasoline and diesel is adjusted every 10 business days based on the international crude oil price, processing cost, taxes, transmission fees and reasonable profits.

Gas (including LNG) prices used to be heavily regulated by the central government, but there has been a steady process of deregulation in past years. Prices for gas produced from unconventional gas (including shale gas, coal-bed gas and coal gas), domestic offshore production, LNG and some of the imported pipeline gas have been deregulated and negotiable by the parties. For now, mainly the price for selling conventional gas produced from domestic onshore production and sold to urban gas utilities is still under regulation, but this will likely change in the near future, as the latest Catalogue of Pricing Control by Central Government (2020) issued by the NDRC provides that the price of gas sold to urban gas utilities in 'provinces where a competitive market exists' (the scope of which is, however, not clear at this stage) will not be subject to regulation.

Power

To a large extent, the power prices are set by the government, taking into account the power purchasing cost, the loss from power transmission and distribution, power transmission and distribution price and government funds. The prices vary depending on a number of factors, including season, peak hour, region and type of user (whether residential, agricultural or industrial and commercial).

Customers are allowed to participate in the power market if certain criteria are met, and may choose to enter into power purchase agreements with power supply companies or directly with power generators. The terms and conditions of these agreements can be freely negotiated between the two parties.

The Opinions regarding Further Reform of the Electric Power Regime (2015) and the Circular by the NDRC and NEA on Issuing Supporting Documents for Power Industry Institutional Reforms (2015) sets out future steps to further facilitate the reform, including determining qualified generators based on energy conservation and environmental protection requirements, expanding the direct trading to power supply companies and encouraging long-term agreements between generators and customers.

The NDRC and NEA issued the Circular on Actively Promoting the Market-oriented Power Transactions and Further Improving the Trading Mechanism in 2018, which stipulates a further increase in the scale of market-oriented power trading, the speed of development of power consumption plans, the scope of market entities, and the active promotion of the participation of various market entities in power market transactions.

Renewable energy and conservation

As part of government policies in response to climate change and in line with China's commitments to the international community, the State Council set an objective to control energy consumption to 6 billion tonnes of standard coal during the period from 2021 to 2030, according to the Revolutionary Strategy of Energy Production and Consumption (2016–2030). The NDRC also set medium to long-term goals for renewable energy development: 15 per cent of total energy consumption should be sourced from non-fossil fuels by 2020 and 20 per cent by 2030.

For about a decade, China's renewable energy projects benefited from higher FITs to encourage power generation from renewable energy. The difference between renewable energy FITs and the benchmark FITs for desulfurised coal-fired power is paid from the Renewable Energy Development Fund. With developments in technologies and the decline of manufacturing costs during the past few years, the renewable energy FITs set by the government has been in continual decline and the renewables sector is expected to compete with coal-fired utilities on a subsidy-free basis.

The tables below set out the current policy on FITs for wind, biomass and solar power, as of April 2021.

Wind and biomass

Electricity sourceFITs
WindOnshore projects: guidance prices are set in four tiers ranging from 0.34 yuan/kWh to 0.52 yuan/kWh (for projects approved in 2019) and from 0.29 yuan/kWh to 0.47 yuan/kWh (for projects approved in 2020), depending on project locations. If, at any location, the guidance prices are lower than the benchmark FITs for coal-fired power plants, then the benchmark FITs for coal-fired power plants shall apply as the guidance prices. Benchmark FITs for desulfurised coal-fired power shall apply to new projects approved from 2021 onwards and no government subsidies will be granted.

Offshore projects: guidance prices are set at 0.8 yuan/kWh (for projects approved in 2019) and 0.75 yuan/kWh (for projects approved in 2020).

Newly approved centralised onshore wind power projects and offshore wind power projects: feed-in tariffs shall be determined through competition and not be higher than guidance prices introduced above.
Biomass0.75 yuan/kWh for agricultural and forestry biomass.
0.65 yuan/kWh for waste-to-power projects.

Solar

Resource areaCentralised photovoltaic:
feed-in tariff
Distributed photovoltaic:

subsidy payments

General
(guidance price)
Poverty alleviation projectsIndustrial and commercial useResidential usePoverty alleviation projects
Class I regions0.35 yuan/kWh0.65 yuan/kWh0.05 yuan/kWh0.08 yuan/kWhIn line with local policies
Class II regions0.4 yuan/kWh0.75 yuan/kWh
Class III regions0.49 yuan/kWh0.85 yuan/kWh
Notes

1. The photovoltaic power plant feed-in tariff in Tibet is 1.05 yuan/kWh.

Other incentives include:

  1. surcharges collected from all electricity end users are used to subsidise the difference between FITs and the benchmark price for desulfurised coal generators, operations and maintenance for independent public power systems, and costs for connecting renewable energy generators to power grids;
  2. favourable loans with financial discounts for renewable energy projects listed in the guidance catalogue for renewable energy industry development;
  3. subsidies for renewable energy development in areas such as new-energy vehicles, building-integrated solar photovoltaic systems, wind turbines and biomass power generation; and
  4. tax incentives and land supply priority.

However, the Action Plan (2014–2020) for Energy Development Strategy marks a concerted shift to a more market-driven approach to future build-out in China. To implement this plan, the Circular on Photovoltaic Power Generation (2018) and the Circular on Positively Promoting the Work on Subsidy-free Grid Price Parity for Wind Power and Photovoltaic Power (2019) were issued to gradually reduce subsidies in the solar and wind sectors.

To help reduce government subsidies to the renewables sector, the NDRC, with the Ministry of Finance and the NEA, issued a Circular on the Trial Implementation of the Renewable Energy Green Power Certificate Issuance and Voluntary Subscription Transaction System in January 2017. According to this Circular, solar and wind power producers would apply for and be issued tradeable certificates for the renewable electricity they generate. End users are encouraged to buy these certificates at an agreed price through negotiation or a bidding process. Solar and wind power producers will not receive a direct subsidy (higher FITs) for the electricity corresponding to the certificates sold. In July 2017, an official website for trading of the Green Power Certificate was launched. As of March 2020, while more than 27 million certificates have been issued, only around 37,000 certificates have been traded.

After the Fukushima Daiichi nuclear accident in 2011, the NDRC approved a nuclear project in March 2015 marking the official relaunch of nuclear projects in China. The Mid-to-Long Development Plan of Nuclear Power by the State Council sets the target for nuclear power at installed capacity of 58 million kW and 30 million kW under construction by 2020, which represents a shortfall of 39 million kW. The industry was expecting a large wave of investment in nuclear power in the near future. In January 2019, two units of Zhangzhou Nuclear Project Phase I (a joint investment by China National Nuclear Corporation and China Guodian Corporation) and two units of Huizhou Taipingling Nuclear Project Phase I (investment by China General Nuclear Power Corporation) were finally approved by the State Council, which marked the end of a three-year period during which no new nuclear projects were approved. In early April 2019, the NDRC issued a new circular providing that the first batch of third-generation nuclear power projects shall apply FITs case by case.

Low-carbon transition to achieve carbon neutrality

i Low-carbon transition of the energy sector

China approved and ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, the Kyoto Protocol in 2002 and the Paris Agreement in 2016. Under the Paris Agreement, each individual country should make nationally determined contributions (NDCs). In September 2020, during a speech at a UN General Assembly, President Xi Jinping announced China's commitment to reaching carbon neutrality by 2060. He also reaffirmed that carbon emissions would peak by 2030, which is part of China's NDC under the Paris Agreement.

China has adopted various specific policies in the past few years to meet its climate goals. These policies generally focus on two aspects, mitigation and adaption to climate change. Mitigation measures generally include reducing greenhouse gas emissions, introducing transition in industrial structure and energy structure, promoting energy saving, afforestation and natural carbon sinks, etc. Adaptation measures focus on adapting to climate change through agriculture, water systems, coastal areas etc.

The energy sector's low-carbon transition will be very important for enabling China to achieve its climate goals. Following President Xi's pledge, many major energy corporations put in place more ambitious strategies to reach their emissions peak and carbon neutrality with road maps to develop low-carbon energies such as renewables, nuclear and hydrogen. For example, SPIC and China Three Gorges both pledged to achieve their carbon emissions peak by 2023, seven years ahead of the national goal. China Three Gorges pledged to achieve carbon neutrality by 2040 and Sinopec announced that it aims to achieve carbon neutrality by 2050. A number of major energy companies have launched research projects on the transition to low-carbon energy sources, and have set up dedicated subsidiaries for carbon asset management or investment in renewable energies.

ii Development of carbon emissions trading schemes

The goals to reach the peak of carbon emissions by 2030 and carbon neutrality by 2060 will have significant implications for China's carbon emissions trading scheme (ETS). The ETS is a market-based instrument to put a price on greenhouse gas emissions and promote cost-effective emissions reductions.

Since January 2012, China has initiated ETS trials in five cities (Beijing, Tianjin, Shanghai, Chongqing and Shenzhen) and two provinces (Hubei and Guangdong). This 'cap-and-trade system' sets an overall limit on how much an entity can emit each year by allocating (freely or by auction) the same amount of allowances. Allowances can be traded between entities covered by the ETS. A company that invests in emissions reduction can also sell the credits to a company that operates less cleanly. Traders can speculate on the future value of the credits. The seven ETS pilots have different sectoral coverages (mostly covering power, petrochemical, cement and steel), different emissions thresholds for coverage and showed different levels of market liquidity. All of the ETS pilots have set an intensity cap (i.e., a cap of emissions calculated based on carbon intensity, rather than an absolute cap).

In 2015, shortly before the Paris Agreement was signed, China announced that it would develop a national ETS, followed by a road map issued in late 2017. However, the national ETS had not been officially launched until promulgation of the Administrative Measures on National Carbon Emission Trading (for trial implementation) by the Ministry of Ecology and Environment in late 2020. The national ETS currently only covers the power sector. It was scheduled that the entities covered by the current national ETS would be able to start trading by the end of June 2021. In the future, it is expected that the national ETS will cover other high emissions sectors as well.

In addition to pilot and national ETS, China has established a domestic carbon offset mechanism – Chinese certified emission reduction (CCER). CCERs can be used by companies to offset their emissions voluntarily or to offset their emissions for the purpose of compliance under China's pilot ETS and national ETS, subject to qualitative and quantitative restrictions. According to the Administrative Measures on National Carbon Emission Trading (for trial implementation), CCERs are allowed to be used for up to 5 per cent of the compliance quantity in the national ETS.

The year in review

The past year has witnessed China's first steps towards an 'energy revolution' to establish a modern energy system that is clean, low-carbon, safe and efficient, as proposed in the 14th Five-Year Plan for National Economic and Social Development (2021 to 2025).The Plan sets goals for future energy structure, with at least 20 per cent of energy to be supplied from non-fossil fuels.

China continues towards the marketisation of its energy supply from upstream to downstream. 'Regulating the midstream and opening up the upstream and downstream' is still the cornerstone guiding the reform of marketisation. Key midstream oil and gas assets have been transferred to and operated by PipeChina, which has already started to grant third-party access to its infrastructure with surplus capacity.

In light of China's commitment to reach peak carbon emissions by 2030 and carbon neutrality by 2060, it is expected that the Chinese market will be driven by more clean energy investments, including renewable energy projects. We have also seen market players start to trade carbon-neutral LNG on a spot basis, although no unified industrial standard has been formulated.

The market also expects that a new round of spending and investment in the new infrastructure sectors (such as UHV transmission and new energy vehicle charging stations) will be the theme for China's economic development. A number of local governments have put new infrastructure projects in their investment agenda. Policy incentives have guided market funds into the sectors, and monetary support from local governments is expected to come in the form of special bonds, public–private partnerships and credit support.

Conclusions and outlook

The regulatory environment is changing quickly in China, and the energy sector is no exception. Both the economic restructuring plan and the development of green energy technology have had a profound influence on the energy industry. Various stakeholders and their demands contribute to innovation in the industry, while also adding complexity to the reform process. With reforms taking place in the regulatory regime and the restructuring of the market continuing, it is vital to keep a close eye on energy regulations in China.

Footnotes

1 Monica Sun is a partner, James Zhang is a senior associate and Qiujie Tan is an associate at Herbert Smith Freehills LLP. The information in this chapter is accurate as of 2020.

2 According to a notice issued by MLR in late 2017, for exploration rights in 'minerals other than oil and gas' (note that it is not clear whether oil sands or other types of unconventional oil and gas will fall into this category) acquired by ways of (1) prior application, (2) bidding, (3) auction, or (4) listing (i.e., other than by private agreement), the conditions for transfer of exploration right shall include that two years have passed since the issue of the exploration licence, or one year has passed if a geographical report has been filed for recordation after reserve assessment at or above the general survey level. If the exploration right was acquired by private agreement, then 10 years must have passed, otherwise the requirements and procedures for a new private agreement shall apply to such transfers.

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