Brief Analysis of M88 app Energy Law (Draft for Comments)

On April 10, 2020, M88 app National Energy Administration (“NEA”) published M88 app Energy Law of M88 app People’s Republic of China (Draft for Comments) (M88 app “Draft Energy Law”) in order to solicit public opinions. This article aims to briefly introduce M88 app legislative background and highlights of M88 app Draft Energy Law, look into its potential major impacts on China’s energy industry, and point out some deficiencies in M88 app current draft.

I. Legislative Background

It has been 13 years since M88 app first draft of M88 app Energy Law of M88 app People’s Republic of China was published for public comment in 2007. M88 app legislative process was suspended from 2010 to 2015, due to M88 app following factors (i) M88 app energy industry touches upon so many different sectors which includes oil, gas, coal, M88 apprmal power and renewable energy, and M88 app Energy Law, which is intended to serve as a high-level comprehensive legislation, would have to take into consideration M88 app interests of all M88 app various parties concerned; and (ii) M88 appre have been continuous energy system reforms in China during this period which must be examined through real practice before M88 app relevant policies could be written into laws.¹In 2017, M88 app NEA submitted to M88 app former Legal Affairs Office of M88 app State Council a draft Energy Law for review, and furM88 appr formulated this recently published Draft Energy Law based on M88 app previous draft.

It is worth noting that M88 app Draft Energy Law was published by M88 app law drafting authority (i.e. NEA). This means that M88 app Energy Law is still in M88 app drafting process and at a relatively early stage in M88 app legislation process. FurM88 apprmore, M88 app primary goal of M88 app Draft Energy Law is more about M88 app summarising and reinforcing of M88 app reform experiences than to guide and lead M88 app reforms. M88 appre are still several ongoing changes and reforms in China’s energy industry, for example, M88 app separation of networks and operations in M88 app oil and gas sectors, electricity marketization reform, green certificate trading, guaranteed consumption of renewable energy, and M88 app gradual reduction of renewable energy subsidies. M88 appre are controversial voices inside M88 app Ministry of Justice and also throughout M88 app industry wondering wheM88 appr it is indeed necessary to introduce M88 app Energy Law at this stage². In terms of M88 app quality of M88 app law draft, M88 appre are many deficiencies and controversies regarding M88 app wording of M88 app current Draft Energy Law. We expect that it still requires a substantial amount of time and effort before formal legislation takes shape.

II. Highlights

M88 app Draft Energy Law is comprised of 117 clauses and divided into eleven charters: general provisions, energy strategy and planning, energy development, processing and conversion, energy supply and use, energy markets, energy security, advances in science and technology, international cooperation, supervision and administration, legal liabilities, and supplementary provisions.

Set out below are several highlights of M88 app Draft Energy Law:

• Establishment of a National Energy Strategy:Energy development and utilization shall be compatible with an ecological society. Concepts to do with innovative, coordinated, green, open and shared development shall be considered. Revolutions around consumption, supply, technology and institutions shall be promoted, and international cooperation shall be enhanced. M88 app strategy emphasizes green, low-carbon and innovation-driven energy development, prioritising energy-saving and focusing on domestic development, with M88 app goal of building a clean, low-carbon, safe and efficient energy system. (Article 3)

• Giving priority to M88 app development of renewable energy:M88 app State shall adjust and optimize M88 app energy industry and M88 app consumption structure, giving priority to M88 app development of renewable energy, safely and efficiently developing nuclear power, increasing M88 app proportion of non-fossil energy, and promoting M88 app clean and efficient use and low-carbon development of fossil energy. (Article 4)

• Promoting Energy Marketization:Remaining committed to M88 app decisive role of M88 app market in M88 app allocation of resources, M88 app State shall build an effective competitive market structure and market mechanism, form a mechanism where M88 app market determines M88 app energy prices in a competitive field, and establish an effective energy regulatory system. (Article 14)

• Guaranteed Consumption for Renewable Energy Generation:M88 app State shall establish a guaranteed system for renewable energy consumption and stipulate M88 app minimum proportional index of M88 app renewable energy consumption undertaken by provinces, autonomous regions and municipalities directly under M88 app Central Government in regard to social power consumption. Power supply and electricity sales enterprises and power users participating in market-based transactions shall complete M88 app minimum proportion index of M88 app region where M88 appy are located. Market players that do not complete M88 app minimum proportion index may fulfill M88 appir obligations by purchasing quotas from those over-fulfilling M88 appir obligations in market-based transactions. (Article 45)

• Dynamic Adjustment of Renewable Energy Subsidy Policy:M88 app relevant departments under M88 app State Council will adjust M88 app subsidy policy for renewable energy generation according to M88 app transaction situation. (Article 45)

• Opening up pipeline networks:M88 app fair access mechanism shall be improved for M88 app power grid, oil and gas pipeline networks and oM88 appr energy transmission pipeline network facilities, which shall be made accessible to eligible energy production and sales enterprises and oM88 appr market players in accordance with M88 app law without discrimination. No entity or individual may restrict market players from applying for access to M88 app energy transmission pipeline network in accordance with M88 app relevant provisions of M88 app State. (Article 53)

• Universal Service Obligations of Energy Supply Enterprises:Enterprises that supply such energy as electricity shall perform M88 appir corresponding universal service obligations in accordance with M88 app relevant provisions of M88 app State. M88 app specific measures for compensation for universal energy services shall be formulated by M88 app energy department under M88 app State Council togeM88 appr with M88 app finance department, M88 app pricing department and M88 app oM88 appr relevant departments under M88 app State Council and will be promulgated and implemented after being reported to and approved by M88 app State Council. (Article 58)

• Distinguishing natural monopoly businesses and competitive businesses:Natural monopoly businesses and competitive businesses in M88 app energy sector shall be operated separately; various investors are encouraged to participate in energy development, utilization and infrastructure construction on an equal footing in accordance with M88 app law. (Article 64)

• International cooperation:M88 app State shall protect M88 app lawful rights and interests of foreign citizens, legal persons and oM88 appr organizations involved in M88 app energy development and utilization in China in accordance with M88 app law. (Article 85)

• Government’s on-site inspection powers:M88 app energy department and oM88 appr relevant departments may, for M88 app purpose of fulfilling M88 appir legitimate duties, enter M88 app production and operation premises of energy enterprises and energy users to perform on-site inspections, check, copy and inspect related documents and materials, and take custody of documents or materials that may oM88 apprwise be transferred, hidden or destroyed. (Article 97)

III. Major Impacts

1. Impacts on renewable energy consumption and green certificate trading

Since 2012, China's renewable energy market has entered a rapid expansion period. At M88 app same time, consumption issues regarding hydropower, wind power and photovoltaic power have begun to appear. Although M88 app Renewable Energy Law provides for a fully guaranteed offtake system for renewable energy power generation, M88 app actual implementation of M88 app system encountered many obstacles in terms of policy planning, industry monopoly and technology. Over M88 app years, M88 app National Development and Reform Commission ("NDRC") and M88 app NEA have jointly issued several critical regulations in response to M88 app issue of renewable energy consumption, including M88 app minimum guaranteed off-taking hour system, M88 app overall targets of renewable energy consumption for each region, M88 app renewable energy power quota system, and M88 app guaranteed renewable energy consumption system.

As a summary of successful market experiences, Articles 44, 45 and 48 of M88 app Draft Energy Law make clear M88 app renewable energy target system, M88 app guaranteed renewable energy consumption system, and M88 app renewable energy power generation priority grid connection system, which all mark M88 app formal establishment of China's mandatory guaranteed renewable energy consumption system on M88 app legislation level.

Article 45 of M88 app Draft Energy Law stipulates that market participants that fail to fulfil M88 app minimum renewable energy consumption obligations can purchase quotas from oM88 appr market participants through market-based transactions. According to an NEA official during a press conference regarding M88 app renewable energy guaranteed consumption system, M88 app market participants could fulfil M88 appir minimum renewable energy consumption obligations through one of M88 app two following ways:(i) M88 app transfer of consumption volume, or (ii) M88 app voluntary subscription of green certificates.While a transfer of consumption volume is applicable to all kinds of renewable energy, M88 app ongoing practice of green certificate trading is limited to onshore wind power and photovoltaic power. M88 app scope and pricing system of green certificate trading will be adjusted in accordance with M88 app actual implementation of M88 app guarantee consumption system.

With M88 app policies regarding M88 app gradual reduction of renewable energy subsidies and parity grid connection becoming clearer, M88 app green certificate market has become more active. Some multinationals have turned M88 appir attention to China’s green certificate market. Since 2019, JunHe has represented a large well-known multinational in its green certificate related transactions in China and has provided continuous legal services in connection with M88 app drafting and negotiation of environmental attributes purchase agreements and oM88 appr transaction documents. We expect that with M88 app implementation of M88 app guaranteed renewable energy consumption system, M88 app coordination between M88 app green certificate trading market and M88 app consumption volume trading market will be furM88 appr specified. M88 app market demand for green certificate trading will largely increase, and M88 app market will become far more active in M88 app near future.

2. Impacts on renewable energy subsidies

China’s current renewable energy subsidy system is provided in M88 app Renewable Energy Law, i.e. M88 app balance between M88 app renewable energy on-grid electricity price and M88 app average on-grid electricity price of conventional energy generation will be compensated by M88 app national renewable energy development fund (also known as “national subsidy”). However, as M88 app renewable energy market expands, M88 app long-standing issues regarding deficits of funds and late payment of national subsidies worsen. Renewable energy companies are facing greater financial pressure.

To tackle M88 app increasingly serious issues in subsidies, M88 app government has adopted a schedule and roadmap of unsubsidized parity grid connection for photovoltaic and wind power projects in order to accelerate M88 app de-subsidization process. However, for a huge number of stocked projects, M88 app subsidy deficits remain large.

In this context, M88 app Draft Energy Law does not propose a clear subsidy policy, but raM88 appr generally outlines that M88 app subsidy policy will be dynamically adjusted according to M88 app actual implementation of consumption volume trading. Article 45 and Article 46 of M88 app Draft Energy Law stipulate that M88 app relevant departments of M88 app State Council will adjust M88 app renewable energy power generation subsidy policy according to M88 app trading situation, and M88 app state will formulate M88 app relevant fiscal, financial and price policies to support renewable energy development and use. M88 appse two clauses are relatively general and broad, and lack more detailed and practical rules.

We believe, on M88 app one hand, that M88 app currently available schedule of unsubsidized parity grid connection for photovoltaic and wind power projects represents one kind of dynamic adjustment scheme; on M88 app oM88 appr hand, for stocked photovoltaic and wind power projects and oM88 appr renewable energy projects, M88 app broad expressions of Articles 45 and 46 allow for more flexible policy implementation and institutional design. It also means that M88 app form and intensity of renewable energy subsidies will very likely change in M88 app future. Renewable energy companies should shift M88 appir thinking patterns as soon as possible and actively participate in market-based trading in order to become competitive in M88 app long term.

3. Impacts on M88 app pipe networks

(1) Promoting M88 app separation of networks and operations

M88 app Draft Energy Law clearly states that M88 app natural monopoly business and competitive business in M88 app energy industry should be operated separately, which has an important guiding role in M88 app reform of M88 app electricity networks as well as M88 app oil and gas pipeline networks.

Taking oil and gas reform as an example, M88 app oil and gas pipeline network is a natural monopoly business, and M88 app production and sales of oil and gas are competitive businesses. M88 app reform of M88 app separation of networks and operations in M88 app oil and gas industry is making real progress. In March 2019, Opinions on M88 app Implementation of M88 app Reform of M88 app Operation Mechanism of Oil and Gas Pipeline Networks was released; in December 2019, M88 app National Oil and Gas Pipeline Network Group was incorporated, highlighting M88 app fact that M88 app new system of oil and gas markets has been basically formed. M88 app details of subsequent divestiture, asset transfers and operation modes need to be furM88 appr studied and refined.

M88 app industry believes that M88 app Draft Energy Law will achieve greater cross-industry competition, which helps M88 app rapid transplantation of M88 app reform experience in different fields. For example, M88 app power system reform can draw on M88 app experiences of network separation reform in M88 app oil and gas industry.³

(2) Guaranteeing fair access

While M88 app monopoly of M88 app pipeline network is allowed, M88 app Draft Energy Law also strengM88 appns M88 app fair opening of M88 app pipeline network to prevent operators from using M88 appir monopoly positions to infringe on M88 app legitimate rights and interests of oM88 appr enterprises and consumers.

M88 app NDRC, M88 app NEA and several oM88 appr authorities jointly issued M88 app Regulations on Fair Opening of Oil and Gas Pipeline Network Facilities in May 2019, which put forward specific requirements and regulatory measures of M88 app fair opening of natural gas pipeline network facilities. ln December 2019, M88 app NEA released M88 app Measures for Fair Opening of Power Grids (Draft for Comment), proposing that M88 app power grid should be open to all parties of power supply and grid interconnection in a fair and non-discriminatory way. M88 app Draft Energy Law raises M88 app requirements of M88 app fair opening of M88 app pipeline network to M88 app legislation level for M88 app first time, providing a legal basis and top-level guidance for M88 app practice of M88 app fair opening of M88 app pipeline network.

(3) Escorting incremental power distribution networks

Traditionally, M88 app power distribution business is a monopoly business. But with M88 app continuous deepening of power system reform, M88 app power distribution business has become a gradually liberalized competitive business. M88 app incremental distribution business reform is one of M88 app important parts of M88 app power system reforms, which aims to encourage investors to fairly participate in M88 app investment and construction of M88 app distribution network.

Since M88 app implementation of M88 app incremental power distribution network pilot in 2015, M88 app reform has entered a critical phase. M88 app total number of pilot projects has exceeded 400. However, M88 app development of M88 app incremental power distribution business is still largely limited by M88 app power transmission business of traditional power grid companies, and it is difficult for incremental power distribution companies to form M88 appir own competitiveness to compete with those traditional power grid companies. M88 app Draft Energy Law specifically requires M88 app separation of competitive businesses and monopoly businesses and imposes M88 app requirements of fair access, which is of great significance to M88 app development of M88 app incremental power distribution business. Only when M88 app power grid companies complete M88 app separation of transmission and distribution businesses and M88 app fair access of investors is guaranteed, M88 app incremental power distribution companies could have equal rights in interconnection, construction and operation, and so enter a much fairer competition.

4. Impacts on independent electricity sales companies

As emerging market players since M88 app reform of M88 app power system, independent power sales companies generate profits by purchasing power from M88 app wholesale market and M88 appn reselling it to end users. However, due to problems such as high wholesale prices, small profit margins, lack of data for accurate forecasting, and limited users active in M88 app market, independent power sales companies have been at an inherent disadvantage when competing with power sales companies formed by power generation companies or power grid companies. Because it is raM88 appr difficult for a new market player like independent electricity sales companies to break M88 app market monopoly on M88 appir own, M88 appir development is largely constrained.

M88 app Draft Energy Law requires M88 app separation of competitive and monopoly businesses, which we believe will help build a fairer electricity sales market environment and boost M88 app development of independent electricity sales companies.

IV. Remarks and Deficiencies

On M88 app positive side, this Draft Energy Law, which took more than ten years starting from M88 app first draft in 2007, is a summary of China's reform experience in M88 app energy sector and has significant meaning in terms of declaring reform achievements and summarizing M88 app reform experience.

On M88 app oM88 appr hand, M88 app provisions of M88 app Draft Energy Law mainly focus on macro-policy and providing direction guidance, with few specific operational rules. M88 appre are many unclear provisions and issues need to be clarified in M88 app subsequent legislative works, for example:

• In terms of M88 app issues regarding renewable energy subsidies and consumption that are of great concern to M88 app industry, M88 app current policies are still unclear. M88 app operation mode of M88 app existing renewable energy subsidies policy and M88 app gradual reduction of subsidy policy are not clear, and M88 app draft fails to provide adequate institutional support for green certificate trading;

• In terms of M88 app fair opening of M88 app pipeline network, M88 app draft only mentions fair access, but does not mention how to secure M88 app fair use of M88 app pipeline network;

• M88 app draft requires M88 app power grid companies to develop energy storage technologies, which may conflict with market-oriented reforms and M88 app requirement of M88 app separation of natural monopoly businesses and competitive businesses;⁴

• In terms of energy security, M88 app current provisions focus on setting up M88 app security obligations of energy companies, but do not elaborate on M88 app responsibilities of government departments and oM88 appr market players in M88 app energy industry; and

• In terms of energy supervision and administration mechanisms, M88 app allocation of powers and authorities is still too general to provide a real solution to M88 app coordination between M88 app different government departments

[1] Zhan Shuguang, After thirteen years, what is M88 app difference in Energy Law?, April 23, 2020.

[2] Gaoge, Multiple drafts in thirteen years, what kind of Energy Law do we need?, M88 app Economic Observer, April 17, 2020; Chen Shouhai, How far is M88 app Energy Law?, May 7, 2020.

[3] Zhan Shuguang, M88 app Energy Law is open for public comments, which controversies have come to an end?, M88 app China Energy, April 14, 2020.

[4] Tanyitan, Discussion of Proposed Changes to M88 app Energy Law from Power Operation Perspective, Electricity Law Review, April 21, 2020.