The PRC’s reliance on conventional thermal power generation, especially coal fired power-stations, is well publicised not just within the Asia-Pac region but globally. While coal is likely to remain the PRC’s primary source of energy for the immediate future, the PRC’s stated commitment to tackling climate change and a swift transition to a low carbon and climate resilient economy implies a comprehensive shift away from thermal power generation in favour of renewables. This transition will present both challenges and opportunities in the physical commodities space.

There are signs that the focus is already shifting away from coal as a power source. Between 1994 and 2014 the PRC’s consumption of coal doubled, reaching more than four billion tonnes a year. However, according to figures released by the PRC’s National Bureau of Statistics, coal consumption in 2015 fell 3.7% from 2014 levels (which themselves were down 2.9% from 2013 levels). Further, under the 13th Five Year Plan adopted on 16 March 2016, the PRC signaled its intention to reduce carbon emissions by 18% from 2015 levels by 2020 and earlier in the year, the PRC’s National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) banned new coal-fired power projects approvals in nine regions and slowed the pace of approval and construction of new projects in 15 others.

At the same time, there is growing legislative and regulatory support for renewables. The NDRC promulgated a directive setting out detailed measures for a minimum quota system for the purchase of renewable power by power grids. The directive, which was foreshadowed by President Xi Jinping in last year’s US-China Joint Presidential Statement on Climate Change, sets an annual minimum purchase guarantee for PRC power companies for wind and large-scale solar generation. This is intended in part to help attract investment in renewable projects by guaranteeing an end market.

One of the other aims of the quota system is to address the worsening wastage of renewable power due to grid bottle necks, limited long distance grid capacity, slow power demand growth and a sharp increase in renewable power generating capacity. In this regard, according to recently published data, nearly 10% of the PRC’s solar capacity remained untapped during the first half of 2015, and 15% of windpower remained unused. With this in mind the NEA recently banned new wind farm constructions in regions with the worst power grid problems, and required the regional governments to develop plans to reduce the output of coal fired plants to aid absorption of the unused renewable capacity.

While many predict that these developments will create a sustained downward pressure on coal, other commodities that are core to the renewables sector such as copper, and the construction sector more generally, such as iron ore, may well benefit from recent developments in the regulatory framework within the PRC and a gradual (or not so gradual) transition to low carbon energy alternatives.

The key for those involved in the sector will be navigating this regulatory framework, closely monitoring developments in a rapidly evolving market and working within the PRC’s new energy paradigm.

In practical terms this means for some that if, for example, you are in the process of negotiating a long term coal supply contract, you should be considering the PRC’s present and potential future renewables policy alongside other more traditional risk considerations (e.g. counterparty creditworthiness, supply side risk and so on). For others, it will mean reviewing their mid and long-term sale portfolios to assess the likely impact of these policies. They will want to identify any pressure points or increased risks in the underlying transactions (as a result of the structures employed, specific contractual terms agreed or otherwise) and to take remedial action. More positively, they will also look to take full advantage of any new opportunities.