Chapter Three provides an overview of the supporting mechanisms under China’s Renewable Energy Law and their effects in driving large-scale renewable energy investment in China. This chapter provides an in-depth analysis of the contributing factors, mainly from legal and regulatory perspectives, to the curtailment of renewable energy in the Chinese context. It also discusses newly adopted administrative measures to facilitate the integration of renewable energy. This chapter sheds light on the limited role of market reform in achieving large-scale renewable energy penetration in China and highlights the future direction of market development based on the latest reform objectives.

Chapter Five delves into fuel switching in the context of market and law reform in China’s gas sector. With the objective of increasing natural gas supply and consumption, the reform of the gas sector in China has taken a significant step forward since December 2019, with the establishment of an independent pipeline operator (i.e. PipeChina) and the promulgation of essential regulations on tariffs and third-party access. This chapter discusses the overall regulatory governance of China’s gas sector, assessing the extent to which market reform and newly promulgated regulations can drive the desired outcomes of increasing natural gas supply and consumption to accelerate fuel switching.

Underinvestment, overinvestment or mistargeted investment are common across sectors at all development stages. They penalize the poorest when it slows down increase in access rates, all users when it leads to congestion, environmental impacts or low quality, and taxpayers as their costs are passed on to final prices or subsidies. These failures are due to poorly designed processes, corruption and capture of politicians or civil servants, and collusion between service providers. Regulation is often part of the problem because cost-plus/rate-of-return regulation tends to stimulate overinvestment, price/revenue cap regulation tends to result in underinvestment, regulated firms can underinvest to exclude potential entrants, regulatory designs omitting to include service obligations and/or access rules lessen incentives to invest, and some regulatory commitments are unrealistic or non-credible. Regulatory failures and uncertainties increase the risk premia built into the financing cost of investment, contributing to further investment mismatch. Regulation can be part of the solution with the adoption of hybrid price regulation approaches and well-designed access prices and rules.