Focus on Arts and Ecology

The government’s legislative push for the sector is stalling, while experts warn of its socio-environmental risks and governance gaps. 

By Leonardo Coelho, March 4, 2026

Brazil’s data centre capacity could triple by 2030, fuelled by companies from China and the US flocking to the country. The implications for local water and energy consumption are worrying experts.

Brazil is already Latin America’s data centre hub, with an installed capacity of around 800 megawatts (MW). The country has 198 facilities according to the Data Center Map, which gathers information on both operating and planned facilities worldwide.

Data centres are not a new phenomenon, but the explosion of generative AI chatbots has led to a huge increase in demand. The US has by far the highest number of data centres, followed by Germany, the United Kingdom and China.

In December, ByteDance, the Chinese company behind TikTok, announced a USD 38 billion investment for a data centre in Porto do Pecém, in the eastern coastal state of Ceará. Other Chinese companies interested in Brazil include Huawei and Alibaba.

Meanwhile, a US consortium including the asset manager BlackRock, Microsoft, and Elon Musk’s xAI, recently spent USD 40 billion to buy Aligned Data Centers. That company manages facilities in Brazil country and is the parent company of Brazil’s Odata. The national government has encouraged these investments via tax breaks.

Indigenous leaders and environmental and energy experts are concerned about the impacts on local water and electricity availability. Chief Roberto Anacé, an Indigenous leader in Ceará, tells Dialogue Earth he fears shortages could result from the ByteDance facility.

China and US at the centre of the rush

The data centre rush follows concerted efforts by the Brazilian government in the US and China. Last year, the finance minister, Fernando Haddad, told technology investors in the US of his desire to boost a “simultaneously digital and green” economy, by harnessing tax incentives and renewable energy supplies. Meanwhile, the communications minister, Frederico de Siqueira Filho, visited investors in Beijing and other cities in China.

The government launched a National Data Centre Policy in September 2025 that included a special tax regime for the centres, called Redata. By offering tax breaks linked to commitments on environmental standards, Redata aimed to promote more sustainable development of data centres.

“Industry and government are moving to attract more investment to the country, especially large data centres […] focused on artificial intelligence,” Luis Tossi, vice president of the Brazilian Data Centre Association (ABDC), tells Dialogue Earth.

In late February 2026, however, Brazil’s data centre push stalled. Redata had been introduced as a temporary executive order to fast-track investment but it required congressional approval to become law. Political tensions meant that vote did not happen in time and Redata’s tax policy expired.

One of the stumbling blocks was a gas industry attempt to have projects involving natural gas included in the policy. That is what lobbyists with close ties to congress told the Brazilian newspaper Valor Econômico. The original proposal prioritises projects using renewable energy, and the push to broaden its remit to include gas triggered disagreements. This is already having an impact on the data centre plans of major companies, according to Valor Econômico.

“The government is not going to abandon this project,” says Júlia Catão Dias, from Brazil’s Consumer Protection Institute (Idec). “The problem now is a dispute between the gas sector and the government… That is why the bill is stalled, and there is no timeline for its approval.”

Digital sovereignty v water security

Haddad says he is still working hard with lawmakers to get Redata passed in Congress, telling reporters there is a queue of companies looking to invest in Brazil. “I’ve spoken to several senators and explained how sensitive the issue is,” he says. “Those who are committed to national development and sovereignty are fully prepared to take on this challenge.”

Only 40% of Brazilian data is processed within the country, he says. The rest is handled abroad, outside the reach of Brazilian legislation. For the government, therefore, the expansion of data centres would strengthen the country’s “digital sovereignty”.

Igor Marchesini, special advisor to the Ministry of Finance and an architect of the data centre policy, says Brazilian expansion would reduce the overall emissions of the sector thanks to the country’s renewables-heavy electricity mix. “Brazil does not need to burn coal to power a data centre,” he tells Dialogue Earth. About 88% of the country’s generation comes from renewable sources, according to the International Energy Agency.

Others are less certain of how Brazil will meet this increase. Fabro Steibel, executive director of the Institute for Technology and Society, says the government’s proposed strategy remains vague and unclear. Publicly shared information on projected water and energy usage has been minimal, he adds.

Some 80% of data centres in Brazil operate with closed-loop cooling systems, which reuse water to cool servers. This is according to the tech industry trade body, Brasscom, which says that share could reach 90% by the end of the decade.

But André Fernandes, director of the Recife Institute for Research in Law and Technology, points out that the initial water requirements are still very high: “That water has to come from somewhere. It is no coincidence that these projects are usually located near watercourses.”

TikTok and the Brazilian firm Casa dos Ventos tell Dialogue Earth that the data centre buildings will have a cooling system with a capacity equivalent to two Olympic swimming pools – about 5 million litres of water. They estimate daily water use of between 20,000 and 30,000 litres (equivalent to the consumption of 46-72 households) with around 10% used for cooling.

The closed-loop model raises other concerns. José Renato Laranjeira, founder of the Brazilian Laboratory of Public Policy and the Internet, says that although such a system reduces water usage, it requires more electricity to function than alternatives because of its reliance on powerful refrigerators: “There is an increase in energy demand associated with this choice.”

Local conflicts

Experts interviewed by Dialogue Earth say the data centre rush is happening with little consultation.

Idec’s Dias, alongside other experts consulted by Dialogue Earth, question the reasons for the government’s push to attract facilities, particularly without embedding effective environmental safeguards, or protections for the public interest. “Artificial intelligence for what? For whom? On what terms? Do we really need it? Because that would determine what kind of data centre we want,” says Dias.

Fernandes says the Redata bill only mentions the use of renewables generically, and fails to address the socio-environmental impacts of these projects: “It does not mention electronic waste, nor does it address the impacts on the neighbourhood and territories, or water consumption and disposal.”

There are local concerns, too. Anacé and other leaders in Ceará are trying to block the installation of TikTok’s data centre, fearing disputes over water and electricity in their communities. “They say there is surplus energy. For now, there is, but when the data centre is operating at 100% capacity, there will be a shortage,” says Anacé.

The companies tell Dialogue Earth the project’s energy will come from dedicated renewable sources, such as new wind farms, which are still in the planning stage. As such, they say, it would not compete with local electricity needs.

An analysis of internal documents seen by the media outlet Intercept Brasil indicates the TikTok project’s daily energy consumption is equivalent to that of 2.2 million Brazilians. São Gonçalo do Amarante, where Porto do Pecém is located, is home to just 54,000 people.

In August 2025, protesters occupied the state environmental agency and filed a legal case with the Federal Public Prosecutor’s Office (MPF), which subsequently pointed out flaws in the licensing process.

According to the companies, “the environmental licensing of the data centre has been conducted in strict compliance with current legislation.” They are still analysing the MPF’s report.

Anacé says his people do not reject local development initiatives, but it is essential for projects of this size to include grassroots consultations with affected communities: “Neither a cashew tree nor a mango tree bears fruit if it has no roots.”

Displaced by coastal erosion, people began moving to Bagapatia in the 2010s, but continue to decry the village’s inadequate and dangerous conditions. 

By Dimple Behal, February 20, 2026

A young girl has died. She gave birth, and the same day, she was dead,” laments Saraswati Mohanty.

The funeral procession snaked its way through the village streets, carrying the body of Kashmira (not her real name). She was 18 and pregnant. There was an emergency, and the closest hospital that could tend to her was two hours away. She died en route.

Bagapatia was meant to be a place of refuge. Instead, in this corner of Odisha, near India’s eastern coast, life tiptoes among the wreckage of loss.

In 2023, the local government described it as India’s first “rehabilitation colony” for people displaced by climate change. It became home to families uprooted from Satabhaya, a cluster of seven coastal villages that have largely been rendered uninhabitable under the pressure of erosion and storms. By 2018, 571 Satabhaya families had been relocated here; by April 2024, officials said 17,049 displaced people had been resettled.

Government funds were set aside for infrastructure – roads, sewer systems and basic services. The move was framed as an example of the state anticipating climate displacement, rather than reacting to disaster. For families who consented to leave what had always been their home, it marked a moment of hope.

But resettlement has not meant rehabilitation.

Bagapatia falls woefully short of necessities for a settlement of its size. It has a single community health centre, which offers medication, vaccinations and other basic primary care, but not enough to tend to urgent cases like Kashmira’s. There is no piped water supply and no drainage system. The people of Satabhaya once relied on farming and fishing, but the swampy soil in Bagapatia is unsuitable for agriculture.

That means work is scarce. Kashmira’s husband had to move to Kerala, in south-west India, to find employment in the plywood industry. It is a journey many displaced from Satabhaya are making as their options narrow. Bagapatia sits close to a river that floods during the high tides and crocodile sightings are frequent; even the act of fetching water is laced with danger. The flooding means schools are routinely shut, disrupting education.

Niranjan Swain, a member of the Panchayat Samiti (the village government), says: “The sea took our land. Now the floods take our peace.”

Mass exodus

In coastal Satabhaya, people could rely on fresh fish for sustenance, and to earn a living. Bagapatia, on the other hand, lies around 12 kilometres inland. “We were given houses, not livelihoods,” says Swain.

Before the move, families in Satabhaya had kitchen gardens and paddy fields. In Bagapatia, villagers tell Dialogue Earth the land is low-lying and unfavourable for any cultivation. What was grown must now be bought. “We are always dependent on money,” Swain says.

This dependence on food markets, the corresponding need for an income and the lack of local employment have created a vicious circle. A report by Climate Action Network South Asia noted that by 2021, around 2,000 residents had migrated in search of work, sending remittances home. In the words of Ranjan Panda, an Odisha-based climate and water activist, “it’s ecological poverty that fuels their economic poverty”.

Saraswati Mohanty’s two daughters, aged 18 and 21, are among those planning to leave for Kerala. When they arrive there, over 2,000 kilometres from home, they will likely find work in garment factories overwhelmingly staffed by young women. They will get paid as little as INR 10,000 (USD 110) a month.

“Earlier, only a few people used to go,” Swain says. “Now, half the village leaves every year.”

A village born out of the sea

According to the National Centre for Coastal Research, 36% of the 136-kilometre coastline of Kendrapara district – the administrative unit that encompasses both Satabhaya and Bagapatia – experienced some form of erosion between 1990 and 2018.

Satabhaya, the victim of many cyclones, has been eroding since at least the 1970s. With each storm, its shoreline recedes further. “During every cyclone, around 50 to 100 feet (15 to 30 metres) of the coastline would vanish,” says Swain, who has lived in the village for five decades. The sea began threatening their homes. “All we could do was pray to our goddess and hope to survive.”

The scale of that loss is stark. The village’s area shrank from 350 square kilometres in 1930 to 140 square kilometres by 2015, according to the journal Economic and Political Weekly.

With the threat growing, the decision to move came long before it happened. The Odisha government identified Bagapatia as Satabhaya’s resettlement site in 2008, though plans to relocate had reportedly been discussed as early as 1992. Resettlement finally began in the late 2010s, by which time much of Satabhaya had already been claimed by the sea.

Bagapatia lies just a few kilometres away from Bhitarkanika National Park, designated a wetland of national importance and part of India’s second-largest mangrove forest after the Sundarbans. It is richly biodiverse but poorly suited to dense human settlement.

During cyclones, the area is often inundated by water. Animals from the national park move into the village, including predators such as saltwater crocodiles, and snakes like the Indian python and king cobra. “It’s difficult to travel, and sometimes crocodiles threaten both people and livestock,” says Mohanty. When Cyclone Dana hit Bagapatia in late 2024, she recalls, floodwaters entered homes and fields, and the village’s roads were cut off for days. “This was never prepared as a human settlement,” she says. “It was just land, and we were told to make our homes on it.”

In 2017, the government provided households with plots of land and INR 150,000 (USD 1,660) to build new homes, according to an officer of the Satabhaya Rehabilitation Project speaking to the media that year. But as the site was low-lying, residents had to level the land by as much as nine metres, adding soil before construction to prevent flooding. “We carried soil from nearby areas to lay the foundation ourselves. The trenches we dug would fill with water when it rained or when the groundwater levels were high,” Mohanty recalls.

Today, housing conditions have improved for a small number of families, “but the settlement as a whole falls short of providing secure and equitable housing”, says Swain. Some households, often supported by remittances from relatives working outside the village, have gradually built cement homes over several years. Others continue to live in mud and thatch structures, similar to those they left behind in Satabhaya.

The same inequalities extend to basic services. A few households can afford water storage tanks; others remain dependent on handpumps.

Dialogue Earth contacted both Kendrapara’s district magistrate and its Housing and Urban Development Department for comment but did not receive a response.

The rainy season brings another set of problems. “Skin diseases and diarrhoea are very common, mainly because of the waterlogging,” says Swati Sucharita Rout, the community health officer at Bagapatia’s community health centre. Apart from her, the facility has one pharmacist on duty, she says, while a doctor travels from Rajnagar once a week to see patients and prescribe medicines.

Children are often the hardest hit. And when the storms come, their school – the only one in the village – doubles as a cyclone relief centre. It often fails at that purpose, too, being scarcely able to accommodate all 571 families. Most leave their children at the centre, and risk shelter somewhere else.

Relocation without rehabilitation

Bagapatia was a settlement meant to help villagers rebuild their lives and adapt to a changing climate. Instead, the village has exposed the gaps in the state’s response to climate-related displacement: it reflects relocation without the conditions that make life liveable.

In 2022, India’s parliament introduced two bills to address climate-related displacement: the Climate Migrants (Protection and Rehabilitation) Bill, and the Rehabilitation and Relocation of Persons Displaced due to Climate Change Bill.

The climate migrants bill, introduced by member of parliament Pradyut Bordoloi, seeks to “establish an appropriate policy framework for the protection and rehabilitation of internally displaced climate migrants”. It proposes periodic risk assessments in climate migration hotspots, alongside measures to support adaptive agriculture, land and water use, and the diversification of livelihoods.

The rehabilitation and relocation bill proposes the creation of a committee with dedicated state officers to oversee resettlement, the distribution of funds, and the issuance of identity cards, ensuring displaced people can access government benefits. It also envisages the construction of essential facilities, including hospitals, schools and drinking water wells.

Both bills have failed to pass.

Ranjan Panda believes this reflects a deeper failure to grasp what displacement actually means. “We still lack a comprehensive rehabilitation policy that can make the process of relocation and rehabilitation just and inclusive,” he says.

The same fear that stalked Satabhaya now stalks Bagapatia. Swain urges the government to invest in erosion mitigation measures, such as planting mangrove forests: “If the government plants mangroves along the coast, the erosion can slow down. Without the forests, nothing will protect us.”

He fears the same erosion that consumed Satabhaya will eventually reach Bagapatia.

How long before that happens?

“Maybe in 20 or 30 years.”

Dimple Behal

Women in Mandla, Madhya Pradesh are becoming leaders of their homestead farms, write three experts from IWMI. 

By Tanmoy Bhaduri, Gulshan Borah, Sudharsan Malaiappan, February 26, 2026

Rows of brinjals, chillies, cowpeas, tomatoes and leafy greens shimmer in the morning sun in Kusum Devi’s lush backyard garden.

She lives in the small village of Chimkatola, perched in the hilly terrain of Mandla district, Madhya Pradesh, central India.

Kusum sprinkles a concoction made of cow dung, neem leaves and fermented jaggery (an unrefined cane sugar) over the rows of vegetables. She applies this natural pest repellent as well as bio-fertilisers on the crops every 15 days. “Earlier, we bought [these] from the market, but now, we make it all at home,” she tells Dialogue Earth.

Not long ago, this 10-decimal (400-square-metre) plot yielded little more than maize due to the region’s water stress, and offered meagre returns. Now, 35-year-old Kusum earns up to INR 1,200 (USD 14) per month selling her produce in the weekly market in Mandla town, after keeping some for her family’s consumption.

Kusum has also introduced 10 chickens into her garden. Their eggs provide additional income and nutrition for her family.

Along with those from several neighbouring villages, Kusum is part of a growing network of women farmers transforming Mandla’s uplands through the agroecological homestead model.

This model seeks to address key challenges – including malnutrition, irregular income and resource degradation – faced by Mandla’s tribal communities, such as in Chimkatola and neighbouring Kevlari. These villages are inhabited by the Gond and Baiga communities, recognised as Scheduled Tribes in Madhya Pradesh.

As Kusum’s backyard plot demonstrates, a key part of the model involves cultivating different kinds of vegetables at different heights, maximising use of space. This is alongside crop rotation, bio-composting, rainwater harvesting and livestock integration. The latter involves using organic manure for crop farming and crop residue or surplus for animal feed.

With this model, women farmers have been taking charge of production and decision-making on their families’ homestead farms, challenging traditional norms.

From monocropping to multilayer farms

The agroecological homestead model is an initiative of the CGIAR Multifunctional Landscapes Program and a grassroots organisation, the Professional Assistance for Development Action. Pradan, as it is known, works with the region’s adivasis, or Indigenous inhabitants.

Before the project began, most farmers in Chimkatola and Kevlari practised monocropping – of mainly maize in upland areas and rice in low-lying fields near rivers, notes Gopal Kumar.

Kumar is a researcher at the International Water Management Institute (IWMI), which is monitoring the project along with Pradan.

These crops were vulnerable to erratic rainfall, land degradation due to improper farming on steep slopes, and fluctuating market prices due to unstable fuel prices and other factors. Backyard plots were largely left fallow, with maize occasionally cultivated.

Gopal explains that to diversify income and ensure nutrition, in 2024 the institute introduced the agroecological homestead model to four villages in the Narayanganj block (rural administrative subdivision) of Mandla district. Women from Chimkatola and Kevlari visited these pilots, were encouraged by their success, and adopted the model, he notes.

Via the model, some farmers in Chimkatola and Kevlari have also adopted drip irrigation and portable water tanks (known as Jal Kunds) that can store up to 12,000 litres of rainwater. These small interventions have enabled year-round farming. “Earlier, we had to depend [solely] on rain,” says Yashoda Devi, a farmer in Kevlari. “Now, with the Jal Kund and drip irrigation, we can plan our crops and earn throughout the year.”

Each woman farmer participating in the agricultural homestead project cultivates around 400-500 square meters of land, using bio-fertilisers like jeevamrut and panchagavya, both made from cow dung and urine mixed with other organic matter.

According to IWMI’s findings, production diversity has increased by 350%, dietary diversity has doubled, and consumption of nutrient-rich foods such as leafy greens has gone up by 70%. Protein intake and household savings have also improved through backyard poultry, and families’ dependence on external markets for produce and fertiliser has fallen.

“Initially, farmers were hesitant to adopt natural inputs,” says Gopal. During the first attempt, heavy rainfall washed away everything, including bio-fertilisers, bio-pests, and seedlings. “But once they saw better yields and healthier crops, confidence grew. Today, more women are preparing and applying bio-formulations on their own.”

With men migrating, women lead

In the villages of Mandla’s Narayanganj block, men often migrate seasonally to nearby towns for work, leaving women to manage farms and households. Traditionally, their roles are confined to supportive labour such as sowing, weeding or harvesting. Under homestead model, however, they have taken charge of production and decision-making.

“Before, women waited for men to decide what to grow,” says Saurav Kumar, team coordinator for Pradan. “Now, they decide when to sow, what to sell, and how to reinvest [the proceeds]. The [model] has built confidence as much as capacity.”

He notes that the model has been co-created with women’s self-help groups, and that this participatory design aims to make the transition to leadership roles in farming as smooth as possible for the women.

Farmers told Dialogue Earth that income from their homestead farms supplements the remittances sent by their husbands, who usually work in construction or transport. “When my husband is away [working] in Jabalpur [a city in Madhya Pradesh], I manage everything here,” says Pushpa Devi as she harvests brinjal from her farm. “With [just] off-season prices, we earn enough to support children’s tuition fees and pay small household expenses.”

Yashoda Devi regularly supplies vegetables to a hostel in the nearby town of Bichhiya. “Last month alone, I harvested 33 kilograms of brinjal and earned about INR 1,200 [USD 14] profit from selling vegetables. It may seem small, but for us, it makes a big difference.”

In Chimkatola and Kevlari, two women-led associations of water users have been set up for farmers involved in the homestead model. This has been done through a connected scheme to bring solar-powered irrigation pumps to 13 women farmers, supported by the CGIAR program and the Swiss Agency for Development and Cooperation. The associations manage the shared pumps and generate income by providing irrigation. Excess power from the pumps is used to turn a rice mill, allowing farmers to process paddy locally.

The scheme sits under IWMI’s Solar Energy for Agricultural Resilience (SoLAR) project, with the pumps and the mill funded by IWMI, through government loans and farmers’ capital.

Each association maintains a bank account to manage revenue, with profits used to repay loans. Members have been trained in governance, financial record-keeping and maintaining solar infrastructure. “For the first time, women here are running a water system and handling finances,” Kusum Devi said.

Overcoming challenges and cultivating hope

Despite the visible progress, implementing agroecological practices in resource-constrained tribal regions has not been without hurdles. Limited capital, pest attacks, erratic weather and knowledge gaps continue to challenge homesteaders.

“The first few months were difficult,” admits Balwanti Devi from Kevlari. “Some crops were damaged by heavy rain, and we didn’t have money to buy organic inputs again.”

The project team has been exploring how participants can be supported by existing government programmes, Kumar of IWMI says. One way has been to encourage water-user associations to apply for subsidised loans for a new wheat mill and renewable-energy equipment through Madhya Pradesh’s state rural livelihood mission, which they are eligible for as self-help groups.

Self-help groups are being encouraged to access subsidised loans for initial investment, and labour costs are covered through public works – creation of waterbodies and irrigation canals – under the Rural Employment Guaranteed Scheme.

To ensure their farming is sustainable, women are provided training by Pradan staff in bio-composting, water management and crop scheduling. Farmers are learning to adjust sowing times and improve canopy management – to optimise light and air circulation in crops – and boost productivity using climate-resilient seed varieties, notes Saurav Kumar.

Looking to the future, the project team plans to establish wholesale centres where farmers’ produce can be transported to larger markets, he adds, to help farmers get more stable prices for their produce.

With the homestead project, women who once saw farming as mere subsistence now view it as enterprise. The transformation is visible not only in the fields of Chimkatola and Kevlari, but also in the confidence of the women who till them. “Earlier, we were invisible in farming,” says Kusum Devi, standing next to her farm. “Now, we are the decision-makers.”

Tanmoy Bhaduri

Tanmoy Bhaduri is a development journalist focusing on underreported issues in South Asia. Currently with the International Water Management Institute (IWMI) as science communicator, he weaves innovative narratives on water management and sustainable development.

As subsidies for renewables are phased out, market distortions mean renewables still can’t stand on their own feet, writes Zhang Shuwei. 

By Zhang Shuwei, February 25, 2026

Since implementing its renewable energy law in 2005, China has been rapidly rolling out wind and solar power – from 10 gigawatts (GW) per year early on to over 430 GW last year. The country now has about 1,840 GW of installed capacity, forming more of the power capacity mix (47.3%) than that derived from fossil fuels.

China’s new climate action plan, submitted to the UN last year, includes a target to almost double capacity to 3,600 GW by 2035. That would go far beyond what any other country has or aims to have. To achieve it, China must continue building and connecting renewables to the grid at pace.

Many think that the rapidly falling cost of installing renewables and improving technology means the sector can already compete on the open market. But as the share of renewables in China’s electricity mix keeps rising, generators are having a tougher time. They are dealing with fluctuating earnings, difficulty getting hooked up to the grid and low average prices for their output.

Amid these challenges, can renewables win sufficient revenue and investment to drive expansion and add the 200 GW or more of capacity required every year to achieve China’s target? Let’s take a look.

The new pricing system for supporting renewables

Reaching 3,600 GW very much depends on a document produced last year by China’s economic planning body, the National Development and Reform Commission.

Document 136 provides the top-level policy design for China’s energy transition. It includes so-called market mechanisms to promote the consumption of renewable power and consistent investment, laying the foundation for a new electricity system.

The document requires provincial governments to set up price-guarantee mechanisms for new wind and solar projects. These are similar to the contract-for-difference (CfD) systems used overseas. CfD systems mitigate the wide price fluctuations in electricity spot markets that give generators unstable incomes and scare off investors.

Under such a system, renewable generators bid against each other to supply electricity to the grid at a fixed “strike price”. When market prices fall below that price, which is set annually, the government pays the generator the difference. When market prices exceed it, the generator pays back the surplus.

These CfD mechanisms had been put in place by the end of last year. They spelled the end of feed-in tariffs, feed-in premiums, or benchmarking against coal power prices, and the start of a centrally led but locally determined system for price setting.

But the new rules have not straightforwardly stabilised generators’ income or given investors certainty on returns.

In Europe and the US, CfDs usually cover all electricity generated by a project. In China, to keep more control over profitability, most provinces are underwriting only some of the generation – between 40% and 80%. The remainder of a project’s income is subject to market fluctuations.

In one sense, the CfD mechanism resembles the “capacity payments” that some coal-power generators receive for standing idle, ready to produce power if needed to meet peak demand. That is, both are annual risk-free payments proportionally linked to a power plant’s rated capacity. 

China’s whole power system is shifting to capacity payments

Renewables aren’t the only form of generation being underwritten. China has rolled out capacity payments for several types of generation.

A system for pumped hydropower – a form of energy storage – was put in place in 2021, with payments in the region of CNY 500 (USD 72) per kilowatt per year made to 48 pumped hydro stations.

For “new-type” storage, which largely means battery storage, some provinces are paying between CNY 100-250 per kilowatt per year, with a national system for capacity payments implemented in early 2026.

For coal power, a 2023 document set fees at CNY 330 per kilowatt per year.

For gas, decisions on capacity payments have always been devolved to provincial governments, with provinces such as Guangdong and Jiangsu setting clear capacity-payment or subsidy standards.

China’s electricity system is clearly shifting from paying for electricity generated to paying for the capacity to generate it.

The CfD mechanism involves new wind and solar in this broader capacity-based subsidy system. In effect, the government is providing renewables facilities with a stable annual income, rather than them relying purely on market price signals.

Will income levels enable long-term expansion?

There are major differences in the amount of income support renewable generators receive across China’s regions. Judging from the strike prices and kilowatt-hours of power covered, wind power can cover its capital costs in most provinces. But returns on solar power in western provinces have reached the edge of, or even fallen below, the threshold of profitable investment – mainly due to lower than expected prices.

The support itself is also not consistent over time. Strike prices and covered quantities are set annually. While spot market prices change on a shorter timescale. Central government policy usually works on a five-year cycle. While provincial implementation of that policy adjusts annually. And electricity trading and settlement – meaning billing and payment – works to a monthly schedule.

In practice, monthly settlement means annual CfD-covered quantities must be artificially divided across the 12 months and settled at the monthly price. The actual subsidies projects receive are impacted by the changing monthly average of spot market prices, with generators giving up or receiving income depending on that average.

Subsidies are paid for by commercial electricity users as part of a “system operational fee”. Local governments, however, have concerns about the magnitude of the subsidies, and so the balance of the subsidy account influences how covered quantities are set in future.

Wind and solar projects require huge up-front investment, and their profitability and success relies on long-term stable cashflow. If electricity prices, covered proportions or settlement rules change frequently, investment risk quickly increases. That means higher financing costs and so less investment.

In theory, electricity spot prices should reflect the balance of supply and demand, but also send a signal to long-term investors. Under China’s current system, these prices are used more to recover costs and implement policy. Dispatch discretion, price ceilings and floors, and off-market interventions (including directed dispatch and off-market arrangements) make market prices lower than needed for long-term returns on investment.

As a result, renewable generators may still not be able to stand on their own two feet. They need to be supported by the new pricing mechanism as subsidies are phased out. Wind and solar power prices are still largely set in line with their costs, rather than the market price.

The issues of low prices and wasted generation

The part of a project’s generation not covered by the CfD mechanism can still be sold, via the spot market or through longer-term contracts. But that is limited as electricity markets are currently somewhat fragmented and distorted, plus there is not enough liquidity across markets in various time segments. Prices on short-term markets often drop the closer they get to real-time trades.

In Shandong, Zhejiang and Sichuan, the average electricity spot market price is significantly lower than the coal-power reference price, and close to zero when solar power generation is peaking. This price structure doesn’t reflect the actual “marginal costs” in the system but does significantly increase uncertainty for renewable generators. (Here marginal costs means the cost of the final unit of electricity needed to meet demand, which usually comes from a coal power plant when demand is high.)

That exposes uncovered generation to low and unstable prices, putting overall return on investment at risk.

As more renewables come online, wasted generation, or “curtailment”, is becoming a bigger problem, rising particularly in north-western China. According to reports, curtailment rates in Gansu are over 30% for solar and even higher for wind. The CfDs of Document 136 are closer to a “price guarantee, with conditions”: the guarantee only comes into play if a project is hooked up to the grid and actually generating power. It can’t provide discipline for electricity curtailments.

Rule restrictions behind the boom

Even with wind and solar generation costs having fallen significantly, China’s renewables remain highly reliant on predictable cost-recovery mechanisms.

In Europe and the US, market pricing is used to complete short-term clearing and is key to balancing real-time supply and demand. China’s electricity system, by contrast, has long regarded prices as a cost-recovery tool. This significantly weakens competition, and means the scale and structure of investments are made within a very policy-driven framework.

Achieving the 3,600 GW target on time will ultimately depend on whether local governments are willing and able to set CfD proportions at levels that ensure new projects can recover their costs.

Zhang Shuwei