China’s Distributed Energy: Innovation or Illusion?

“The push is top-down and massive”

By: Tim Daiss

House to house power. Image from EV Energy Blog

China’s clean-energy transformation has dazzled the world, but behind the megaprojects and record-breaking numbers lies a quieter revolution, one built not on massive hydro dams or sprawling solar farms, but on thousands of small, distributed energy resources (DERs).

Rooftop solar, local wind, smart grids, and electric-vehicle (EV) batteries all feed power back into the system, a strategy meant to make China’s energy mix cleaner and more resilient. It also gives Beijing bragging rights with global media outlets and in sustainability circles. But much of that praise might be misdirected.

A new International Energy Agency (IEA) report, “Integrating Distributed Energy Resources in China,” paints a nuanced picture. The country is indeed leading the world in distributed energy deployment, but it’s also wrestling with the contradictions of scale, control, and market design. In typical Chinese fashion, the push is top-down and massive, signaling its greatest weakness.

Distributed boom that’s still centralized

The IEA notes that China’s installed rooftop solar capacity now exceeds 200 GW, a staggering figure that would outclass the entire renewable capacity of some continents. The government’s “Whole-County Rooftop PV” initiative alone covers more than 2,000 counties and millions of Chinese households. EV ownership and charging infrastructure are exploding as well. China already accounts for nearly two-thirds of global EV sales. China is also the undisputed EV manufacturing hub, responsible for more than 70 percent of global production.

Yet the country’s power sector remains tightly controlled by state-owned grid companies, leaving limited room for true market signals or independent participation. The IEA puts it bluntly: China’s distributed generation is expanding faster than the system designed to integrate it. In practice, that equals stubborn electricity grid curtailment, inefficiencies, and grid congestion. In short, the “distributed” future is still being run by energy planners and bureaucrats in Beijing.

The contradiction is structural. China wants flexibility, but it also wants control. The central grid operators, State Grid and China Southern Power Grid, are tasked with integrating millions of small-scale resources without losing oversight of system stability. That’s no easy feat in a country with nearly 1.5 billion people and a transmission network stretching more than 1.2 million km.

Against that backdrop, the IEA calls for “a new regulatory framework” that rewards flexibility, data sharing, and fair market access for third-party providers. But as anyone familiar with China’s state-capitalism model knows, market reform tends to move only as fast as political comfort allows. This has already been proven in countless sectors, including the country’s coal industry. Notably, for every pilot program that opens up to private participation, there’s another that doubles down on state coordination.

Still, pressure is mounting. The more distributed resources connect to the grid, the greater the risk of imbalance, instability, and energy waste. Without reform, China’s world-beating renewable build-out could hit diminishing returns.

One promising frontier, and one that China is uniquely positioned to dominate, is the use of Big Data and artificial intelligence (AI) to manage this distributed chaos. The IEA highlights pilot programs where AI-driven platforms coordinate real-time power flows among distributed units. Some of these platforms can predict consumption patterns, reroute electricity to avoid local overloads, and even orchestrate battery discharges at the neighborhood level.

In theory, such digital coordination could offset the central planning rigidity. But it raises another concern – data monopolies. The same state-owned entities that control the wires also control the data streams. For China, energy security is inseparable from information control, and that means any smart grid will remain a highly monitored one.

Market integration vs industrial policy

While Europe and parts of North America are experimenting with competitive peer-to-peer energy trading, China’s approach to integration is industrial, not market-driven. Beijing’s 14th Five-Year Plan doesn’t just target gigawatts of capacity, it also sets quotas for domestic equipment manufacturing, software development, and digital infrastructure. In other words, it creates a self-contained industrial ecosystem.

That policy delivers scale and speed, but it risks distorting incentives. When subsidies drive deployment more than economics, capacity can outpace demand. Already, rooftop solar installations in some provinces are being switched off during peak hours because the grid can’t absorb the excess power. The IEA warns that these inefficiencies could worsen unless China modernizes grid-pricing mechanisms, introduces flexible tariffs, and allows more local balancing markets.

There’s also a geopolitical undertone. China’s distributed-energy model, if successful, would easily export to Southeast Asia, Africa, and parts of Latin America. Chinese companies already sell the panels, the batteries, and increasingly the digital management systems that make DERs work. If the rest of the developing world follows that template, China won’t just dominate hardware; it will shape the software of global energy governance.

Washington policymakers and US firms should heed this as a warning shot. However, these developments show both the brilliance and the danger of China’s model: speed and scale at the expense of transparency and competition.

China’s distributed-energy expansion is both an engineering triumph and a policy gamble. It is building the largest decentralized energy network in the world, but running it with a centralized mindset. Whether that contradiction can hold will determine not just China’s energy future, but the pace of global decarbonization. For now, the IEA’s message is clear: distributed energy can only succeed if power, both electrical and institutional, is shared more broadly. That may prove to be the hardest reform of all.