China led the world in expanding renewable energy capacity in the last year

China led the world in expanding renewable energy capacity in the last year, and it's set to grow by another 60% over the next half decade, according to a report released Tuesday by the International Energy Agency.

Integrating that capacity could be difficult however, given a slowdown in demand for electricity and the fact that renewables still compete with less costly fossil fuels.

"China remains the undisputable global leader of renewable energy expansion, representing close to 40% of growth," the IEA said, noting that China's "air pollution concerns and a favorable policy environment are driving the growth."

IEA Renewable Energy Medium-Term Market report 2016

China's set to lead the world in renewable energy capacity growth.

The IEA predicts that in 2021, more than one-third of global solar photovoltaic and onshore wind capacity will be located in China.

Read:'Turning point' in green energy prompts IEA to drastically raise 5-year outlook

But the IEA also warned that "a new challenge of electricity overcapacity may emerge over the medium term given that China still has a substantial number of coal, nuclear and renewable plants under development."

At same time, the country is seeing a "slowdown in electricity demand growth driven by several factors including energy efficiency," it said.

A chart from the IEA shows very little growth year-on-year in China's electric demand for 2015, compared with year-on-year growth of more than 12% five years earlier.

Over the medium term, this "overcapacity situation" is expected to have an impact on the integration of renewables into an already congested power grid system, said the IEA.

The IEA pointed out that China's five-year plan for the economy released earlier this year aims to focus on shifting economic growth away from heavy industries such as coal . The plan also sets protection of the environment as a priority, with a focus on the quality of energy produced to bring down pollution levels.

China has been forced to seek out a more financially sustainable policy to "tackle the increasing total cost" to support renewable energy, the IEA said.

IEA Renewable Energy Medium-Term Market report 2016

The country installed over 160 gigawatts of non-hydro renewables since 2010 mostly supported by the "feed-in tarriff", or FIT, which was aimed at promoting investment in renewables, requiring power companies to purchase green energy at a set cost. But the FIT also caused renewable energy to appear more costly than fossil fuels such as coal.

The rapid growth in renewables, in turn, also "increased the financial burden, with the renewable energy surcharge more than tripling over the last five years" since it's introduction in 2009, the IEA said.

"Several policy options are on the table to decrease the cost of renewable support, but they are all at an early stage of development," it said.