China’s Electricity Market: Current State and Challenges
China stands at a critical juncture in its journey towards meeting its ambitious dual-carbon goals: peaking emissions before 2030 and achieving carbon neutrality by 2060. Central to this endeavor is the establishment of a unified national power market. This two-part article will delve into the characteristics and current state of electricity trading in China in part one. In contrast, part two will explore proposed pathways for establishing a unified power market.
Unprecedented Heatwaves Drive Electricity Demand
The global average temperature for July soared to 17.23°C, marking the highest monthly temperature ever recorded. This alarming increase is attributed to both global warming and El Niño conditions. In China, soaring temperatures since June have triggered a significant surge in electricity demand, causing the annual summer peak in consumption to arrive early. For instance, in the Beijing-Tianjin-Hebei region, temperatures spiked early, leading to a staggering 30% increase in grid load compared to last year. Due to high temperatures and drought, Sichuan and Yunnan, China’s major hydropower generators and hubs for “west-to-east power transmission,” witnessed a 24.4% and 43.1% drop in hydroelectricity output, respectively.
These events are troubling reminders of the power shortages experienced in 2021 and the peak load electricity restrictions imposed in Sichuan and Chongqing during the summer of 2022.
The Role of China’s Complex Power Grid
China boasts one-third of global power generation and operates the world’s most intricate power grid. Ensuring a secure power supply in the face of extreme weather events is of paramount importance. The power industry’s contribution to carbon emissions is equally significant, accounting for 40% of China’s total. Consequently, the transformation of this sector towards a low-carbon future holds the key to achieving the nation’s dual-carbon goals.
Challenges in the Path to a Unified Power Market
Despite the urgency to advance China’s power sector, numerous obstacles of power trading and market development stand in the way. These obstacles include hindrances to inter-provincial electricity trading, price inelasticity that hampers rapid market response, and insufficient support for developing and utilizing renewable energy sources. To overcome these hurdles, it is imperative to bolster the capacity for flexible, inter-provincial, and inter-regional electricity allocation. Moreover, the underlying market mechanisms for electricity must be critically examined and improved beyond relying on grid infrastructure to balance regional surpluses and shortages.
The journey towards a unified national power market in China is indispensable for achieving the dual-carbon goals of peaking emissions before 2030 and reaching carbon neutrality by 2060. However, the challenges posed by extreme weather events, the complexity of the power grid, and obstacles in power trading must be addressed urgently to pave the way for a sustainable, low-carbon future.
Evolution of China’s Electricity Industry Reforms
Since the inception of China’s reform and opening-up era in 1978, the country’s electricity industry has undergone a series of transformative reforms. The evolution began in the 1980s, progressing through multiple phases, including the transition from a vertically integrated planning and management system to the introduction of pooled financing for development, followed by the separation of government and business and eventual corporatization.
In 2002, the State Council introduced an Electricity System Reform Plan (Document No. 5) to break monopolies, introduce competition, enhance efficiency, reduce costs, and strengthen the tariff mechanism. However, this reform left certain critical issues needing to be solved, such as the absence of an electricity-trading mechanism and the inability to harness renewable energy resources to their full potential.
A New Wave of Reforms in 2015
In 2015, China embarked on a fresh wave of reforms with the issuance of the State Council’s Opinions on Further Deepening the Reform of the Power System (document no. 9). This initiative accelerated the development of the electricity market, particularly the spot market. Over the years, the market’s trading volume has steadily increased, establishing itself as a platform primarily for provincial-level transactions involving medium-to-long-term agreements among power generators, users, and sellers.
A Provincial-Centric Electricity Market
Since the release of Document No. 9, China’s electricity market has been structured around provinces as the fundamental unit. The implementation of reformed transmission and distribution tariffs, applicable nationwide, has been piloted at the provincial level. Currently, two-thirds of provinces are actively participating in comprehensive trials of electricity reforms.
Impressive Growth in Market Trade
According to statistical analysis, market trade in electricity, encompassing intra- and inter-provincial trading, experienced remarkable growth between 2017 and 2022. During this period, trade volumes surged from 1,632 terawatt-hours (TWh) to 5,254 TWh, expanding its share of China’s total electricity consumption from 25.9% to 60.8%.
Intra-provincial trading currently dominates the market, accounting for over 80% of China’s electricity transactions. The remaining portion is traded inter-provincially, with its share showing incremental growth, fluctuating from 17.9% in 2017 to 19.7% in 2022. Last year, intra-provincial trading reached a staggering 4,218 TWh, while inter-provincial trading amounted to 1,036 TWh, three times higher than those recorded in 2017.
Towards a Unified National Electricity Market
Despite the continued expansion of intra- and inter-provincial electricity trading, recent government policy documents indicate that “establishing a unified national electricity market” has risen to a national strategy. Expectations for the future of cross-provincial and cross-regional electricity markets are substantial, driven by the imperative to optimize resource allocation and mitigate inter-regional surpluses and shortages.
China’s electricity industry has come a long way through several reforms. Recent developments underscore the nation’s commitment to building a unified national electricity market, setting the stage for an exciting transformation in the management and utilization of electrical resources.
Setting the Stage for a National Unified Power Market System
Early last year, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) took a significant step by issuing the Guiding Opinions on Accelerating the Construction of a National Unified Power Market System. This marked the beginning of a comprehensive plan to systematically develop a national, multi-level, unified electricity market system by 2030, with the existing provincial-level electricity markets retained as integral components.
The 14th Five Year Plan (FYP) for a modern energy system, unveiled in March of the same year, emphasized the importance of establishing a unified national electricity market as one of the key electricity reforms during the FYP period.
In January of the current year, the NEA reaffirmed its commitment to this vision, making “the establishment of a unified national electricity market” the foremost priority in its Energy Regulatory Work for 2023. This directive also stressed the urgency of formulating plans and parameters for electricity market development, advancing the electricity market mechanism in southern China, and expediting the construction of electricity markets in critical regions such as the Yangtze River Delta and the Beijing-Tianjin-Hebei region.
Spot Market’s Resilience and Expansion
In the realm of electricity trading, the predominant focus has historically been on medium-to-long-term (MLT) transactions, supplemented by spot trading. Given electricity’s unique nature as a commodity that cannot be stored in significant quantities and must be precisely controlled by dispatching authorities in real-time, the wholesale electricity market typically consists of both MLT and spot markets, varying in trading cycle duration.
The MLT electricity market involves multiyear, annual, quarterly, monthly, weekly, and multi-day wholesale electricity transactions conducted through market methods like bilateral negotiation and centralized trading. These transactions occur among electricity generators, users, sellers, and other eligible market participants. Conversely, the spot market primarily covers day-ahead and intra-day transactions characterized by short trading cycles and heightened price volatility. In the past year, a substantial 79% of China’s total market-traded electricity was conducted through the MLT market, amounting to an impressive 4,141 TWh.
A Shifting Landscape
China’s electricity market landscape is evolving. Since the trial operation of the spot market in 2018, China has been diligently establishing more flexible, inter-provincial, and inter-regional spot markets to complement the MLT market. This effort has gained momentum.
Last November, the NEA issued consultation drafts of the Basic Rules for Electricity Spot Markets and Regulatory Measures for the Electricity Spot Market, extending the pilot spot markets to a national scale and laying the groundwork for consistency and efficiency throughout the electricity market. The development of the southern China electricity market, beginning with Guangdong, has played a pioneering role in creating a unified spot market for electricity at the national level. Notably, during the trial operation of the inter-provincial electricity spot market (State Grid operating region) in 2022, the cumulative volume of electricity traded for the entire year reached an impressive 27.8 TWh.
Challenges in Inter-Provincial Trading
Intra-provincial transactions dominate China’s power market, accounting for over 80% of market-traded electricity in the last five years. In contrast, inter-provincial trading represents less than 20% of total market-traded electricity. Even in 2022, inter-provincial spot trading constituted less than 1% of the overall market-traded electricity. Several factors contribute to this skewed trading pattern:
- Policy: The approach to electricity market reform has been province-centric, allowing provinces to determine their own paths and pilot programs for internal electricity markets. While this has nurtured mature provincial electricity markets, it has also led to discrepancies in rules, standards, and transmission and distribution tariffs, hindering inter-provincial coordination.
- Inter-Provincial Transmission: Optimizing and enhancing inter-provincial and inter-regional transmission channels remains a necessity. For instance, power restrictions in Sichuan in 2021 revealed issues with one-way transmission channels from Sichuan to other provinces, exacerbating difficulties during power shortages.
- Barriers Between Provinces: Objective barriers and challenges related to economic development and supply security hinder inter-provincial trading. Disputes, such as the disagreement between Yunnan and Guangdong, exemplify the complexities involved in transmitting electricity across provinces.
As we move forward, addressing these challenges will be pivotal in realizing the vision of a unified national electricity market and ensuring the efficient allocation of electricity resources across provinces and regions.
Breaking Down Inter-Provincial Barriers: A Pressing Need
The realm of inter-provincial and inter-regional electricity trading faces formidable challenges, from competition among development initiatives to the presence of inter-provincial barriers. Despite these obstacles, the demand for procurement in inter-provincial spot markets has surged due to fluctuating global primary energy prices and seasonal domestic supply shortages. In 2022, the volume of electricity traded across provinces and regions in southern China reached 230.7 TWh, marking a slight 1.4% year-on-year decrease. Notably, there was a remarkable 13.4% increase in market-traded power, accounting for 76.2 TWh.
The imperative has marked the past two years to secure electricity supply during peak summer and winter loads. Inter-provincial spot trading, characterized by its wide reach and short trading cycles, emerges as a market-driven solution for efficiently allocating surplus power to regions facing supply constraints. This approach incentivizes power firms to generate electricity during peak periods, aligning with their province’s supply and demand requirements. Consequently, it enhances the overall grid’s power supply and balancing capabilities.
The Shanxi spot market illustrates this concept, where spot prices reached the maximum cap of 1.5 yuan/kWh during the evening peak hours of July and August 2021, precisely when supply was strained. This robust incentive prompted generators to meet the peak demand, ensuring a reliable power supply within the province and facilitating inter-provincial transmission to needy areas.
Enhancing Grid Capacity for Reliable Energy Supply
Amid the current fluctuating electricity supply and demand landscape, improving the entire grid’s capacity to guarantee energy supply via inter-provincial and inter-regional spot markets takes on paramount importance. By leveraging market mechanisms to guide electricity flow from regions with surpluses to those experiencing tight supply, we can significantly enhance the resilience and efficiency of our electricity infrastructure.
The urgent need to dismantle inter-provincial barriers and embrace inter-provincial spot trading is evident. These measures strengthen our capacity to meet peak electricity demands and ensure a more secure and balanced energy supply for the entire nation.