China is shaking things up in the energy world! A major reform in renewable power pricing is underway, and it could accelerate the country’s transition away from coal. The key? Competitive auctions. But will this new system truly kick coal to the curb? That depends on the details.
Out with the Old, In with the Auctions
For years, wind and solar farm operators in China have enjoyed a fixed electricity price, linked to coal power rates, for a set portion of their output. Any extra energy? Sold at lower, fluctuating prices. Now, that's changing. Instead of these coal-pegged rates, new wind and solar projects will compete in auctions, where the market will determine their selling price. Since coal power is relatively pricey, this shift is expected to push electricity costs down across the board, a win for consumers and renewables alike.
Local governments are on the clock, tasked with rolling out this auction-based system by year-end. The new rules will apply to wind and solar projects completed after June 2024. Older projects? They'll still operate under the old fixed-rate model.
This is more than just a pricing tweak, it has the potential to reshape China's entire power sector. But with coal still the dominant player, the new policy needs careful execution to ensure renewables actually replace coal and help cut emissions.
How Will This Work?
China's new approach borrows from the UK's Contract for Difference (CfD) model. Here's how it works: renewable energy producers bid for contracts at a fixed "strike price". If market prices dip below this price, the government steps in to cover the difference. But if prices rise above it, the generator pays back the surplus. A dedicated fund, usually managed by the grid operator, handles these financial balancing acts.
The China-Sized Challenges
Of course, China's power market isn't quite like those in the West. Coal still rules the grid, and government intervention is common. As of late 2024, coal-fired plants provided around 60% of China's electricity, with prices often locked in through long-term contracts.
China's spot electricity market (where power is bought and sold in real time) is still in its infancy and often sends wonky price signals. Take Shandong province, for example—coal supplies 70% of its power, meaning electricity prices are mostly set by coal costs. In theory, these prices should stay positive, given coal's fuel and maintenance expenses. But reality begs to differ. Shandong has seen negative spot prices for more than ten hours straight, forcing power plants to pay to generate electricity. Yep, you read that right.
Then there's the issue of plummeting renewable energy costs. The expected strike prices for wind and solar are already far lower than coal's benchmark rates (around RMB 0.38 per kWh). That sounds great, but it could push companies to bid ultra-low just to secure contracts, squeezing their profits. If local governments impose strict price limits—as this reform suggests—the auctions could lose their competitive edge and end up resembling the old, government-controlled pricing system.
A Renewable Future with Speed Bumps
Another quirk in China's energy landscape: the government and grid operators, not market forces, dictate when and how renewables get dispatched. Grid operators focus on stability, often sidelining renewables even when there’s plenty of wind and sun to go around. Without market-driven incentives, this setup weakens renewables' ability to meaningfully replace coal.
And let's not forget innovation. CfDs might unintentionally slow down tech upgrades. Why? Because new projects have to bid against older ones that still enjoy higher subsidies or fixed prices. In the UK, CfDs have successfully lowered financing costs for renewables, but they come with trade-offs. For example, in Germany, wind power generators have kept their turbines spinning even when electricity prices turned negative, just to keep earning money—not exactly an efficient outcome.
Picking the right market price reference for CfD payments is another puzzle. Many CfD systems use day-ahead prices, which could reduce flexibility in real-time electricity trading. On the flip side, relying on real-time prices might make it harder for generators to plan ahead.
And let's not forget the wild world of wind energy. Wind power is naturally unpredictable, meaning operators might miss out on peak prices if the weather doesn't cooperate. Just ask Spain's wind farm operators, they've seen their revenues swing wildly due to fluctuating wind conditions.
The Verdict? It's Complicated
China's move to auction-based renewable pricing could be a game-changer, making wind and solar more competitive and pushing coal further into the background. But challenges abound—from distorted market signals to unpredictable policy tweaks. Whether this plan speeds up coal's exit or just adds new complexities to China's energy puzzle remains to be seen. Either way, it's a bold step toward a greener future—and one worth watching.
What's Next for CfDs in China?
The future of Contracts for Difference (CfDs) in China hinges on smart policy design and execution. Three possible scenarios help paint the picture:
Scenario 1: Renewables Take the Lead, Coal Bows Out
Renewables get dispatch priority, meaning wind and solar energy flow into the grid first, reducing waste. CfDs provide stable revenues, and well-functioning spot markets allow clean energy to quickly outcompete coal. Coal plants shift to backup roles, their market share shrinking fast. Since electricity prices stay above renewable strike prices, the CfD system generates a surplus—funds that can boost energy storage, smarter grid tech, or even lower industrial electricity costs. This is the fastest route to deep emissions cuts.
Scenario 2: Coal Fades Slowly, Competition Lags
Coal's decline is gradual, steered by policy rather than fierce market competition. Renewables grow steadily, but coal still holds a significant presence. Spot market prices hover around the strike price for wind and solar, keeping the CfD account balanced—neither racking up big surpluses nor major deficits. Government interventions continue to influence renewable dispatch, and emissions decline, but at a sluggish pace.
Scenario 3: Coal Holds On, Renewables Struggle
China's vast coal fleet, some 1,300 gigawatts, keeps running at high capacity, propping up electricity prices. The spot market remains constrained, leaving renewable developers fighting over a limited pool of direct contracts. When spot prices dip below renewable strike prices, the CfD system racks up deficits. If these losses are passed on to businesses, their electricity costs rise. Renewable capacity still expands, but curtailment worsens, failing to displace coal in any meaningful way.
Making CfDs Work
CfDs are a pivotal step in reforming renewable energy pricing, but their success depends on how they're designed and implemented. The goal? Not just adding more wind and solar but actively replacing coal.
- If CfDs consistently run deficits, renewables may be leaning too heavily on subsidies rather than competing effectively.
- If CfDs generate steady surpluses, it signals that renewables are making real inroads against coal.
For CfDs to accelerate China's energy transition, policymakers must fine-tune the system. Market signals, financial health, and proactive policy adjustments will determine whether CfDs drive a clean energy revolution, or just another layer of complexity in China's power sector.