Cover Story: China’s Power Market Reform Poised to Level Up as Renewables Plug In

China has been on a two-decade-long campaign to reform its power sector to ensure a stable nationwide electricity supply, predominantly using fossil fuels, while simultaneously working towards carbon reduction goals through renewables.[para. 1] The main objective is to balance, secure, clean, and provide an affordable energy mix by integrating growing capacities of solar energy and other renewables into the national grid and power trading system.[para. 2] Despite initial success with lifting state-set power pricing, new energy providers face difficulties in market participation due to supply fluctuations, presenting a significant challenge for policymakers.[para. 3]

The imbalance between traditional coal-fired generators and new energy providers has significant consequences for China’s electricity grid, which is critical for the country's economic growth.[para. 4] While coal still constitutes about 60% of China's electricity, renewables have grown considerably, reaching an installed capacity of 1,600 gigawatts (GW) by May, a 30% year-on-year increase now making up over half of the total installed capacity.[para. 5] However, actual generation from key renewables is much lower, with solar providing less than 5% and wind just over 10% of the nation's total. Increasing these levels remains a major policy challenge.[para. 6]

China’s new energy capacity boom has been driven by state-set on-grid prices and guaranteed power purchases to meet carbon reduction targets. The combined wind and solar power capacity surpassed 1,130 GW by April, likely meeting the target of 1,200 GW by the end of 2024, six years ahead of schedule.[para. 7] Nonetheless, post the 2015 reforms, the government relaxed control over power generation and sales, retaining control over the grid.[para. 10] Easing mandatory purchase requirements for grid companies to buy new energy sources further complicates policy goals, as fluctuating new energy supplies challenge stable grid integration.[para. 12] Solar and wind energy's intermittent supply can lead to both excess and shortage in various regions despite installed capacity.[para. 13]

For instance, solar power peaks at noon, causing system operation complexities and significant power production costs due to its fluctuations.[para. 14] Market prices for new energy have tumbled in some regions like Gansu, impacting company revenues and highlighting the high costs despite decreasing generation costs.[15,16] The disparity between installed capacity and actual generation is stark, with solar accounting for 21% of total installed power capacity but only 3% of total generation, reflecting low utilization rates.[para. 18] This situation exemplifies the difficulty of balancing stable power supply, new energy development, and cost management.[para. 22]

China needs to reform its pricing systems, originally designed for fossil fuels, to accommodate the intermittent nature of solar and wind power.[para. 23] The IMF emphasized the urgency of developing robust power markets to improve resource allocation and correct market distortions.[para. 24] Chinese authorities aim to create a unified national power market system, expected to be initially completed by 2025 and fundamentally by 2030, to support multi-layered, varied market types.[34,35]

Emphasis is placed on developing spot markets and encouraging renewables in trading to form accurate pricing mechanisms.[para. 37] Despite challenges, progress is evident as the share of new energy traded on the power market increased from 22% in 2021 to 47% in 2023, with aims for full market trading by 2030.[42,43] As the market evolves, more effective pricing signals are crucial to reflecting supply and demand accurately.[45,46]