event
25 Mar 2015: Electricity reform plan aims to deregulate electricity prices for industry by setting up an alternative market outside the NDRC price-controlled system allowing producers to sell outside their given quotas. Grid companies will not be able to influence price-setting in this market.
signals
- grid monopoly to be kept intact; following international trends set by UK, US
- power producers can generate at optimal capacity; not limited by state quotas
- power producers have more selling options; no longer reliant on grid companies
- in the alternative market, grid companies' role redefined from profit-oriented firm to a public utility
- grid companies to earn revenue through transmission and distribution tariffs based on a ‘cost + reasonable profit’ (revenue-cap) model instead of the on-grid and retail price difference. Aim: greater transparency and efficiency
- phasing out industry and residential price cross-subsidies
- subsidising residential price via industry tax to be trialled in new market
- high-tech industrial parks, non-state capital and public utilities can enter into distribution and sales, but no clear registration details yet
context
10 Feb 2002: State Council’s last major electricity reform plan was more ambitious. It aimed to split generation from the grid; transmission from distribution; distribution from ancillary services such as network design, construction, and maintenance; and introduce competitive pricing. State Electric Power Corporation SPC was divided into five power generation groups and two grid companies. Little headway was made on other objectives.
9 Jul 2003: State Council’s electricity price reform plan intended to restructure electricity prices into competitive on-grid tariffs, state-set transmission and distribution fees, and competitive retail prices. This corresponds to new separate companies for generation, transmission and distribution. Direct purchase pilots for large users were first introduced.
25 Dec 2012: NDRC announced it will no longer set the price for purchasing contracts between coal mines and coal-fired power stations. On-grid tariffs must be adjusted if coal prices fluctuate over 5 percent within a one-year period—passing higher or lower coal prices onto grid companies, but not necessarily end users.
24 May 2013: NDRC released a notice simplifying energy user categories. Retail prices will be based on three classifications: residents, agriculture, and industry. Public utilities and services are included in resident prices.
23 Oct 2014: Shenzhen pilot plan released. Basing transmission and distribution fees on a ‘cost + reasonable profit’ model aims to lower electricity prices.
20 Mar 2015: NDRC and NEA release first supporting document to promote integrating renewable energy into the grid. Grid companies must buy all produced renewable energy from quotas and bring it onto the grid. More of the electricity provided to the ‘three regions’ (Jingjinji, Yangtze River Delta, and Pearl River Delta) by grid companies must be produced from renewables.
7 Apr 2015: NDRC and MoF release second supporting document. Outlining demand-side management and demand response pilots in Beijing, Suzhou, Tangshan, Foshan, and Shanghai, it aims to solve power shortages during peak use by reducing demand or shifting electricity load off-peak.
outlook
- global competitiveness of domestic industry will rise with lower market-based electricity prices; incentives to reduce consumption and energy efficiency will fall
- local DRCs may have to pressure companies to participate in the alternative market; most transactions in direct purchase pilots required local interference
- power producers, especially clean energy that has higher costs than coal, unlikely to sell in alternative market if not cost-effective
- difficult to evaluate costs in the 'cost + reasonable profit' model without reaching the 2002 goal of splitting transmission and distribution services from ancillary services
- new distribution and sales companies will (as with Shenzhen pilot) struggle to compete with grid companies; may compromise emission reduction programs to cut costs
- high costs for new distribution and sales companies to set up and connect with grid company transmission networks
- success depends on future supporting measures: registration standards for new distributors and sellers; distributed energy development; independent trading platforms
- foreign capital in power sales and distribution depends on development of the negative list
roundtable
do not measure the strength of reform by whether it breaks up the grid companies
Liu Suhong 刘素宏 | Beijing News
Focus on splitting grid companies does not necessarily address the important matter of improving efficiency in these companies. Measuring reform by this standard moreover is amateur, swipes Zhou Dadi 周大地 NDRC Energy Research Institute former director. The 2002 plan was modelled on UK and US designs that have since shown significant limitations.
will prices rise or fall under the new electricity framework?
Chen Zongfa 陈宗法 | China Energy News
Electricity prices will slightly decrease over the next three to five years, argues Chen Zongfa 陈宗法 China Energy Research Society. Despite the large costs associated with renewables, de-carbonising thermal power plants, and lowering power producers' debt ratios, over-supply, a depressed coal market, and tighter supervision over transmission and distribution prices will overall push prices down.
with grid companies kept intact, where does reform resistance lie?
Chen Huanhuan 陈欢欢 | China Science Daily
Cross-subsidies are a major obstacle to competitive electricity prices. Residential prices, kept artificially low, will shoot up if marketised. Shenzhen, in this respect, is a poor choice for a pilot, argues Lin Boqiang 林伯强 Xiamen University. Cross-subsidies are not commonplace because the city’s high-density networks make it relatively cheap to supply electricity to residents. The Inner Mongolia pilot will offer a better test.
Zeng Ming 曾鸣 | North China Electric Power University professor
Admired specialist in electricity markets, power generation, and public utilities, Zeng was a key player in the 2002 electricity reform’s drafting process. He now argues for strengthening supervision over grid company costs and profits rather than splitting transmission and distribution. Rapid moves to marketise prices will hit low-income residents hardest. Zeng instead argues for a softly, softly approach: more pilots and more research.
Zhou Dadi 周大地 | NDRC Energy Research Institute researcher (former director)
Renowned energy economist, Zhou has over 30 years of experience in energy research and analysis working for NDRC, CNOOC, and developing the National ‘863 Plan’ (1986). Also prominent for his climate change work, he co-authored the Intergovernmental Panel on Climate Change (IPCC) Second and Third Assessment Reports. He is the vanguard of keeping grid companies intact—grid monopolies make for better managers—and argues residential prices will still be affordable if cross-subsidies are eradicated.
Wu Jiandong 武建东 | China Society of Economic Reform researcher
China’s go-to guy and leading expert on smart grids and smart energy networks, Wu argues market-based reforms are needed before traditional energy structures can be updated. Wu co-authored the ‘Green book on deepening electricity market reform’ (2013)—considered the blueprint for the 2015 new reform plan—that called for breaking up grid companies and setting up a smart network enabling producers to effectively interact with consumers. Despite keeping grid companies intact, he commends the new reform plan for more modest, but realistic, ambitions.