China Power System Transformation |
Context and status of power system transformation in China |
commercial and industrial; agricultural; and residential. Within each pricing category, the retail price varies with voltage level and time of use. They are typically divided into peak, normal and valley prices.
Power system transformation in China is also seen in the growth of renewables in the power mix. The Chinese government has long encouraged the development of renewable energy through pricing incentives. A benchmark feed-in tariff for wind and PV was implemented in 2009. Grid companies pay an on-grid price for wind/PV power benchmarked to coal, and the central government subsidises the difference. Subsidies come from the Renewable Energy Development Fund, resources for which are embedded in the retail electricity price. This means that every consumer in China pays to support renewable energy development (NEA, 2012). The generous subsidy boosts wind and PV capacity, making China the largest wind and PV power operator in the world.
However, the expansion of wind and PV has created a significant deficit in available funds, despite feed-in tariffs having been reduced by central government several times. It is estimated that by the end of 2017 the deficit had reached CNY 100 billion (Chinese Yuan renminbi), and generators claim they have not received payments since 2015. The NEA has therefore designed and revised several times a mandatory quota allocation system, aiming to force either grid companies or other generators to purchase credits up to a certain percentage of their total consumption or generation, the credits being used to pay the outstanding subsidies (NEA, 2018a; NEA, 2018b; NDRC and NEA, 2018a).
Historical evolution
Between the foundation of the country in 1949 and the 1980s, China’s power sector followed a vertically integrated model. Central government was in charge of investing in the power sector and operating the system. During the 1980s, the nationwide “reform and opening up” campaign boosted China’s economy, but the power shortage at the same time largely hampered economic growth. The Chinese government thus adopted policies aimed at attracting power sector investment and increasing power supply capability.
The first major change in China’s power sector was made to the vertically integrated utility structure and ownership in 1984. Third parties outside central government, including provincial governments, local governments, state-owned enterprises, private-sector investors and foreign companies, were allowed to invest in power plants (State Council, 1985). Power plants built in this period were granted a power purchase agreement (PPA) with predetermined utilisation hours and power prices to guarantee the rate of return on investment. Moreover, a so-called “fair dispatch rule” was introduced in 1987 to ensure “transparency, equity and fairness” in dispatch and has been implementing ever since (see previous section “How the power system works in China”) (SERC, 2003a). At this time, although power generation was opened up to a diversity of investors, grid assets were still controlled by central government.
The second major change took place in 1998, when most of the assets of the power sector were transferred from the Ministry of Electricity to the newly formed State Power Corporation (SPC) (State Council, 1996). This marked the first step towards separation of government regulatory oversight and market operation. The SPC owned approximately half of China’s generation assets and almost all grid assets.
The third major change was the power sector reform of 2002, starting with the release of an official document entitled Power System Reform Scheme (Document 5). This largely contributed to the current shape of the sector’s structure (State Council, 2002). The intention of this round of reform was to tackle the oversupply of power – after nearly two decades of rapid increase in generation capacity, China no longer suffered from a power shortage. Instead the inertia of
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China Power System Transformation |
Context and status of power system transformation in China |
overinvestment in capacity and a reduction in power demand caused by the Asian financial crisis created and exacerbated an oversupply situation. Problems including regional overcapacity, inflexible dispatching and interprovincial trade barriers drew the attention of the highest-level leaders and led to the reform.
The goals of this round of reform, under Document 5, were to break the institutional monopoly and introduce competition, improve overall efficiency, particularly through interprovincial transactions, protect the environment and adopt better regulations. However, the initial idea of transforming the power system to a more energy-efficient and interconnected system was only partly realised for complex reasons (see Box 1).
The crucial changes during the Document 5 round of reform can be summarised as:
Unbundling the SPC: the SPC’s assets were disaggregated into five generation companies, two grid companies and four power service companies. The new “big five” generation companies were all state-owned enterprises, including Huaneng, Datang, Huadian, Guodian and China Power Investment Corporation. The two grid companies after unbundling were the State Grid Corporation of China (SGCC) and China Southern Power Grid (CSG). The four power service companies after unbundling were allocated the key power service businesses that had previously been integrated into the SPC.
Introducing regulation: the Chinese government clearly signalled its intention to introduce independent regulation by establishing the State Electricity Regulatory Commission (SERC) in 2003. Priority duties of the SERC were to establish rules for competitive power markets, with authorisation for supervising interprovincial power transmission, policy making and implementation. In general, the SERC had a positive influence on the progress of China’s power market transition, but some of its functions overlapped with the NDRC. The SERC merged with the NEA in 2013 (State Council, 2013).
Attempts to improve system efficiency: Several new initiatives to encourage market trading and more efficient dispatch were launched after the release of Document No. 5. However, not all achievements matched expectations. Attempts to improve system efficiency included:
Piloting regional wholesale power markets in the Northeast China and East China grids in 2002; however, the pilots were called off in 2006 mainly due to a surge in power demand and vested interests (SERC, 2003b).
Implementation of direct power purchasing in 2004, initially between power generators and large industrial consumers selected by the government; this has continued to be crucial in China’s market trading since then (SERC, 2009).
Promotion of interprovincial and interregional trading, although most of the trade deals have involved government projects such as the large hydropower plants (e.g. Three-Gorges dam) and trade deals between provincial governments (SERC, 2010).
Introduction of generation rights trading in 2008, initially intra-provincial, then expanded to interregional/interprovincial trading (SERC, 2008).
Piloting energy conservation dispatch as an alternative practice to the fair dispatch rule, although this encountered obstacles and saw limited application (State Council, 2007).
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Box 1. Lessons learnt from Document 5 round of reform
The Document 5 round of reform unbundled the vertically integrated power utility, established a regulation authority and attempted to introduce different market-based trading opportunities into the power system. In general, the reform has successfully ensured the rapid development of China’s power sector over the past decade; however, it did not realise all its initial objectives. Here are the lessons learnt from this round of reform:
Grid monopoly. Although the SPC was unbundled, the grid companies still had a negative influence on improving system efficiency. They acted as a single transmission and distribution system operator, plus a single buyer on the wholesale side and a single seller on the retail side. In addition, there was no separate transmission and distribution tariff, which made it difficult to know accurate investment and operational costs.
Institutional interests. While a consensus had been reached that cross-regional trading would benefit overall system efficiency, barriers could not be removed because of institutional interests. Resistance from provincial governments made interregional trading difficult, a result of the strong incentive for each province to rely on its own generation rather than import power from other provinces – the incentive was for each province to boost its own GDP growth. In addition, as provincial governments were responsible for power supply stability, the possibility of an uncontrollable blackout also hampered their willingness to accept interregional trading.
Market limitations. A market-based pricing system was important but not easy to implement. The government-determined benchmark pricing system was only seen as a temporary measure before the introduction of competitive markets. However, due to the opposition of provincial governments, generators seeking to maintain high revenues, and grid companies being threatened with losing some of their interests, the wholesale power market was not able to continue. Without a market-based pricing system, more efficient system operation could not be achieved.
Planning challenges. Experience demonstrates a deep-rooted fear of power shortages and the importance of planning. The Document 5 round of reform originated from a severe power oversupply that started in 1997. As a result, central government suspended construction of coal power plants from 1998 to 2000 and underestimated power demand in the 10th Five-Year Plan (2001-05). The dramatic growth in power demand after 2000 rapidly turned oversupply into shortage, resulting in another round of power construction and reform not being a top priority. Fear of power shortages has always been the greatest concern in China’s power sector. Therefore, power sector reform should be made with full awareness of this issue, even in an oversupply situation, and the planning process should consider measures to encourage the right levels of investment while avoiding oversupply.
Power sector reform in 2015
After several years of rapid development, China has realised many achievements in its power sector. Although they are remarkable, several remaining problems still need to be resolved to realise a more efficient, environmentally friendly, low-carbon and safe power system, especially under the circumstances of the clean energy transition and demands for environmental protection.
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