Emerging trends in system transformation in China

11 This section follows Power Sector Reform in China: An International Perspective (IEA, 2018a).

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further expanded to all provinces within the Southern grid region in the future. If successful, this market design could be the basis for spot markets in the other Chinese provinces. The design incorporates many features that are considered state of the art, including:

Central optimisation of the commitment and dispatch of units by the system operator, taking generators’ bids and security constraints into account.

A gross pool model, where prices will be defined by the most expensive clearing bid.

A high granularity of prices, geographically (with different prices for every node in the system) and temporally (with trading intervals of 15 minutes).

Integration of operations across a large geographical area, which will allow participating provinces to benefit from sharing their resources.

The capability for demand and supply to bid, although only generators will be able to bid in the first stage of the pilot project.

Optimisation of all ancillary services.

Settlement of longand medium-term contracts through contracts for differences, taking as reference the price in the day-ahead market.

A centralised system of bonds that will be used to guarantee all the long-, mediumand short-term transactions, meaning that the power exchange will also work as a clearing house.

Implementation of capacity markets, financial transmission rights and other remaining derivatives after 2020.

The Guangdong spot market takes into consideration the existence of plants not participating in market transactions (type A plants), which will continue with the existing on-grid feed-in price, and those participating in the market (type B plants). The description of the market acknowledges that old rules will coexist with the new market, but defines as an explicit objective the gradual phasing out of the generation defined by administrative authorities in type B plants.

An interregional spot market for surplus renewable generation was established in August 2017, aiming to promote the integration of renewables. Sellers are mainly from provinces with high renewables curtailment rates, such as Gansu, Xinjiang, Ningxia, Qinghai and Sichuan. Buyers can be large consumers, power retail companies or local grid companies. The spot market runs on a small scale due to reliability and stability considerations, allowing only renewable energy unable to integrate after trying all possible methods of participation. The price of the surplus generation tends to be low, which is favourable to the receiving-end provinces in the Central and Eastern regions. In 2017, 6 TWh of renewable generation was traded on the surplus renewable spot market (total power consumption was 6 307 TWh). Gansu Province, the largest trader in the market, sold 2.35 TWh in the first half of 2018.

Incremental distribution grid pilots

Incremental distribution grids are a key part of the Document No. 9 round of reform (NDRC and NEA, 2016b). One reason for promoting distribution grid reform is because, unlike the regional/provincial monopoly on transmission, power distribution can be a local monopoly at the level of the municipality. Therefore, breaking the monopoly on distribution from China’s grid companies has the advantage of allowing comparative competition between distribution companies. This, in turn, promotes competition between management teams and in input markets, and increases responsiveness to customer demands for quality of service. An additional reason is that institutional innovation in power distribution could provide support for

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a future power system with more VRE and distributed power generation, helping realise the power system transformation.

Incremental distribution grid reform allows more participants to enter the distribution segment. The NDRC and the NEA have identified 320 distribution grid pilot projects in 3 batches. Incremental distribution business, in principle, refers to local power grids of 110 kilovolts (kV) and below, an industrial park of 220 kV and below, or an economic development zone of 330 kV and below.

The progress of these pilots is lagging behind. A survey of distribution grid pilots in 14 provinces was conducted by the NDRC and the NEA in August 2018, showing that only one-tenth of the pilots actually finished construction, with even fewer able to progress to trial operation. The main reasons for the slow progress are resistance from the grid company, which is afraid of losing some of its business, and the lack of a complementary pricing mechanism. However, central government is demonstrating decisiveness on the reform and has mandated deadlines for these pilot projects. SGCC has also taken action to accelerate progress and has issued a dedicated plan in late 2018 to accelerate implementation of incremental distribution grid network pilots.

Unlocking the retail side

Traditionally, grid companies in China acted as the single seller on the retail side. To unlock the retail market, central government decided to introduce market competition in retailing by allowing other players outside grid companies to do retail business (NDRC, 2015b). As a result, consumers – including SMEs, residential and agricultural users – are able to purchase power at the market price rather than at the benchmark retail price issued by government. By 2017, the following progress had been made:

The number of registered retail power companies had reached 3 500.

Power trading between generators and retail companies had exceeded 90% of total provincial power trading in Guangdong, Shandong and Anhui provinces.

Power trading via retail companies had exceeded 30% of total provincial power trading in Shanxi and Yunnan provinces.

Trading centres and regulatory committees have also been established:

By January 2018, 35 power trading centres had been founded nationwide, comprising 33 at the provincial level, and two at the regional level, namely the Beijing trading centre in the SGCC jurisdiction and Guangzhou trading centre in the CSG jurisdiction.

Based on power trading centres, 26 regulatory committees have been founded. Members of the regulatory committee consist of delegations from power generation companies, power grid companies, power sales companies, consumers and trading centres.

Power plant flexibility pilots

Increased power plant flexibility has been piloted in Northeast China and proved to be successful in lowering the curtailment rate of variable renewables (NEA, 2016b). Northeast China has excess generation capacity, a large proportion of which is at co-generation plants, alongside a substantial amount of wind power generation. These co-generation units run at a high operating rate during the winter heating season and cause wind curtailment. The ancillary service market was introduced in 2014 to incentivise the flexible operation of coal plants. All plants are required to provide downward regulation, that is, reduce output if called upon at no cost if the plant’s output is above a certain threshold (typically 50% of the maximum generation capacity). If the output of the plant, however, is below the threshold while providing downward

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