Putting China’s electricity market reforms on the spot

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Since beginning market reforms to improve the efficiency and reliability of its electricity system in 2015, China has made significant progress in deregulating the market to move away from the equal allocation dispatch regime.

In support of the reforms, the Implications of Energy Spot Markets in China report published by U.S. research organization the Rocky Mountain Institute has tested market scenarios based on representative samples from regions of northern China with a total 20 GW of electricity generation capacity – made up of 2% solar power, 74% thermal generation and 24% wind – and with peak demand of around 10 GW.

As well as helping policymakers and market operators achieve China’s goals of cost reduction and efficient dispatch, the report noted market design must consider the behavior of generators and other stakeholders in terms of the potential for political resistance to reforms, rewarding good behavior and removing the potential for actions that would render the market ineffective.

“Designing electricity markets is not a new problem but finding the right ways to address political challenges without sacrificing market performance is a huge one,” said Dan Wetzel, lead author of the report and a manager at the Rocky Mountain Institute. “Markets around the world are still struggling with this problem and each country has taken a different approach. Finding an approach that works for China’s power reforms is one of the most important regulatory challenges in the world right now. Even a small improvement in market implementation of China’s power sector could lead to a significant reduction of global emissions.”

Lower energy prices

Key findings of the report included that in the region modeled, implementation of a spot market could reduce electricity costs 3.6% – RMB627 million ($91.1 million) – and reduce carbon emissions 4.4%, or 2.1 million tons per year. The report added, that was a conservative estimate which did not take into account other possible changes in plant operation and regional grid interconnection.

Such reforms would also lower prices and push inefficient, expensive generators out of the market, resulting in a reduction in wholesale electricity prices without requiring flexibility in generation. In the study’s northern China model, the market exit of inefficient power plants saw prices reach RMB370 ($54)/MWh, which the report noted would be RMB11.2 lower than the benchmark price for the year modeled.

The report went on to note the ‘market optimization and simulation tool’ it developed for the study could be applied to other regions undergoing energy market reforms, including India and Southeast Asia.