Credit: Steffen Ramsaler / Flickr
Beginning in March 2015, following years of silence in electric system reforms, China has introduced new policies and documents reforming its electricity generation, retail, usage, and many other sectors.
The leading policy document, Several Opinions of the CPC Central Committee and the State Council on Further Deepening the Reform of the Electric Power System – also known as Policy No. 9 – have established a new framework which officials are referring to as “pipeline in the middle, open at both ends.” China is putting forth a series of reforms in electricity pricing, distribution and retail segments, electricity trading, distributed generation, and other aspects. Combined with the set of policies that followed, we expect that this round of electric system reforms will have a profound impact on China's electricity markets and industries.
(1) Changes to T&D pricing and grid operation models
New electric system reform policies. Source: CNESA
Policy No. 9 separates T&D and retail, establishes a principle of “approved costs plus reasonable profit,” and differentiates T&D prices based on voltage level . The policy also breaks up China's long‐standing model that integrates transmission, distribution, and retail in a single entity. It also puts a stop to practices where grid operators can profit from differences between generation and retail prices. The role of the grid will shift from that of an electricity trading body towards an electricity transmission provider, in which the grid will earn profits through a “toll” in exchange for services.
Before the issuance of Policy No. 9, Shenzhen and Inner Mongolia were T&D reform pilot regions. Another policy document emerging in the wake of Policy No. 9, Notice on Hastening Implementation of Policy No. 9-related Transmission and Distribution Reforms, will expand the pilot program to include Anhui, Hubei, Ningxia, and Yunnan, bringing the number of pilots up to six. We expect that this number will continue to grow.
Following the beginning of Shenzhen's T&D pricing pilot, electricity prices have dropped. From 2015 to 2017, Shenzhen's T&D prices will drop year-by-year: ¥0.1435, ¥0.1433 and ¥0.1428 per kWh, respectively. This is more than ¥0.01 less than 2014 levels. Electricity customers are already realizing the benefits of reform.
The changing role of the grid operator and a clarified T&D price will:
Create flexible electricity trading models
Introduce competitive pricing on the generation and retail sides
Promote the entrance of diverse participants into the electricity market
Improve utilization and efficiency of the entire electricity system
(2) Reforms to price-setting, and the formation of market trading mechanisms
Policy No. 9 clarifies that outside of T&D pricing and public welfare electric pricing, generation and retail prices will be determined by the market. Generators can determine prices through agreements with large users or retailers, or through market competition. In addition, during the process of reform, differences in electricity subsidies among different users will gradually undergo reform.
3) Generation and retail side competition, and a diversity of retail entities
In addition to prices being set by the market, Policy No. 9 shows that following the elimination of public welfare generation and use planning, generation-side generation planning and retail-side electricity usage planning will also be determined more and more by the market. Generation-side and retail-side competition will become much more intense. As private funding of retailers liberalizes, there will be more pathways to breed market entities.
In the new system, high-tech industrial parks and economic zones, privately-funded retailers, utilities such as water, gas, and heat providers, energy service companies, qualified generation companies, microgrid operators/owners, and others can all take part and fight it out in the future retail market.
Before Policy No. 9, Shenzhen's T&D price reform, the first of such reform pilots, had already been active in this respect. On March 24, 2015, Shenzhen's first privately operated retail electric company, Shenzhen Electric Power Retail Co. Ltd. (Shenzhen Dianneng Shoudian Co. Ltd.), officially received its industry and commerce permit. It is also China's first privately-owned retail electric company. Whether more of these companies will appear is a matter that will be watched closely.
(4) New ancillary services market
China's ancillary services have long been provided by grid‐connected power plants, without any ancillary service market. This will change with Policy No. 9.
Policy No. 9 establishes a new “shared responsibility” mechanism for ancillary services. This improves the compensation mechanism for ancillary services provided by grid‐connected power plants. It will use a “those who undertake are those who benefit” principle. It also establishes "shared responsibility, shared gains" mechanisms for user participation in ancillary services. Users, in accordance with their contracts with either generator companies or the grid, can be responsible for a required ancillary service fee, or some other type of economic compensation.
Another new policy document, Guiding Opinions on Improving Electric Operation and Regulation to Promote Greater and Fuller Use of Clean Energy (hereafter referred to as Opinions on Clean Energy), was drafted to promote renewable energy consumption. It also reemphasized the importance of ancillary services, and stressed the establishment and improvement of related mechanisms. These include peak shifting compensation mechanisms, incentivizing the direct purchase of clean energy ancillary services, and advancing the development of electric ancillary services.
(5) Demand side management and new electric service companies
One of the highlights of this electric reform is the simultaneous reform of electricity production and consumption. Policy No. 9 emphasizes demand side management in balancing the grid. The Notice on Perfecting Electric Emergency Mechanisms to Conduct City Pilot Demand Side Management emphasized the need to establish time-of-use pricing, incent the participation of private electricity service companies, and establish online electricity usage monitoring platforms to promote demand side management efforts.
Opinions on Clean Energy, from the angle of renewable energy consumption, also emphasized the importance of demand side management, increased time-of-use price spreads, comprehensive operation and usage subsidy policies, incentives for user participation in peak shifting and frequency regulation, and the establishment of demand side management platforms.
User usage behavior has a large impact on the overall efficiency of the electric system. Through demand side management and demand response, user load can become a dispatchable resource with a certain degree of flexibility. This can lower peak loads and play an important role in providing the grid with peak shifting and ancillary services.
(6) Gradual transition from fossil fuels to renewables, and the creation of distributed energy markets
Opinions on Clean Energy further promotes the usage and consumption of renewable energy after the release of Policy No. 9. Key methods included in the document for advancing renewable energy consumption include comprehensive overall planning for annual electric balancing, strengthening of daily operation regulations, sufficient ancillary services and other benefit compensation mechanisms, and strengthening of demand side management.
Of particular importance, Policy No. 9 emphasizes the establishment of new distributed energy development mechanisms, as well as the complete opening of user-side distributed energy markets. In reality, since the 2013 issuance of the NDRC Notice on Implementing Price Leveraging to Promote the Healthy Development of the Solar PV Industry, which established a ¥0.42/kWh subsidy for power provided by distributed solar PV, many localities launched their own local subsidy plans. However, distributed PV development has not completely been taken up. In 2014, only about 2.52 GW of distributed PV was installed, well short of the 6 GW target.
In the other reforms under Policy No. 9, distributed energy can now become a resource for regional retail companies via usage by specialized ESCOs, in addition to existing models such self‐consumption, grid feed-in, or grid dispatch.
Moreover, distributed energy, especially distributed PV, can work with energy storage and other devices to participate in demand side management, broadening the value of distributed energy. The distributed energy market can likely bring great development opportunities.
Energy storage is a flexible power resource, and has already proven many applications at all levels of the grid from generation down to the user. However, a great many bottlenecks continue to hamper widespread application. Outside of technological performance and cost factors, in China, the lack of appropriate mechanisms for market participation has been a major reason for the slow development of energy storage.
The new reforms will open up Chinese electricity markets such as demand response, ancillary services, and distributed energy, within all of which energy storage can play a major role.