The future of China’s power sector, which accounts for about a quarter of the world’s annual consumption of coal and a still-growing fleet of coal-fired generation units, is one of the central questions for world climate policy. Within China, the National Development and Reform Commission and the National Energy Agency have been coordinating a power sector reform effort, including development of new electricity markets across the country. Depending on the implementation details, these markets promise to help improve the efficiency and flexibility of power system operations, promote integration of variable renewable energy (VRE), reveal the increasingly uneconomic nature of coal-fired generation assets and spur coal plant retirement. Indeed, the reforms are already helping to reveal the poor economic case for coal generation and putting downward pressure on coal generator profits. However, despite significant progress in recent years, there is much work to be done to iron out the complex details of market design and implementation — and to make sure these details work well as part of a coherent power sector policy package that includes planning, pricing, emissions trading and other regulatory considerations.
Against this backdrop, the State-owned Assets Supervision and Administration Commission (SASAC), an organization that has not previously been publicly involved with power sector reform, recently issued a new policy for reorganizing the state-owned enterprises (SOEs) that dominate coal generation. The first announcement was reported in the Chinese-language media in late November, with a more detailed statement circulated by media in May. The reorganization will begin with a three-year effort in the multiprovince Northwest region, where coal overcapacity and financial losses are heavy, but SASAC says it will likely be expanded to other coal-intensive parts of the country. The SASAC plan for the Northwest calls for “strict control” of new coal capacity, “elimination of outdated capacity,” reduction of coal-fired capacity for the region, and mergers to form a single coal generation SOE for each province in the region. SASAC’s May statement included a detailed list of required mergers, indicating resolve to push ahead with the plan.
This has been a contentious issue within China and among international observers. On one hand, the push to rationalize and reduce coal capacity is much needed. Various “below 2 degrees” scenarios call for coal generation capacity in China to decline rapidly. On the other hand, some critics argue that SASAC’s push to consolidate ownership threatens to undermine the new provincial wholesale “spot” electricity markets that the National Development and Reform Commission and the National Energy Agency have been fostering. The critics say that SASAC’s mergers may dampen competition at a critical early stage.
There are several ways to resolve this tension — maintaining SASAC’s push for coal capacity reduction while preserving the momentum of market reform:
- Creating spot markets with integrated multiprovince regional footprints would help foster competition across a wider geographic area and be very beneficial for VRE integration. The National Development and Reform Commission and the National Energy Agency have signaled their intent to gradually develop regional spot markets, but it would be useful to issue a more detailed road map, including plans for coordinating the responsibilities of market operators, dispatch centers (system operators) and regional energy officials.
- A strong framework for electricity market regulation will be essential. This can help ensure that electricity markets are producing efficient results that minimize costs and emissions, even if competition is weak in the early years of market development. Otherwise, a dominant coal SOE in each province will likely be able to undermine the market to preserve its position. Policymakers in several provinces have made moves to establish such a regulatory structure, including frameworks to estimate and monitor generator operating costs and generator market behavior, but this work is still at the early stages. Provinces like Gansu likely will need to implement markets with strict oversight of the dominant generator, replacing that generator’s bids with “mitigated” bids (i.e., bids based on estimates of the generator’s operating cost) to ensure efficient outcomes for costs and emissions.
- It is important to design spot markets so that real-time prices reflect true conditions on the grid and so that any resource that is able to provide energy and grid support services at valuable times and locations — including VRE and storage resources — is appropriately rewarded. The spot market price floors and ceilings featured in some provincial spot market designs may be counterproductive in this regard. A level playing field in spot markets for all resources will help bring in new competition and reduce emissions.
SASAC’s focus on maintaining hours of operation is fundamentally at odds with the idea that each resource on the grid should produce only when it is most efficient to do so.
- In addition to reducing financial losses, one of SASAC’s stated objectives is to “significantly increase the average number of full-load hours for each generator.” This goal is likely to clash with important power sector reform objectives to improve generator dispatch, increase grid flexibility and reduce VRE curtailment. Remaining coal generators will need to operate more flexibly to accommodate growing penetrations of VRE on the grid. SASAC’s focus on maintaining hours of operation is fundamentally at odds with the idea that each resource on the grid should produce only when it is most efficient to do so. Indeed, moving away from the traditional focus on generator annual operating hours has been one of the most important aspects of power sector reform. Because SOE managers keenly watch SASAC’s metrics for evaluating these enterprises, this goal may undermine reform efforts. SASAC should review all its metrics for SOE generators to ensure they drive economically efficient behavior and support the government’s stated power sector reform objectives, including those for clean energy.
In the big picture, SASAC’s new measures can be a positive step forward by creating a new process for coal generation retirement. The key is to get the details right and foster coordination across policymaking agencies so the interplay of electricity markets, SASAC coal reduction efforts, and broader power sector policies produces clean and efficient outcomes for China’s power sector.
*Photo by Samule Sun via Unsplash