China Power Sector Reform: Key Issues for the World’s Largest Power Sector
China’s power sector is now the largest in the world by a number of measures, and its transformation is crucial to global climate goals. In March 2015, Chinese authorities launched a new round of power sector reform with what is known as “Document #9.” This document sets out a broad vision for the power sector, framed in terms of the need for reliability; increased use of market mechanisms; protection of residential and agricultural consumers; energy savings, emissions reductions, and increased use of renewable and distributed generation; as well as better governance and regulation, including better planning and strengthened capacity in terms of regulatory agencies and approaches. The challenge now is to develop a detailed, well-implemented set of policies, institutions, and regulations that realize these principles.
This discussion draft synthesizes several reports published in recent years by RAP that analyze the context and current status of power sector policy and regulation in China, draw parallels with international experience, and offer recommendations for the next stages of reform. It focuses on three key topics crucial to China’s power sector:
- Planning. China needs coordinated, integrated processes for planning generation, transmission, and environmental impact, as well as transparent mechanisms to identify the least-cost mix of resources. The U.S. experience with integrated resource planning (IRP) may be useful for China.
- Generator operations and pricing. The approach to pricing, in which coal and most gas generators are compensated on a per-kWh basis and are reluctant to accept cuts in their allotted hours, is a major barrier to reform. This paper briefly considers several reform possibilities: strengthening generation rights trading, implementing two-part pricing (capacity and energy prices), or designing new, liberalized wholesale market mechanisms.
- Grid company regulation. The report discusses how to align China’s two major state-owned grid companies’ behavior and investment decisions with the government’s policy goals.