Economic Daily recently invited some experts including Professor Qixin Chen, Deputy Director of the Energy Internet Research Institute of Tsinghua University and Executive Deputy Head of the Energy Internet Think Tank Center, to discuss the progress of electricity market reform. We have summarized some key points from Professor Qixin Chen’s perspective.
China’s power market construction has been steadily advancing since a new round of electricity system reform, shaping a power trading market system with diversified participants and orderly market competition. This year, the State Council issued the “General Plan for the Comprehensive Reform Pilot of Market-oriented Allocation of Factors” and proposed to support pilot areas to improve their market-oriented power trading mechanism, carry out spot power trading pilots, and improve the power market ancillary service. This issue of Economic Daily focuses on the discussion about power marketization reform.
Host: How have the pilots of the spot power trading market been progressing? Is there anything we can learn from international experiences regarding how to solve existing problems in the construction of spot markets?
Qixin Chen: Since the first batch of spot power trading market pilots was introduced by the National Development and Reform Commission (NDRC) and National Energy Administration (NEA) in August 2017, the development of China’s power spot market has been steadily advancing. Among these pilot regions, five of them, Guangdong, Shanxi, Shandong, Sichuan, and Gansu, started continuous trial operations of spot trading in 2021 and have been maintaining operations since then. During this time, the rules were updated and iterated according to the trial operation results. Zhejiang and West Inner Mongolia recently updated their rules regarding spot markets. Zhejiang would carry out trial operations for simulation and dispatch of the spot markets after confirming the new rules, while West Inner Mongolia has started trial operations for continuous settlement since June 1, 2022. Since the commencement of trial operations of long-term settlement in Fujian in 2020, power generation has been taking a unilateral participation approach. Recently, the market trading rules in Fujian have been revised, and the simulation and settlement trial operations will be promoted once the rules are approved. In March 2021, the second batch of spot power trading pilot regions was announced, including Shanghai, Jiangsu, Anhui, Liaoning, Henan, Hubei, etc.
China currently has a total of 14 electricity spot market pilot regions, and the results of electricity spot market development are remarkable. Firstly, it fully reflects the role these spot markets play in price discovery for power resources. Under the spot market mechanism, market participants declare supply and demand bids in advance. Then, these bids are cleared by the market operation agency to establish time-segmented market clearing prices that reflect the different time-value attributes of electrical energy. When there is congestion in the system network transmission, different regions and nodes may experience different electricity prices that reflect the different spatial-value attributes of electrical energy. The different time and spatial price signals guide market participants to use energy in a more scientifically informed manner. Secondly, diversified market participants participate orderly and enjoy the social welfare released by the market mechanism. Many pilot regions have now achieved bilateral participation from both power generation and power consumption sides, where quoted quantities and prices from both sides are taken into consideration to optimize resource allocation. Thirdly, it establishes an effective transition between medium- to long-term contracts and spot market transactions. Typically, more than 80% of market transaction volume is locked in medium- and long-term contracts to mitigate risks. However, many medium- and long-term contracts only determine the quantity and price, without reaching an agreement on the detailed electricity settlement curve, which poses challenges in connecting with the spot market. Some pilot regions have proposed solutions such as standardized settlement curves for the electricity spot market, achieving efficient transitions between medium- and long-term transactions and the electricity spot market.
The electricity spot market is developing in an orderly manner, yet there remain certain issues that need to be addressed. Differences persist in the progress of development and trading rules of power spot markets across different regions, posing challenges to the establishment of a unified national electricity market. The pilot mechanisms of the electricity spot market have not accounted for the high proportion of renewable energy sources, and there are uncertainties in the market operation under the framework of the new electricity system. The openness of the electricity spot market in some regions needs improvement, and the participation threshold and trading restrictions need further relaxation, to bolster the breadth and depth of the allocation of resources.
China has the world’s largest power system and has forged a distinctive organizational model of the electricity spot market through practical operations. The model ensures optimized power resource allocation while safeguarding a safe and stable supply of power energy. Therefore, addressing the existing issues in the electricity market requires tailored solutions that are contextually appropriate. Nevertheless, valuable lessons can still be drawn from well-established international markets to target some common developmental challenges facing China’s electricity markets.
In terms of multi-level market coordination, Europe and the United States have both seen cross-regional and large-scale electricity spot market coordination in recent years to cope with challenges brought by a high proportion of renewable energy. China may use this as a reference for developing a standardized national electricity market system. For the future construction of electricity spot markets, it is suggested to design a multi-level market coordination architecture and a standardized system of spot market rules to guide local and cross-regional transactions on trading sequence, clearing and settlement to ensure compliance with spot markets' operation mechanisms in different regions.
In terms of the adaptation mechanism of this new power system, regions with a high proportion of renewable energy, such as Europe and California, have begun to experiment with market mechanisms that are high-proportion renewable energy oriented and revise the existing mechanisms. For example, they introduced incentives for market participants to provide new ancillary services such as flexible ramping, provided capacity compensation or capacity markets for reliable energy sources like thermal power, and addressed missing energy price signals caused by high proportion renewable energy with seldom pricing mechanisms.
In terms of orderly market operations, there have been large fluctuations in energy prices in the past two years. Regions such as California, Texas and Australia have experienced power shortages, power rationing or market suspension at different times. Benefiting from the robust electricity spot market mechanism, power market prices in China have been maintaining a relatively stable level. However, restrictions such as harsh market entry requirements and allowing only unilateral participants has also been limiting the optimization and allocative efficiency of resource to a certain extent. We need to enhance the efficiency of resource optimization and allocation to the best ability while preserving the orderly market.
