Caixin Explains: Why China Needs a New Green Energy System and How It Could Work

China’s drive to reform its power system to create a more competitive and efficient market has reached a critical point due to the rapid growth of new energy sources such as solar and wind power. These changes are challenging the country’s energy system, which still relies heavily on fossil fuels (para. 1)(para. 2)Starting in 2002, China embarked on a series of reforms aimed at introducing market forces into its energy sector, the world’s largest electricity market, with the aim of ensuring a sustainable, clean and affordable energy mix (para. 3)The last phase of the reform began in 2015 and consisted in further liberalization of electricity prices and the introduction of a spot market for electricity trading. (para. 4).

Experts emphasize that further acceleration of the development of efficient energy markets is crucial to correct market distortions and improve resource allocation (para. 6). A major reform plan is expected at a Communist Party meeting scheduled for mid-July. (para. 7)Treating energy as a commodity and eliminating rigid systems and monopolies is expected to stimulate economic vitality and improve governance. (para. 8).

China’s energy sector is undergoing significant changes as renewable energy sources change the structure of supply (para. 9). Although coal still supplies around 60% of electricity, installed capacity from new energy sources now exceeds half of the total, reaching around 1,600 GW by the end of May 2023 – a 30% increase year-on-year (para. 11)However, the intermittent nature of renewable energy sources has led to complex problems of surpluses and shortages. (para. 12)emphasizing the need for a more stable energy market that can manage these fluctuations (para. 13)A modern energy system is essential for China to achieve its climate goals of peaking carbon dioxide emissions by 2030 and carbon neutrality by 2060. (para. 16).

Historically, China’s electricity market was monopolized by State Grid Corp., but reforms in 2002 broke that monopoly by splitting the company into several grid and power generation entities. (para. 20)(para. 21)The 2015 reforms aimed to open up markets for electricity generation and sale while maintaining tighter government control over the grid. (para. 24)Despite these efforts, some key producers and buyers do not participate in these markets, and prices remain increasingly state-fixed. (para. 26)Recent crises, such as the coal price spike in 2021 and the drought in 2022, have forced further reforms aimed at liberalizing prices and better integrating new energy sources (para. 27).

The aim is to create a single national electricity market by 2030, comprising multi-layered markets at national, regional and provincial levels, as well as different types of trading markets. (para. 29)Spot markets and a higher share of renewable energy are key to these reforms (para. thirty)From 2023, almost 47% of new energy production is traded on the energy market, with all new energy capacity expected to be traded on the market by 2030 (para. 33)Next steps include deepening existing reforms and clarifying energy distribution and trade rights, while defining the role of local authorities (para. 34).

China’s growth in new energy demand has been encouraged by state-set prices and guaranteed purchases, but the imbalance between capacity and production has led to energy shortages (para. 36)(para. 38). The utilization rate of wind and solar energy remains below expectations, leading to significant energy waste (para. 41)(para. 43)To balance the energy system, a more effective pricing system is necessary that reflects supply and demand. (para. 45).

Absorbing wind and solar energy is difficult due to limited grid capacity and the inherent variability of these energy sources, which results in significant energy waste (para. 47). Energy-intensive businesses also struggle to access cheap green energy. Developing an integrated source-grid-load-storage network is seen as a viable solution, but has faced opposition from national grids (para. 49)(para. 50).

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