Cover Story: China’s Energy Market Reform Set to Rise as Renewables Emerge

China has been campaigning for two decades to reform its energy sector to ensure a stable electricity supply across the country, largely using fossil fuels, while also pursuing carbon reduction goals through renewable energy sources.(para. 1) The main objective is to balance, secure, clean and provide an affordable energy mix by integrating growing solar and other renewable energy capacity into the national grid and energy trading system.(para. 2) Despite initial success in abolishing state-set electricity prices, new energy suppliers face difficulties in participating in the market due to fluctuating supply, posing a significant challenge for policymakers.(para. 3)

The imbalance between traditional coal-fired power plants and new energy suppliers has serious consequences for China’s electricity grid, which is crucial to the country’s economic growth.(para. 4) While coal still accounts for about 60% of China’s electricity generation, the share of renewables has grown significantly, reaching an installed capacity of 1,600 gigawatts (GW) by May, up 30% from a year earlier and now accounting for more than half of the total installed capacity.(para. 5) However, actual generation from key renewable energy sources is much lower, with solar providing less than 5% and wind just over 10% of the country’s total energy. Increasing these levels remains a major policy challenge.(para. 6)

China’s new power capacity boom has been fueled by state-set grid prices and guaranteed power purchases to meet carbon-cutting targets. Combined wind and solar capacity exceeded 1,130 GW by April, likely meeting a target of 1,200 GW by the end of 2024, six years ahead of schedule.(para. 7) However, following reforms in 2015, the government relaxed controls over energy generation and sales while retaining control over the grid.(para. 10) Relaxing mandatory purchase requirements for new energy sources further complicates the achievement of policy objectives, as variable supplies of new energy make stable grid integration difficult.(para. 12) Intermittent supplies of solar and wind energy can lead to both excess and shortages in different regions, regardless of installed capacity.(para. 13)

For example, the peak use of solar energy occurs at noon, which makes the system difficult to operate and causes significant energy production costs due to fluctuations.(para. 14) Market prices for new energy have fallen sharply in some regions, such as Gansu, which has hit company revenues and highlighted high costs despite falling power generation costs.(15,16) The gap between installed capacity and actual production is huge, with solar energy accounting for 21% of total installed capacity but only 3% of total production, reflecting low utilization rates.(para. 18) This situation is an example of the difficulty of maintaining a balance between a stable power supply, the development of new energy sources and cost management.(para. 22)

China needs to reform its pricing system, originally designed for fossil fuels, to account for the unstable nature of solar and wind power.(para. 23) The IMF stressed the urgent need to develop robust energy markets to improve resource allocation and eliminate market distortions.(para. 24) China is working to establish a unified national energy market system, initially scheduled for completion in 2025 and ultimately in 2030, to support multi-layered, diversified market types.(34,35)

The focus is on developing spot markets and encouraging trading in renewable energy sources to develop accurate pricing mechanisms.(para. 37) Despite the challenges, progress is evident as the share of new energy traded in the energy market increased from 22% in 2021 to 47% in 2023, with the goal of achieving full market trading by 2030.(42,43) As the market evolves, more effective price signals are crucial to accurately reflect supply and demand.(45,46)

Generated by AI, for informational purposes only