Caixin Explains: Why China Needs a New Green Power System and How it Could Work

China’s push to reform its electricity system to create a more competitive and efficient market has hit a critical point due to the rapid growth of new energy sources like solar and wind. These changes pose challenges to the country's power system, which is still largely based on fossil fuels [para. 1][para. 2]. Starting in 2002, China embarked on a series of reforms to introduce market forces into its power sector, the world’s largest electricity market, in an effort to secure a balanced, clean, and affordable energy mix [para. 3]. The latest phase of reform began in 2015, further liberalizing power pricing and introducing a spot market for power trading [para. 4].

Experts emphasize that further speeding up the development of efficient power markets is critical to correcting market distortions and improving resource allocation [para. 6]. A significant reform plan is anticipated at a Communist Party meeting scheduled for mid-July [para. 7]. Treating energy as a commodity and dismantling rigid systems and monopolies are expected to stimulate economic vitality and improve governance [para. 8].

China's power sector is experiencing significant change as renewables reshape the structure of supply [para. 9]. Despite coal still providing about 60% of electricity, the installed capacity of new energy sources now exceeds half of the total, reaching roughly 1,600 GW by the end of May 2023 — a 30% year-on-year increase [para. 11]. However, the intermittent nature of renewables has led to complex issues of surplus and scarcity [para. 12], highlighting the need for a more robust power market to manage these fluctuations [para. 13]. A modern power system is essential for China to meet its climate goals of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060 [para. 16].

Historically, China's electricity market was monopolized by State Grid Corp, but the 2002 reforms broke this monopoly by splitting the company into several grid and generation entities [para. 20][para. 21]. The 2015 reforms aimed to open up the power generation and sales markets while keeping stricter government control over the grid [para. 24]. Despite these efforts, some key producers and buyers don’t participate in these markets, and prices remain state-fixed within a widening range [para. 26]. Recent crises like the 2021 coal price surge and the 2022 drought have pushed further reforms to liberalize pricing and better integrate new energy sources [para. 27].

The goal is to establish a unified national power market by 2030, featuring multi-layered markets at national, regional, and provincial levels, as well as various types of trading markets [para. 29]. Spot markets and greater participation of renewable energy are central to these reforms [para. 30]. As of 2023, nearly 47% of new energy production is traded on the power market, with expectations that all new energy capacity will be market-traded by 2030 [para. 33]. The next steps involve deepening existing reforms and clarifying power distribution and trading rights while defining the role of local authorities [para. 34].

China’s new energy growth has been encouraged by state-set prices and guaranteed purchases, but imbalances between capacity and output have led to power shortages [para. 36][para. 38]. The utilization rate of wind and solar power remains below expectations, leading to significant power wastage [para. 41][para. 43]. A more effective pricing system to reflect supply and demand is necessary to balance the power system [para. 45].

Absorbing wind and solar power is challenging due to limited grid capacity and the inherent volatility of these energy sources, resulting in substantial power wastage [para. 47]. High-energy-consuming enterprises are also struggling to access low-cost green power. Developing an integrated network of source-grid-load-storage is seen as a feasible solution, but it faces opposition from national grids [para. 49][para. 50].