Caixin Explains: China’s Plan to Let the Market Set Wind and Solar Prices

China has unveiled a roadmap aimed at transitioning to market-based pricing for wind and solar power, moving away from state-guaranteed purchases. This shift marks a significant move toward a self-sustaining model for the renewable energy sector, as detailed in a notice released by the National Development and Reform Commission and the National Energy Administration.[para. 1][para. 2] [para. 1][para. 2] This reform is intended to phase out subsidies gradually, providing a "buffer" to help developers transition to market-oriented trading. This approach means that wind and solar power prices won't be determined solely by the market immediately, but will eventually align more closely with market rates.[para. 3][para. 4]

The roadmap includes ten measures to deepen the pricing reform for wind and solar power, emphasizing that these energies should be priced at market rates when transmitted to the power grid. Developers will be allowed to trade based on their chosen prices or accept market-determined prices, with transactions restricted to industrial and business power users. Currently, state-run grid operators guarantee purchases from developers at a "benchmark tariff," which is set by local governments and typically matches the cost of coal-fired power.[para. 5][para. 6][para. 7][para. 9] However, to maintain income stability for developers, a "settlement price" mechanism will be introduced, compensating companies for losses if they sell below this price, though it could limit profits if they sell above it.[para. 8]

This shift is partly driven by the significant reduction in renewable energy costs in China, making it vital to foster a market environment that can support the growth of renewables.[para. 11][para. 14] The decreased costs of energy storage have contributed to this development, enabling renewables-plus-storage to emerge as a viable business model and increase the market share of wind and solar power.[para. 13] Despite the challenges, China has made "breakthroughs" in integrating renewable sources into its complex power market, though intermittency issues persist.[para. 14]

The new policy sets a cut-off date of June 1, after which new wind and solar farms are urged to engage in market competition rather than relying on guaranteed purchases. Projects connected post-cut-off will gradually shift more of their generation to market trading, with details on the settlement price system still to be clarified.[para. 16][para. 17] Although production costs have fallen below those of coal power, the compensatory mechanism will protect generators from negative trading conditions, a phenomenon observed in Europe.[para. 19]

Despite these potential benefits, renewable generators might perceive disadvantages in this system due to the loss of revenue and volume guarantees previously provided by grid companies. Provincial grid companies, however, benefit from no longer being obligated to purchase renewable power at fixed rates.[para. 22]

Experts anticipate an initial surge in renewable projects before the cut-off, but a prospect of reduced developments afterward, potentially affecting projects that relied on the old guaranteed pricing scheme for viability. Nonetheless, in the long run, the policy aims to align renewable growth with the market's capacity to absorb it.[para. 25][para. 26] China has achieved substantial renewable capacity exceeding its 2030 goals, but this rapid expansion challenges grid systems already grappling to integrate solar and wind power. The policy's success will largely depend on local governments' execution, as they will set the settlement prices and determine the electricity coverage under the new mechanism.[para. 28][para. 30] As the local governments have historically pushed for renewable energy development, they have incentives to ensure policies continue to support clean energy growth.[para. 31]