China’s electricity market reform

GWECChina’s leadership has been seeking new measures to stimulate the country’s economy since they took office three years ago. The task became even more pressing when economic growth slid to 7% in the first half of 2015. Electricity market reform has become one the top priorities:  to give the economy a boost through lowering electricity prices and increasing industrial productivity.

After having stalled for the last thirteen years, electricity market reform was reinitiated by a new regulation issued by the State Council in March entitled “Decree No. 9: Several Guiding Principles of Furthering the Reform of the Electricity Market”. This new regulation sets the guiding principles for the liberalisation of the wholesale and retail electricity market, while the government would only control the transmission of electricity. 

The new regulation also considerably changes the role of grid companies whose main task in the new system will be operating the transmission system.  Currently, they also do both wholesale and retail sales of electricity, making huge profits from the difference. The wholesale market will be liberalised by allowing non-state owned wholesale electricity companies to enter the market.  The tariffs will be further liberalised by transmission tariffs set by the government, as well as market determined whole sale and retail tariffs. Moreover, inter-province electricity exchanges will be encouraged; and the regulation also makes full purchase of renewable energy obligatory.

The new regulation has triggered a lot of response in the electricity sector. Several provincial and municipal governments are moving fast and becoming demonstration sites for electricity reform, including Shen Zhen city, Inner Mongolia Autonomous Region, GuiZhou province, Hubei Province, Anhui Province and Yunnan Province. The private sector is moving even faster, establishing new electricity wholesale companies in the demonstration areas. Although it’s still early days and the rules for licensing of wholesale companies have yet to be introduced, many private companies are already competing to be the first to enter the new market.

China’s electricity market is very much a buyer-dominated market and the industrial sector is the largest electricity consumer. The wholesale companies will, in the first phase of the electricity reform, negotiate with the electricity producers on behalf of some industry players for better electricity prices. Some wholesale companies, with advanced energy efficiency and energy saving technology or management systems, will also be favored by certain industry players.

Although China seems to be taking a big step towards market reform, there’s still a lot of bargaining going on in the process, in particular regarding the role of the grid companies. Some sources close to the original draft of the “decree No 9” have said that the final version of the regulation concerning the grid companies’ role is somewhat softer and vaguer than in the initial versions; and the grid companies have inserted a number of clauses seeking to improve their future position. Regardless, it is very positive to see electricity market reform re-starting, generating lots of interest at the local level while at the same time being pushed by the central government due to the current economic situation. It will undoubtedly result in further reform than in the last round which was more than a decade ago.

A lot is moving at the moment; we’ll continue keeping a close eye on developments.  There’s also a session dedicated to the electricity market reform at this year’s edition of China Wind Power, taking place from 14-16 October in Beijing, which is not to be missed!

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