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■ Date: March 16, 2022
【China Raises Cap on Electricity Price: What has Changed and Possible Impact for Business】
Author
[Snapshot]
1. Electricity prices for coal-fired power are allowed to rise to 20% against the benchmark price, compared to a previous cap of 10%. In reality, the price has surged to the highest ceiling price in many provinces.
2. Electricity cost for high energy consumption entities is not subject to the 20% cap. In Liaoning and Guangxi, province, the cost has increased nearly 50%.
3. Coal-fired power generators’ operation difficulty would be temporarily alleviated but facing stronger market competition in the future.
4. Bunch of new industries are emerging due to market reform, especially on the demand side. Big data plays an essential role in it.
Keywords: #renewable energy #coal-fired electricity #electricity price #power market # benchmark price + fluctuation range # Grid’s proxy power purchase # Power retailer # Integrated Energy Service (IES) #Energy Management System (EMS)
If you like this article, please also refer to our comprehensive analysis report "China’s Power Market and Green Electricity Trade" in our database.
Intro:
In August 2021, the Beijing Electric Power Industry Association together with 11 coal-fired power companies in the Jing-Jin-Tang area submitted a petition to the government asking for raise in electricity ceiling prices to avoid closing down amid increasing coal prices. But this is not an outrageous request, China’s coal-fired power generators have been suffering from the unreasonable pricing mechanism for almost a decade and 2021 became extremely severe.
One of the 11 companies said that coal prices in July 2021 rose by 57% from June and 65% compared to the previous year. However, in the meantime, the electricity benchmark price in the region has been dropped. This has largely increased their operation cost. Some local coal-fired generators are even unwilling to generate electricity because they would lose even more.
Eventually, this has led to a serious power supply crunch across China and partly caused several severe power shortages last year. In September 2021, blackouts struck around 20 provinces around China. Although China has always had a blackout issue every year in the past, this round of power cuts turned critical as it not only restricted industrial electricity use but also residential buildings and public areas such as schools, hospitals and shopping malls. Public anger and confusion were raised especially in Northeast China (e.g., Liaoning, Jilin, Heilongjiang) where residents’ life is most severely affected.
Figure 1: Some traffic lights are been turned off in Shenyang and caused serious traffic jams (photo credit: video screenshot)
As a remedy to improve the country’s power supply, one major step came on 11th October 2021 when the NDRC released the “Notice on Further Deepening the Market Reform of the Feed-in Tariff for Coal-fired Power Generation《国家发展改革委关于进一步深化燃煤发电上网电价市场化改革的通知》” (The Notice) which mentioned raising electricity cap to 20%.
After the policy has been implemented in certain provinces, the average electricity prices surged by around 20%, almost reaching the ceiling price. This has caused attention from both domestic and international companies.
In this article, we will first introduce the policy background of the new electricity pricing mechanism, then look into the mechanism in detail, their impact on different players as well as what the future image might be.
Background: Why does China want to implement this policy?
With China’s high-growth era coming to an end, it is entering a new phase characterised by slower growth in total energy demand. During this transition phase, China will be bound to be confronted with a series of new challenges such as power shortages, power curtailment as renewable energy (RE) spreads, carbon neutrality etc. Market-oriented reforms are fundamental to achieving this transition and here are reasons:
(1) Marketization helps to prevent future power cuts. China’s resource types determine that coal accounts for almost 60% of China’s total energy generation and supply. Although RE is spreading, coal-fired power generators are still the main supplier of energy for now.
Figure 2, 2020 China's power generation capacity by energy source
- In 2019, China set the "benchmark price + fluctuation range" mechanism for electricity price of coal-fire power, but to control electricity cost for consumers, upward revision was not carried out by the government in 2020. Furthermore, the benchmark price is fixed through the year and will not be modified before the next year starts. Around 70% of the coal-fired power was traded in the market with a discounted price to the benchmark due to fierce competition.
Figure 3, Generator's cost when there is coal price rally vs electricity benchmark price in 2021 (unit:yuan/kwh)
Referring to one report published by the Renmin University of China, under China’s previous electricity pricing scheme, when there is a coal price rally, it affects coal-fired generators the most (see figure 3). On the national level, the high instantaneous coal prices cost the country an average loss of RMB 0.369/kwh.
Northwest and Northeast cities such as Inner Mongolia, Shanxi, Shandong where a lower benchmark price was in place are more severely impacted. The average price of Qinhuangdao 5500 kcal/kg thermal coal in 2020 was heard at 580 yuan/ton, increased to 906 yuan/ton in 2021. Following this increasing rate, 92.5% of coal-fired generators will face loss. And it is possible there would be more power shortages if further marketization is not been implied.
The Notice is an admission that government’s control has led to market distortions, contributed to the supply-demand mismatch which caused issues like power cuts. Although for now, Beijing’s visible hand will still be at play, it is one step towards further liberalisation.
(2) It promotes the “orderly use of electricity 有序用电” and manage the demand-side power usage. Market mechanisms including peak-valley pricing are able to guide consumers to use energy at different times (load management) to avoid power shortages at peak hours and renewable energy curtailment in valley hours.
(3) Marketization helps to achieve carbon neutrality. Key steps towards China’s carbon neutrality include increasing its non-fossil fuel energy share and establishing a national green power market. But the spread of RE also brings issues like power cuts and curtailment. A Liberalised market are able to help with that. The market creates competition and thus boost innovative business models. New businesses such as virtual power plants, demand response, microgrids have created incentives for the demand side to change consumer behaviour and consume more RE. (Our article about RE 【Unveiling RE100 Roadmap: The Way to 100% Renewable Electricity in China】; Our article about carbon emission trade【Eco-China: How Carbon Emission Trade Nurtures Low-carbon Economy】; Our report about Chinese policy in global warming 【Global Warming Policies in China】)
China’s new electricity pricing mechanism:
Figure 4. price comparison in Shandong in December 2021. (For ease of comparison, the same voltage level (C&I users 1-10kv) is compared.)
The notice contains four major announcements:
- All coal-fired generators have to enter the market, up from 70% previously. The floating range is extended to 20%. Market electricity prices are allowed to fluctuate as much as 20% higher or lower based on the benchmark price issued in each province. By 31st January 2021, in 14 provinces that have already implemented the 20% cap, the average trading price almost hit the benchmark ceiling rates (20%).
- Electricity price for high energy consumption entities* will not be subject to the 20% limit. Some provinces have already reacted to the government’s call. For example, Guangxi province has set the ceiling price for high consumption entities to 50%. In Liaoning and Guangxi, electricity prices for some high consumption entities increased more than 40% in October 2021. While in most provinces, it gives no clear indication when this change would take effect.
3. Listed electricity price for all commercial & industrial (C&I) users is cancelled. C&I users of 10kv and above now have to trade in the market (either via direct purchase in markets or via power retailers). Considering China has a large number of C&I users and entering en masse will burden and complicate the current market system, C&I users below 10kv are allowed to choose to buy from the grid for now (proxy power purchase).
4. Residential and agriculture-related users are not affected by this policy and will still follow the current listed electricity price. This policy also does not apply to the spot market.
*high energy consumption entities refer to the following 6 industries:
1. Petroleum, coal and other fuel processing industry
2. Chemical raw materials and chemical products manufacturing industry
3. Non-metallic mineral product manufacturing industry
4. Ferrous metal smelting and rolling processing industry
5. Non-ferrous metal smelting and rolling processing industry.
6. Utilities and heat production and supply industry
Figure 5 Implementation status of the policy in China
Grid’s proxy power purchase
On 23rd October 2021, the NDRC released the “Notice on Relevant Issues of Grid Company Proxy Power Purchase 《关于组织开展电网企业代理购电工作有关事项的通知》”. This notice is a supplement policy to the one mentioned above.
Figure 6, Impact of the Notice on different market entities.
The main purpose of this policy is to encourage all C&I users to enter the market. For small entities that are having difficulties joining the market now, the proxy purchase is a method to partly manage overconsuming of electricity of those users that cannot join for now.
It mentions that the grid will act as an agent to buy electricity for certain users, mostly being C&I users below 10kv. The scope of this proxy power purchase will be narrowed down gradually which implies this is likely just a transition mechanism to help certain users adopt market mechanisms in the future.
Who can purchase from grid companies?
-C&I users below 10kv. (proxy transaction price)
-User withdraws from power markets with reasonable justification (1.5 times proxy transaction price).
-High consumption entities that cannot join the market for now. (1.5 times proxy transaction price)
Except for C&I users below 10kv, other users that buy from the grid will receive a 1.5 times higher transaction price as a punishment for leaving or not entering the market. By doing so, China wants to expand the market size and eventually push everyone into the market.
Proxy power purchase is composed of sectors that are illustrated in the following graph:
Figure 7, Price composition of grid's proxy power purchase
As it is shown above, only the “proxy transaction price” part is marketized (partly). Every month grid companies will forecast next month’s proxy transaction price based on the current month’s average price and trading amount. Grid’s proxy power price changes monthly, but in the market, prices are changing hourly. Thus, users that buy from the grid could expect the price to be very similar to the monthly average market price but less fluctuating than the market price.
What are the impacts of this policy on each player?
While the timing of the policy change was seen to be influenced by severe power cuts in 2021, the impact of the contents goes far beyond any short-term measures that only focus on resolving the power supply crunch. Among all players, coal-fired power generators and high-energy consumption entities are mostly influenced.
Generators:
1.Coal-fired power generator
Coal-fired generators now are allowed to raise prices by up to 20%, which means they can now afford more expensive coal and pass down the cost to consumers. Although in the short run, this policy provides a cost-recovery relief for coal-fired generators, the situation could become undesirable in the mid-to-long term when more fierce competition in the market would occur.
More competition with other coal-fired generators. As any guaranteed dispatch privileges that existed previously are stripped away now, generators will have to compete with other generators in the market. Those who are less efficient and unable to secure dispatch hours might find it challenging to compete in the open market and even face pressure to close. Therefore, pricing strategy and customer acquisition ability become key.
2. RE generators. This policy is beneficial to RE generators. Firstly, it creates larger demand. Now the market size has been expanded and all players entering the wholesale market have Renewable Portfolio Standard (RPS) responsibility which means they have to purchase certain amounts of RE. (Our article about RPS 【What is the Green Electricity Certificate in China? Will it Lead to New Opportunities? 】). Secondly, it might help RE to be competitive in price. RE power is benchmarked to the coal price without fluctuation component. If the current mechanism remains and coal prices continue to increase, RE might produce a cheaper price, thus more customers might buy from RE instead. Thirdly, if the electricity price continues to surge, demand for distributed renewable energies such as distributed PV will also rise as a way to cope with high electricity costs.
Consumers:
- High energy consumption entities. As energy-intensive entities’ ceiling prices in the wholesale markets are removed, their price could surge to more than 40% (in Liaoning the price increased to 49.37% in October 2021). Combing with the government’s policy on peak-varied pricing mechanisms and the implication of critical peak price (CPP, which is 20-25% higher than peak price), electricity price for energy-intensive users could increase up to 175%. Not to mentioned if they enter the wholesale market, there is RPS responsibility they have to consume. This largely increased energy costs. By implementing this, the Chinese government wants to improve the consumption behaviour of high consumption entities and guide them to decarbonize. It might also accelerate the process of switching to green powers. Due to that, there is now a high demand for improving energy efficiency such as installing distributed PV, storage and energy management systems (EMS) etc. (Our report about EMS 【Market Research of Energy Management System (EMS) Industry in China (2021) 】).
2.C&I Users. Previously, there are two channels for C&I users to purchase electricity: (1) via the wholesale market where prices are determined by bidding or bilateral negotiation or from a retail company. (2) via the listed electricity price which is a fixed price according to each province’s conditions. But now, the listed price are cancelled for all C&I users.
C&I users of 10kv or above now will go through the wholesale market for all their power consumptions (likely more volatile). C&I users below 10kv are encouraged to join the power market. However, for those that do not intend to, local grid companies are instructed to purchase electricity on their behalf (proxy power purchase). Although it only has little impact on these users as electricity bill consists of just a small part of their operation spending, they should expect the grid’s proxy power purchase price will be more cost-reflective, thus more volatile. C&I users that previously bought from retailers could expect something similar as their retailers will be exposed to high price fluctuation in the market as well.
Over the mid-to-long term, the price for industrial and commercial users are expected to be more volatile due to China’s promotion of the peak-valley pricing mechanism. Not to mention that proxy purchase will gradually phase out, C&I users need to understand how the power market works because eventually, they will have to enter. It is also foreseeable that C&I users will require increasing investments in improving energy efficiency and decarbonization to lower electricity costs or find a good retailer that does it for them.
Retailer:
Overall, the market will be more competitive for retailers but at the same time bring great opportunities. The market will be more competitive because of the larger fluctuation range. And as more retailers join, price competition will be triggered which leads to cheaper market prices and thus shrinking retailer’s profit margins. It implies that the previous revenue model which is mainly profiting from price difference between wholesale purchasing and retail selling would not be enough. This is certainly a challenge for retail companies, especially weak and small ones that has a simple revenue stream.But in the middle of every challenge lies a great opportunity. Intensified competition in the retail market will boost business model innovation, give birth to promising market chances like value-added services. Services such as integrated energy services (IES), for instance, energy management system (EMS), energy storage, distributed renewable energy will increasingly affect consumers’ choice for a retailer. In China, domestic companies are already starting to launch IES. For instance, renewable energy generation companies like Goldwind and Jinko also run retail services have already joined the IES business.
Grid:
In the short term, the grid is still taking the role as a “retailer” by carrying out proxy power purchases. But there are few signs from policies that the grid’s role will continue to be diminished, their role as a retailer will be weakened and eventually only provide transmission and distribution services. Thus, grid companies, will need to consider new business to expand revenue streams, one example is IES. State Grid and Southern Grid have launched IES subsidiary companies in many provinces. State Grid has been actively expanding its business in Virtual Power Plants (VPP), V2G, load aggregations. The State Grid EV Service 国网电动汽车服务公司 contributed the most adjustable loads in Huabei’s VPP project in 2019 (see figure 8 below). In the project, the State Grid EV Service gained 1.03 million and the IES company under State.
Figure 8, Profit outcome of the Huabei VPP project
Grid gained RMB 1.6 million. Through this project, the State grid was trying to lead the commercialisation of VPP and V2G in China while reducing RE curtailment. It is not hard to find that the change in role has led to diversification and innovation of new business models.
Taken all together, these policy changes represent Beijing’s latest attempt towards a liberalised power market where consumers influence the pricing of electricity and generators invest in based on market demands. Although for now it is still partly marketized, this is a huge step towards full marketization in the future.
What is the future image in China?
Figure 9, Development stages of power market
In the future, China will likely continue to liberalise its power sector. To note here, the market reform does not mean that electricity prices will only keep rising. Liberalization just means that the price will be greater influenced by market forces and better reflect the real cost of power production as well as the demand-supply relationship. In the future, if coal prices continue to surge, we hope to see consistent effort from the government to revise benchmark price or fluctuation range to ensure pricing signals are not distorted.
To further liberalization, expanding market size and trading volume is essential. Without an active number of participants, effective competition is hard to be achieved. And to cope with rising issues such as RE curtailment, power balance, power quality, a bunch of new industries are been encouraged to emerge.
Some of the key trends are:
- Consumers will play a larger role in shaping prices and services in the market. For retailers, one of the core competencies would be to maintain customer loyalty. To achieve that, retailers need to make effort in enhancing the quality of the service such as providing digitalised platforms including apps (see figure 10 for example), better price packages that suit different needs etc. This all requires a better analysis of customer behaviours. In fact, a certain number of retailers have alerady developed their apps for customers. On those apps, customers are able to check price packages, sign contracts, purchase electricity, monitoring electricity use, receive power policy updates and industry news etc.
Figure 10, an example from 晋能售电’s APP 易售电.
2.More fierce competition in the market requires precise forecast skills for generators, the grid, retailers etc. Envision digital, for example, owns the world’s largest IoT platform, EnOSTM . Except for analysing and monitor of the data, its Forecaster are able to predict power generation output with high accuracy, based on high-resolution weather forecasts for demand response, grid stability, storage optimization and energy trading.
Figure 11, EnOS forecast for solar. (Photo credit: Envision website)
3.Intensified competition in the market and an increasing number of RE energies been connected to the grid will boost new industries such as integrated energy services, microgrids, virtual power plants (VPP), load aggregation, V2G, ESCO etc. (Our report about VPP 【Demand Response, VPP, and V2G in China】and our report about ESCO business model 【Market Research of Energy Management System (EMS) Industry in China (2021) 】)
4. Big data will be an essential tool and digitalisation is the main trend. But only acquiring technology advantage is never enough to maintain competitiveness. Finding users’ core issues and real demand is always a top priority.
5. General direction appears favourable for RE energies if the current pricing mechanism are been kept. Although uncertainties about whether coal prices will drop rapidly lead to hesitancy.
Reference:
[1] 北极星电力网，2021-8-30，求涨电价、求改合同！亏损面达100%后，11家发电企业联名呼吁.
[2] Carbon Brief, 2021-9-29, ‘Wave of power curtailment’ expands to 20 provinces across the country, three provinces in the north-west begin to restrict residential electricity”.
[3]北极星售电网，2021-11-5，电价新时代来临！“能涨能跌”机制在多省持续落地！（附电价上涨情况）.
[4] NDRC,2021-10-11, 国家发展改革委关于进一步深化燃煤发电上网电价市场化改革的通知.
[5] NDRC, 2021-10-23, 关于组织开展电网企业代理购电工作有关事项的通知.
[6] 北极星售电网, 2021-11-29, 2021年12月29省区市电网企业工商业用户代理购电价格公布！（附电价表).
[7] 北极星售电网, 2021-11-5,电价新时代来临！“能涨能跌”机制在多省持续落地！（附电价上涨情况).
[8] The Lantou Group, 2021-10-15, Measures to Accelerate and Deepen Power Sector Reforms Announced
in China.
[9] 中国人民大学双碳研究院，2022-1，中国人民大学双碳研究院发布 《中国煤电转型成本分析与风险评估》研究报告.
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