The "Opinions of the Central Committee of the Communist Party of China and the State Council on Accelerating the Construction of a Unified National Market" released on April 10th once again clarify that it is necessary to improve the multi-level unified electricity market system and study the timely establishment of a national electricity trading center. The electricity market is an important part of building a new type of power system, and an effective price mechanism is at the core of the self-regulation and healthy operation of the electricity market.
Is there room for improvement in the current electricity market price mechanism in our country? Due to the inverse distribution of large wind and photovoltaic bases and load centers, more and more new energy is being transported across provinces, which will significantly increase the transmission costs and system stability costs. How should these costs be managed? With the improvement of the electricity market price mechanism, will the full guarantee purchase method by grid companies become unsustainable? Xu Biao, Executive Director for Greater China at Frost & Sullivan (hereinafter referred to as "Frost & Sullivan"), was interviewed by China Energy News to discussthe "breakthrough point" for the constructionof a unified electricity market
Core Reading: The increase in the penetration rate of new energy power generation brings about an increase in grid system costs. On one hand, grid companies have strong cost control capabilities, and some costs can be absorbed through potential tapping by grid companies to better position the pipeline platform for power transmission; on the other hand, according to the principle of "whoever uses it shall bear the cost," scientifically and reasonably approved transmission and distribution prices to promote the transfer of auxiliary service fees to electricity market users.
The "Opinions of the Central Committee of the Communist Party of China and the State Council on Accelerating the Construction of a Unified National Market" released on April 10th once again clarify that it is necessary to improve the multi-level unified electricity market system and study the timely establishment of a national electricity trading center.
“Since 2021, a number of policies have been introduced to promote electricity market reform, which can be described as unprecedented. Whether from the perspective of building a new type of power system or constructing a unified national electricity market, it is necessary to further improve the price mechanism at the core of the electricity market.” Recently, a relevant person from a power generation enterprise told reporters.
In fact, with the increase in the proportion of new energy power generation, the hidden costs such as grid system regulation costs, reserve costs, and capacity costs will rise significantly. Currently, most of these costs are borne by coal-fired power companies or grid companies, and their rationality has sparked widespread debate. In the industry's view, only by improving the electricity market price mechanism can hidden costs be straightened out and help build a new type of power system.
The electricity market price mechanism still needs to be improved
Xu Biao, Executive Director for Greater China at Frost & Sullivan, believes that in the process of continuously advancing electricity market reform in our country, the improvement and optimization of the price mechanism are core tasks.
Xu Biao said that currently, the power reform still faces issues such as the inability to transmit fuel costs, the impact of the "dual-track system" on resource allocation efficiency, an imperfect market trading mechanism, and immature market entities. There is great room for improvement in the electricity market price mechanism.
For example, the tight power supply situation at the end of 2020 was caused by a significant increase in fuel costs for coal-fired generating units and the absence of a coal-fired cost transmission mechanism. In response, relevant government departments introduced a series of measures to promptly manage and solve the problem.
In the view of Mr. Jin, the person in charge of a certain power generation enterprise, on one hand, there are bottlenecks in managing variable costs such as fuel costs, resulting in most coal-fired power plants being unable to calculate their economic accounts; on the other hand, the recovery mechanism for electricity auxiliary service costs is not yet perfect. “If reliable flexible sources like coal-fired power are still evaluated for grid connection based on zero-sum game thinking, it will be unsustainable in the long run.”
The principle of "whoever benefits shall pay" should run through the whole process
Due to the inverse distribution of large wind and photovoltaic bases and load centers, more and more new energy is being transported across provinces, which will significantly increase the transmission costs and system stability costs. How should these costs be managed?
Xu Biao believes that the increase in the penetration rate of new energy power generation brings about an increase in grid system costs. On one hand, grid companies have strong cost control capabilities, and some costs can be absorbed through potential tapping by grid companies to better position the pipeline platform for power transmission; on the other hand, according to the principle of "whoever uses it shall bear the cost," scientifically and reasonably approved transmission and distribution prices to promote the transfer of auxiliary service fees to electricity market users.
Mr. Jin also said that the management of electricity market prices should fully implement the principle of "whoever benefits shall pay," with users paying a price premium for green electricity and grid and users reasonably sharing auxiliary service costs. “However, it is important to do a good job in supervision, avoiding using grid connection assessment to suppress power generation enterprises and also avoiding hindering the role of microgrids due to cross-subsidies.”
Jia Yu, Deputy Director of the Distribution Center at the China Energy Research Society, believes that the consumption of new energy requires cross-provincial and cross-regional transmission, which will inevitably lead to a significant increase in system costs. Therefore, building a unified national electricity market can achieve the management and balance of electricity prices between the sending end and receiving end, as well as different power sources.
Promote the consumption of new energy with the price mechanism
In recent years, new energy has seen large-scale development, and some regions have reduced the minimum guaranteed utilization hours on their own to promote the participation of new energy power generation in market transactions.
For a long time, grid companies have been the only buyers of guaranteed new energy purchases, and the guaranteed power generation volume that ensures quantity and price cannot exceed the scale of electricity they represent and guarantee for users. With the improvement of the electricity market price mechanism, will this guaranteed purchase method disappear?
Xu Biao believes that China's priority power generation and purchase plans are formulated and strictly implemented after coordination by the National Development and Reform Commission with provincial (regional, municipal) government authorities, power generation, and grid companies. There is generally no significant mismatch between priority power generation and purchase volumes.
According to the "Notice on Organizing the Agency Purchase Work of Grid Companies" issued by the General Office of the National Development and Reform Commission, the guaranteed power generation volume that ensures quantity and price should not exceed the scale of electricity guaranteed for residential and agricultural users and agency industrial and commercial users purchased by local grid companies. The insufficient part shall be procured by grid companies through market-oriented methods. This move is precisely to encourage more power generation enterprises and industrial and commercial users to directly enter the electricity market.
In Mr. Jin's view, whether the guaranteed purchase of new energy is cancelled depends on the development level of the electricity market. “The so-called full guarantee purchase is more aimed at power generation enterprises that do not directly participate in green electricity transactions, while grid companies have no such obligation for those participating in green electricity transactions.”
The industry generally believes that with the further improvement of the electricity price mechanism, the consumption method of new energy will become more market-oriented, consumption channels will become more diversified, and the dependence on guaranteed purchases will also decrease.
*This article is reprinted from China Energy News, with reporter Han Yifei. The original article was titled "Our Country Once Again Clarifies the Improvement of the Multi-level Unified Electricity Market System - Improving the Price Mechanism Becomes the 'Breakthrough Point' for the Construction of a Unified Electricity Market."
