China’s green power producers to be given sales priority as market forces given larger sway over prices

Cleaner energy electricity producers given priority in selling output to distributors, ahead of coal-fired generators under market reform

PUBLISHED : Monday, 30 November, 2015, 4:46pm
UPDATED : Monday, 30 November, 2015, 6:34pm

Cleaner electricity producers are to be given priority in selling their output to distributors and large industrial users ahead of coal-fired generators, under a reform plan to let market forces determine power prices, according to broad regulation guidelines announced by regulator National Development and Reform Commission.

More and more power will be traded on spot and futures markets similar to those in many western markets after trials are carried out under the plan, which aims to achieve both market-based pricing reform and continued financial support for producers of more expensive but cleaner electricity.

In a batch of six policy circulars put on its web-site on Monday, the NDRC said producers of renewable power such as wind, solar and biomass as well as peak demand-satisfying generators like natural gas-fired ones - and heat and electricity co-generators will have top priority in selling output to distributors and large users. They will also enjoy higher, state-regulated power selling prices.

Lower down the sales priority list are hydro, nuclear, waste-to-energy power, and high-efficiency, low-emission coal-fired generators. They will also enjoy regulated power selling prices.

More pollution-prone coal-fired generators will see their power sales volume and prices be subjected to market competition, amid worsening over-capacity in the power market. This means some of them will suffer from low utilisation and may be forced to shut down.

“These documents serve as the last missing piece of the long-awaited industry reform,” said Credit Suisse’s regional head of utilities research Dave Dai in a note. “Market-based mechanism will be the key emphasis.”

On the demand side, industrial power users that account for 70 per cent of national power demand will be able to negotiate prices and volumes directly with power producers, while agricultural and government services and utilities entities will continue to enjoy priority purchases and regulated prices.

Electricity spot-market and futures contract trading platforms will be set up by yet-to-be determined entities that will be “relatively independent,” the NDRC said.

Such platforms will form the backbone of municipal, provincial, regional and national electricity markets, including a regional trading centre in Beijing based on the existing infrastructure of monopoly power distributor State Grid Corporation, and another in Guangzhou based on infrastructure of monopoly power distributor China Southern Power Grid.

No implementation time-table was provided by the documents, which also said the power retailing segment will be opened to multiple service providers for the first time in the future, ending State Grid and China Southern’s monopolies.

State power grid operators, independent firms with power grid investments and other firms with no distribution asset investments will still be allowed to retail power in the future.

Such retailers must have at least 20 million yuan of assets. Those with less than 200 million yuan of assets will be subject to caps on their power trading volumes.

Xue Jing, director of statistics department of China Electricity Council that represents the nation’s largest power producers, told a teleconference that she believes it will take many years of trial and error before all of the nation’s power be subject to market-based pricing.

“It would be a very optimistic scenario if we can have half to 60 per cent of our power priced by market forces by 2020,” she said.

A decade ago, up to 15 per cent of power produced in the nation’s northeastern and eastern regions were subjected to trial competitive power price trading, but tight supply of power saw prices go through the roof, resulting in a halt to the experiment.

Power generators that have large industrial customers and managers of industrial parks have competitive advantages to take market shares away from the incumbent distribution monopolies in the retail business, she added.