Establishing
the new energy system is dependent on a new power system. At the end of March
this year, the proportion of China’s installed generating capacity from
non-fossil energy sources reached 50.9 per cent
This is the second of a
two-part series of articles. Part one, “The current state of China’s electricity market
Price discovery function The pathway for developing
electricity markets in China differs somewhat from elsewhere. In the power
markets of other countries, spot markets (for day-ahead and real-time
transactions) usually come first, followed by the establishment of a medium to
long-term (futures) market, primarily as a hedge against spot risk.
In China, however, the
development of the electricity market began with medium- to long-term (MLT)
electricity trading. These markets, which dominate at present, theoretically
have the advantage of stabilising electricity prices and averting risk.
However, without spot prices and day-ahead prices as a reference, and with
trading framed by contract, there is lack of flexibility for adjustments.
As an example, with coal
prices soaring, MLT trading has lagged far behind electricity prices since the
second half of 2021, failing to reflect supply-and-demand conditions and
regulate the rocketing cost of coal power. Coal power producers have incurred large losses as a result 80 per cent
MLT trading aside, spot
trading of electricity helps discover electricity’s real-time prices, better
reflects supply-and-demand and market costs in real time, and can bring surplus
capacity, not subject to MLT contracts, into the real-time market, to compete
on the grid. Coal power companies continued losing money in 2022, but the debt
situation eased. Further penetration of spot markets on the power-generation
side was an important factor, in addition to state measures such as
interval-based regulation of coal prices and upwards adjustment in the floating
range of feed-in tariffs for long-term agreements.
Promoting
consumption of new energy In fact, the positive effect
of electricity spot markets in accelerating new energy consumption can already
be seen. During the past four years of inter-regional and inter-provincial spot
trading in surplus renewable energy, there has been a reduction of more than 23
terawatt-hours (TWh) in curtailment (wastage) of electricity from renewables.
Take as an example the spot market
based on the power grid of West Inner Mongolia, which covers more than half of
installed generating capacity in the Inner Mongolia Autonomous Region. It was
launched in June 2022 as part of the first batch of regional pilots for spot
trading – the first time such spot markets had been set up in China without
differentiating between participation of coal-fired units and new energy
sources. Data since the start of the trial run show striking results in terms
of encouraging the consumption of new energy. As of 20 July 2022, compared with
pre-trial-run operation, new energy consumption had cumulatively increased by
about 64 gigawatt-hours (GWh).
Compared with the MLT market, spot trading in electricity is more frequent and shorter in
cycle
In addition, spot trading
gives rise to a peak-valley price spread. This opens profitable opportunities
for new entrants to the market, such as those providing energy storage and
other services, and encourages flexible adjustment of resources to match
consumption of new energy.
At a practical level,
however, fluctuating spot prices – as new energy sources come onto the spot
market – will affect renewable power generators’ appetite for joining the
market. Such generators usually produce electricity at the same time of day
within a region; that is, the middle of the day for solar and the middle of the
night for onshore wind. Good weather could easily lead to an overwhelming power
surplus, however, when difficult to match with peak demand, which would lead to
zero or negative spot prices over the period. In Shandong, there were 176 days of negative spot prices
If in future we can expand
the inter-provincial spot trading of new energy from a market perspective and
make good use of load-curve differences among regions across time zones, then
we will be able to smooth out new-energy power-generation curves on a broader
geographical and temporal scale, helping to tackle surpluses and shortages
across regions.
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