Power market reform accelerated after power shortage

China’s top decision-making task force, the Central Reform Deepening Committee has issued its instructions on next steps of power sector reform, after multiple provinces suffered severe power shortages in September and October.

The committee, chaired by President Xi, decreed on Wednesday (24 November) that China should accelerate the process of building a national power market to help coordination among regional, provincial and lower-level markets. One key reform is to improve price discovery for coal power via the market in order to “effectively balance supply and demand.” Also highlighted was the need to promote participation of renewable energy in marketised power trading “in an orderly manner,” and the importance for the power market to support the transition to low-carbon and clean energy.

According to power sector watchers, this is the first time since 2015 that the top task force has made an instruction on power sector reform. It reflects the leadership’s realisation that the current system is not aligned with the ambition to build a power system centred around renewable energy. 

Observers predict the reforms will try to set up new pricing mechanisms for power that better reflect desirable qualities in suppliers, such as low-carbon, flexibility and reliability. It will also try to clear obstacles for the market-based trading of distributed solar and wind power in the country’s economically advanced eastern and central provinces. A more integrated national power market can also help build the effectiveness of the national carbon market.

The severe power shortages in recent months have exposed flaws in China’s current power market. For example, rigid power prices created perverse incentives for coal power plants to stay idle at a time when electricity was badly needed. And a lack of flexible cross-regional transmission arrangements made the situation worse.

Read China Dialogue’s recent article on the power shortages and their implications