forest with powerlines

Report | 2022

Power Market and Pricing Mechanism Reform in China: A Vital Step Toward Zero-Carbon Electricity Growth and New Power System

In the world’s largest power market, market and pricing enhancements can speed the growth of zero-carbon electricity and support a more resilient power system

By Shuo Gao, Qin Zhou
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Around the world, zero-carbon power generation technologies are becoming ever more cost competitive. At the same time, solutions to balance flows from diverse sources to end users are advancing steadily, enhancing system reliability. To decarbonize the power sector, the next frontier is to continue expanding zero-carbon generating capacity, promote zero-carbon consumption, incentivize investment in clean technologies, and establish power pricing mechanisms that support reliable system operation and return on investment.

Unlike other commodities, the power system must achieve — under many physical constraints — a balance of supply and demand on local and national levels and at various time scales, ranging from milliseconds to decades. Given these challenges, reforms to pricing and market practices must be taken cautiously, to preserve grid stability. At the same time, the conventional “one approach fits all” pricing model no longer works to support the needs of the fast-evolving mix of abilities, characteristics, and financing needs of new technologies in power generation, distribution, and consumption.

This report, Power Market and Pricing Mechanism Reform in China, helps build a bridge to help markets better support this new era of innovation. It focuses on three challenges: (1) zero-carbon power capacity development, (2) zero-carbon power consumption, and (3) system adequacy in zero-carbon power growth. The study reveals how market development and power pricing reform can help address these challenges through multiyear electricity contracts, interprovincial trade and transmission tariff optimization, and capacity pricing for system adequacy.

Although some countries and regions have used power markets for many years, formulating a pro-climate and pro-transition power market paradigm is an ongoing challenge globally. And as the world’s largest generator of electricity, China’s market innovations are likely to have an outsized impact and inspire others to follow. The findings and recommendations in this report provide actionable solutions to create a national power market, enable zero-carbon electricity growth, and demonstrate a model for the global zero-carbon power transition.