In a massive coming of age for the plurality of the world’s renewable energy, China is shifting green energy generation over from state-controlled pricing onto the market – a natural sequel to reforms which have included ever-steeper time of day pricing, mandatory battery co-location, and the addition since last year of a capacity market.
On February 9th, China’s National Development and Reform Commission (NDRC), and National Energy Administration (NEA), jointly issued the ‘Notice on Deepening the Market-oriented Reform of New Energy On-Grid Electricity Prices to Promote the High-quality Development of New Energy’.
The Notice declared that wind, solar and other green energy sources would have their electricity prices fully determined by the electricity market, replacing previously government-set rates which had been based on coal generation plus a bonus.
The old system supported renewable energy build out, and in the post-pandemic years, this would no longer have been needed financially. However it was retained until now with the Chinese government clearly deciding to promote green energy deployments, and manufacturing scale, far beyond what was economically natural, for strategic reasons relating to energy security and global trade.
China succeeded in delivering about as much of a solar-wind boom as it could have hoped for, now running at 300 GW solar, 100 GW wind, bigger than the entire global industry of just a few years ago – and as large as the rest of the world combined even now.
The switch to fully market-based pricing at this juncture should almost certainly be explained by grid congestion. State Grid and China Southern Power Grid are expanding their investment in grid infrastructure to over $100 billion a year, but transmission and distribution networks will be the limiting factor on renewables build out from now on, as in so many other countries. There is no point financially supporting the industry if it’s bottlenecked not by payback times but by the grid.
Globally, this will reinforce the current situation of solar module oversupply, and will push Chinese turbines into export markets, as the reform will somewhat weaken China’s domestic demand.
Within China, the new system will be of a piece with the removal of battery co-location requirements – batteries will now organically be built in order to profit off ever more variable power pricing, as in other markets.
From January 1st 2024, China introduced capacity payments for its coal and gas plants, to compensate them for utilization rates which were dipping to 50% and below – directly caused by the wind and solar boom in the country, which is ongoing. With less and less MWh being generated per MW, per year, coal power plants needed an extra payment to keep the economics the same as before, which was the government’s intention.
China’s coal-based generation grew only by 1.5% in 2024, as compared to 4.6% growth in total electricity generation to 9,418 TWh, and while coal generation capacity and coal storage grows by several percentage points. Coal’s role, quite deliberately, is shifting from baseload to providing reliability – though admittedly the process has only just begun, and will take another two decades. China’s coal demand may pass 5 billion tons before it peaks in 2027 or so, but it will not grow much beyond that.