China, the world's second-largest economy, has the largest electricity market globally. Over the past few years, China started opening its electricity market.
China, the world's second-largest economy, has the largest electricity market globally. According to the nation's 2019 sector-based electricity consumption report, the primary, secondary, and tertiary sectors' consumption numbers are 0.7 TWh, 49.362 TWh, and 1.862 TWh. Overall, electricity consumption in the nation's grid reached a record high of 72.055 TWh in 2019, rising by 4.5% from 2018.
Historically, China's electricity sector has always been highly regulated and closely controlled by the central government. Over the past few years, China started opening its electricity market. The first round of reforms began in 2002, which focused on improving market efficiency. As a result, the energy sector was divided into the generation and grid sectors. China now has two gigantic state-owned electricity utilities – State Grid Corporation of China and China Southern Power Grid Co. Ltd. Both utilities are directly managed by the Chinese Central Government and have a monopoly in their respective regions for electricity distribution, transmission, and supply. China's second round of reforms was launched in 2015, which continues to reduce government intervention and encourage market-based transactions.
Electricity Market Reform: Market-Oriented Procurement
As part of the first round of reforms, the Chinese government implemented a special trial program named "Direct Purchase of Large Users" (DPLU) in 2004. For the first time, large industrial users with power voltage levels above 110kV could purchase electricity directly from electricity generation companies at non-tariff prices. Only a limited number of large industrial users benefited from the DPLU program because (i) the trial program was only available in seven provinces, and (ii) energy consumers must pass strict regulatory scrutiny to be qualified for market participation. Since the beginning, several ministries, including China's National Energy Board, jointly supervised the DPLU program and set extremely high qualification standards. In 2004, only two companies were approved to purchase electricity directly.
In 2013, almost ten years after the DPLU program initiation, China's State Council relaxed administrative approval requirements by delegating the approval authority to provinces, autonomous regions, and direct-administrated municipalities. Subsequently, the DPLU trial experienced explosive growth in 24 areas. Reports show 185 large enterprises were approved for direct purchase in 2014, although most qualified purchasers were state-owned enterprises and state-supported enterprises. Nevertheless, relaxing regulatory oversight was significant progress. Several provinces gradually lowered both voltage and consumption requirements to allow more consumers to participate in market-based electricity transactions.
The second round of reforms started in 2015. After the DPLU trial, China aimed to deregulate the country's electricity sales market in two stages. The first stage would focus on deregulating both the generation sector and retail sector. The second stage would further deregulate the distribution sector. The 2015 reform proposed a new idea of constructing a unified, multi-level energy trading platform system. In the same year, provincial governments quickly established electricity trading centers for their territories to regulate, manage, supervise, and support market-based electricity trading. China claimed that this unified trading system would enable the two state-owned utilities to conduct their businesses online through 32 provincial trading centers by the end of 2015. However, the ultimate goal is to have all market participants, including consumers, suppliers, and utilities, use the platform to conclude transactions.
The second round of reforms took important steps toward deregulating the electricity market for commercial and industrial users. In 2018 and 2019, China's National Development and Reform Commission (NDRC) published two critical decrees on electricity market liberalization:
- Decree on Further Improving the Mechanism for Electricity Market-Oriented Transactions (Development and Reform  No. 1027)
- Decree on Fully Liberalizing the Electricity Generation and Consumption Plan for Commercially Operational Users (Development and Reform  No. 1105)
NDRC is in charge of China's macroeconomic planning and is responsible for formulating and implementing strategies for national and social development as well as major economic operations. These two decrees provide a critical roadmap for creating a unified national electricity trading platform system and structuring market-oriented transactions.
Case Study: Jiangsu Province
Jiangsu province is an eastern-central coastal province in China. It has the highest GDP per capita of Chinese provinces and is known for leading market-oriented reforms. In March 2017, Jiangsu province published "Rules for Electricity Trading for Mid-to-Long Term Transactions (Trial Implementation)" ("Jiangsu Rules") to deregulate the retail market for commercial and industrial consumers. Jiangsu Rules, which took effect immediately, apply to various types of electricity transactions, including direct purchase, cross-provincial, and cross-regional purchase, and contracted volume trading. The definition of "mid-to-long term transactions" covers transactions concluded via an independent negotiation, a centralized bidding process, or other market-based methods for a service period of multiple years, one year, quarters, months, or weeks.
In September 2020, Jiangsu Development and Reform Commission published "the Notice for Starting 2021 Electricity Trading Transactions" to reduce the voltage requirement for market-based electricity procurement significantly. Electricity consumers with 10kV or higher voltage are generally eligible to participate in market-based electricity transactions. Consumers with 35kV or higher voltage have the option to contract with electricity suppliers or utilities directly. Consumers with voltage between 10kV and 35kV can only contract with energy suppliers. All customers must register on Jiangsu's official electricity trading platform and complete the necessary binding procedure with either utilities or suppliers by 20 November 2020 to participate in any electricity trading transactions for 2021.
The Future of Electricity Market Deregulation
Although China has established a unified electricity trading platform system, full market liberation remains a long way off. Electricity market deregulation progress relies heavily on reform policies and decrees at the national level. The good news is that China is now appointing more entities with energy expertise and industry experience to carry out policy research and create practical implementation guidelines.
For the next phase, China's electricity market reform will concentrate on deregulating inter-provincial and intra-provincial electricity transactions, spot and mid-to-long term transactions, market-oriented transactions, and grid operations. Similar to implementing other new programs, China will select a few provinces to participate in a pilot market liberation program. By the end of 2020, China is scheduled to complete a "1+6" joint market operation – "1+6" means one intra-provincial plus six-inter-provincial markets. The six provincial markets are Zhejiang, Shanxi, Shandong, Fujian, Sichuan, and Gansu. As these six provinces are strategically located across China, the "1+6" joint market operation should lay the foundation for future market deregulation.
By 2025, China aims to simplify the electricity trading system from the existing two-level structure (national and provincial levels) to a one-level structure (national level) that supports electricity capacity, power transmission, and financial derivatives across China. This one-level unified trading system will inevitably improve regulatory transparency, streamline redundant approval procedures, and reduce bribery and corruption. It also will enable small and medium-sized enterprises to benefit directly from market deregulation and become more competitive at local, regional, and national levels. Creating a nationwide unified electricity trading system and fully liberalizing its electricity market are two very ambitious goals for any market reform. However, it will not be the first time that China surprises the world with its policy execution.
More: Research Notes