1.1 Background to Our Study
This chapter introduces the Chinese power system and the background to the reform process which began in March 2015 with the publication of the No. 9 document of the China State Council on âDeepening Reform of the Power Sectorâ.1 Inter alia, this set of reforms seeks to introduce wholesale power markets to trade electricity under longer- and medium-term contracts and via spot markets. It also introduces incentive-based regulation of electricity network tariffs. In doing so it moves the pricing of both wholesale and retail electricity away from a regulated system of tariffs towards market-determined prices for industrial electricity customers. This represents a radical break with the past for China and a significant extension of the role of a market in a sector still dominated by massive state-owned utilities.
The idea behind this book is that there is a wealth of global experience of power market reform that China can draw on in embarking on a renewed push to introduce competitive wholesale power markets and incentive regulation of power networks. The focus of the book is very much on the lessons to be learned from external experience rather than on telling Chinese stakeholders what they already know about their own political economy. What we seek to do is to introduce this international experience and apply it to the Chinese context.
Of course, it is true that the Chinese political context is unique. However power system physics and the economic principles on which power market reform are based are not. Indeed many opponents of the power market reforms that have swept through the US, Europe, Australasia and South America initially opposed reform with arguments about the uniqueness of their national power sectors. This is not to say that power sector reform is straightforward or guaranteed to be successful. While reform has been attempted in many countries, it has been âsuccessfulâ in only a subset of those jurisdictions that have attempted it and it remains a controversial work in progress in every jurisdiction where it has been tried. Indeed at one point, there were good arguments for saying that only in the UK (and perhaps, Norway) has a comprehensive power market reform been âsuccessfulâ, if by comprehensive we mean a reform which created competitive wholesale and retail markets and introduced effective incentive regulation of transmission and distribution networks.
1.2 The Structure of the Book
The book is divided up into five chapters.
The following sections of this chapter go on to examine the scale and scope of the Chinese electricity supply sector focusing on its capacity, carbon impact, roll-out of renewables and energy demand. We then discuss the structure and organisation of the industry, and introduce the recent history of the sector and the background to the 2015 power sector reforms.
Chapter 2 introduces 14 different electricity reform elements from international experience. Under each of these reform elements we will discuss its theoretical significance, general reform experiences with it and its application in the Chinese context. Our motivation is to explain how China might bring down high industrial price of electricity that it had in 2014 (prior to the current reform). We identify four promising sources of price reduction: the introduction of economic dispatch of power plants, rationalisation of electricity transmission and distribution, reduction of high rates of investment and rebalancing of electricity charges towards residential customers. We draw out some overall lessons and identify some important points for future research into Chinese power market reform.
Chapter 3 aims to go deeper in our discussion of power sector reform by examining Chinaâs most economically significant province: Guangdong. Power market reform in China is being promoted primarily at the provincial level, with the setting up of provincial wholesale power markets. We look at the operation of the pilot wholesale power market in Guangdong in the light of international experience. We discuss how the power market pilot is working in Guangdong and the extent to which the current market design is in line with successful power markets we see elsewhere. We examine the evidence on whether the market reform has successfully brought new players into the electricity system in Guangdong. We consider the effects of the reform on the operational and investment decisions of firms in the sector. We conclude with several lessons for the Chinese governmentâs ongoing power sector reform programme.
Chapter 4 seeks to explain how successful power market reform has worked in practice, drawing on the many questions we have received over the last four years from Chinese stakeholders seeking to understand the British experience with electricity supply sector liberalisation. We begin by discussing the components of the price of industrial electricity in Great Britain, as an example of a fully reformed electricity market, where the market is roughly comparable in size to a typical Chinese province. We go on to discuss the key actors in the liberalised electricity system in Great Britain, before unpacking each of the components of the price. We discuss the market-determined elements first, then introduce and discuss the regulated elements of the price and finish with the central government-determined price components. Our discussion covers the determination of the wholesale price, the retail ma...