Emissions and Power Market Links Can Boost China's Green Transition
The following is an excerpt from an op-ed by Asia Society Policy Institute Senior Program Officer Yi Chen and Director of Asia-Pacific Sustainability Alistair Ritchie originally published in Nikkei Asia.
November 24, 2023, by Yi Chen and Alistair Ritchie
China produces more carbon emissions than any other country. Power generation, in turn, is the leading source of those emissions.
This is why China's ongoing power market reforms, including the recent introduction of national rules for spot trading of electricity, merits particular attention. Through interaction with the country's existing national emissions trading system (ETS), the reforms have the potential to power the decarbonization of electricity generation in China.
The country's existing inefficient and outdated power market is based on rigid government planning and tightly regulated retail prices. Through reform, China aims to allow electricity prices to reflect supply-demand dynamics through the mechanisms of spot, medium- and long-term trading with an eye toward boosting efficiency and promoting the use of renewable energy sources.
Spot trading has already been conducted on a trial basis in more than 20 provincial-level markets. In the spot market, prices are "discovered" by matching supply and demand at the lowest operating cost.
This process is known as economic dispatch. Renewable energy, which involves minimal operational expenses, is effectively prioritized this way, while power from coal-fired plants, which have high fuel costs, is used as a last resort.
Over time, the interaction between demand and supply creates a price curve. The curve then forms the basis for contracts in the medium- and long-term market, which is important for planning and risk management for consumers.
Electricity prices surge on the curve at times of peak demand due to the higher operational costs of marginal coal plants supplying electricity to meet extreme needs. This dynamic acts to increase profit margins for renewable energy producers and to encourage consumers to use energy more efficiently, as well as to shift consumption to periods of low demand. At such times, renewable resources can meet market needs, while electricity prices can also drop significantly.
Renewables will also benefit as China integrates its regional markets, moving toward the ultimate objective of establishing a unified national power market by 2030. This process will allow unevenly distributed resources to be balanced across provinces, with an increase in overall system efficiency.