Reforming The Chinese Electricity Supply Sector: Lessons From Global Experience Hardcover

The Chinese electricity sector is the largest in the world, covering well over 20% of the world's electricity supply. While many other countries liberalized their electricity systems in the 1990s, thereby creating competitive wholesale and retail electricity markets, China's move towards liberalization has advanced at a slower pace – until now. Following the China State Council's publication of the No. 9 document on 'Deepening Reform of the Power Sector', this book reflects on the ambitious new round of reforms aimed at introducing competitive wholesale electricity markets and incentive regulation for its power grids. Written in collaboration with Hao Chen, Lewis Dale and Chung-Han Yang, this book provides lessons for China's reforms from international experience, combining a detailed review of reforms from around the world with specific application to China and focuses on how the industrial price of electricity is determined in a liberalized power system. Preface 6 Acknowledgements 8 Contents 11 About the Authors 16 List of Figures 17 List of Tables 21 1: An Introduction to the Chinese Power System and Its Reform 23 1.1 Background to Our Study 23 1.2 The Structure of the Book 24 1.3 The Scale and Scope of the Chinese Electricity Supply Industry in 2015 26 1.4 The Structure and Organisation of the Chinese Power Sector 32 1.5 The History of Power Sector Reform in China 35 1.6 What Motivated the 2015 Power Sector Reform? 38 References 41 English 41 Chinese 42 2: Lessons for China from International Experience of Power Sector Reform 44 2.1 Introduction 44 2.2 Market Restructuring and Ownership Changes 47 2.2.1 Vertical Separation (1) and Horizontal Restructuring (2) 47 2.2.1.1 Theoretical Significance 48 2.2.1.2 General Reform Experience 49 2.2.1.3 Chinese Context 50 2.2.2 The Creation of Wide Area Independent System Operators (3) 55 2.2.2.1 Theoretical Significance 55 2.2.2.2 General Reform Experience 56 2.2.2.3 Chinese Context 57 2.2.3 Privatisation and Monopolies (4) 61 2.2.3.1 Theoretical Significance 61 2.2.3.2 General Reform Experience 62 2.2.3.3 Chinese Context 62 2.3 Supportive Secondary Market Arrangements 65 2.3.1 Creation of Spot and Ancillary Services Markets to Support Real-Time Balancing of the System (5) 65 2.3.1.1 Theoretical Significance 65 2.3.1.2 General Reform Experience 67 2.3.1.3 Chinese Context 67 2.3.2 Participation of Demand Side in Wholesale Electricity Markets (6) 68 2.3.2.1 Theoretical Significance 68 2.3.2.2 General Reform Experience 69 2.3.2.3 Chinese Context 69 2.3.3 Regulated Third-Party Access to, and Efficient Allocation of, Scarce Transmission Capacity (7) 70 2.3.3.1 Theoretical Significance 70 2.3.3.2 General Reform Experience 73 2.3.3.3 Chinese Context 74 2.4 Appropriate Economic Regulation 76 2.4.1 Unbundling of Regulated Network Charges and Competitive Segment Charges (8) 76 2.4.1.1 Theoretical Significance 76 2.4.1.2 General Reform Experience 77 2.4.1.3 Chinese Context 78 2.4.2 Mechanisms to Ensure Competitive Procurement of Wholesale Power for Regulated Final Customer Groups (9) 79 2.4.2.1 Theoretical Significance 79 2.4.2.2 General Reform Experience 80 2.4.2.3 Chinese Context 80 2.4.3 The Creation of Independent Regulatory Agencies to Regulate Monopoly Network Charges and Monitor Competitive Segments (10) 81 2.4.3.1 Theoretical Significance 81 2.4.3.2 General Reform Experience 83 2.4.3.3 Chinese Context 84 2.5 Efficient Promotion of Low Emission Technologies 90 2.5.1 Competitive Procurement Processes for Low Carbon Generation, with Some Exposure to Wholesale Price Variability (11) 90 2.5.1.1 Theoretical Significance 90 2.5.1.2 General Reform Experience 91 2.5.1.3 Chinese Experience 92 2.5.2 Cost Reflective Access Terms for Renewables (12) 95 2.5.2.1 Theoretical Significance 95 2.5.2.2 General Reform Experience 95 2.5.2.3 Chinese Experience 96 2.5.3 Appropriate Pricing of Environmental Externalities (Both Carbon Dioxide and Other Atmospheric Pollutants, such as Sulphur Dioxide) (13) 97 2.5.3.1 Theoretical Significance 97 2.5.3.2 General Reform Experience 98 2.5.3.3 Chinese Experience 99 2.6 All Good Power Market Reforms (and Indeed, Significant Economic Reforms More Generally) Involve Appropriate Transition Mechanisms (14) 101 2.6.1 Theoretical Significance 101 2.6.2 General Reform Experience 101 2.6.3 Chinese Context 102 2.7 Conclusions 106 2.7.1 International Lessons and Policy Priorities for China 106 2.7.2 Suggestions for Future Research 109 Appendices 111 Appendix I: Calculation Process of the Switching Carbon Prices from Coal- to Gas-Fired Power Plant Investment in 2015 (LCOE=levelised cost of electricity) 111 Appendix II: Calculation Process of the Switching Carbon Prices from Coal- to Gas-Fired Power Generation in 2015 112 References 113 English 113 Chinese 122 3: Power Market Reform in China: Lessons from Guangdong 124 3.1 Introduction 124 3.2 Background 127 3.2.1 Guangdong Within China 127 3.2.2 The Size of the Electricity Sector in Guangdong 130 3.3 How the Power Market Works 134 3.3.1 International Context 134 3.3.2 The Power Market in Guangdong 137 3.4 New Players 140 3.4.1 International Context 140 3.4.2 New Energy Market Players in Guangdong 143 3.5 Effects on Operations and Dispatch 147 3.5.1 International Experience 147 3.5.2 Effects on Dispatch in Guangdong 149 3.6 Key Points for Improvement 151 3.6.1 Discussion of Overall Impressions of Reform 151 3.6.2 Recommendations for Furthering Reform 160 Appendix: How Changing Infra-Marginal Bids Changes the Auction Results in the 2016 Power Market Auction Design 162 References 166 English 166 Chinese 171 4: How Industrial Electricity Prices Are Determined in a Reformed Power Market: Lessons from Great Britain for China 174 4.1 Introduction 174 4.2 How Is the Industrial Electricity Price Set in Great Britain 175 4.3 The Key Actors in the Electricity System in Great Britain 177 4.4 Wholesale Prices 182 4.5 Retail Margins 190 4.6 Regulated Network Charges Determination 194 4.7 Transmission Charges 203 4.8 System Balancing Charges 211 4.9 Distribution Charges 222 4.10 Environmental Levies and Taxes 225 4.11 Overall Lessons on Price Determination for China from Great Britain 228 References 230 Additional Useful Resources on UK Electricity Reform 234 5: Prospects for Reform of China’s Electric Power Sector 235 5.1 High-Level Messages from Previous Chapters 236 5.2 Recent Developments on Power Sector Reform in China 237 5.3 Suggestions for Next Steps 244 5.3.1 Improving Regulatory Capacity 245 5.3.2 Improving Regulatory Reporting 245 5.3.3 Promoting Learning from the Pilot Markets 246 5.3.4 Putting All Generation and Demand in the Wholesale Market 247 5.3.5 Consider Whole or Part Privatisation of One Large Generator 248 5.3.6 The Creation of Genuine Interprovincial Market Should Be Done in Stages 248 5.3.7 Pay Attention to Mitigation of the Social Effects of Power Sector Reform 249 5.4 Fundamental Questions Raised by China’s Power Market Reform 250 5.4.1 Is China Ready for the Full Implications of Electricity Markets? 251 5.4.2 Is There an Easier Way to Deliver the Benefits of Power Market Reform Than the Route Currently Being Pursued? 251 5.4.3 Can Reform Be Sustained and Completed in China Given Its Institutional Set-Up? 252 5.4.4 Can China Have a Successful Power Market Reform Without Widespread Private Ownership of the Sector? 253 5.4.5 Is China Willing to Break Up SGCC and CSG in Ways That Will Promote Power Market Development? 254 5.4.6 How Will China Combine Power Sector Reform with Decarbonisation? 254 5.4.7 What Will Reform Reveal About Chinese Electricity Consumers? 255 5.5 Key Closing on Messages for Chinese Electricity Stakeholders on How to Approach Power Sector Reform 256 5.5.1 Policy-makers 256 5.5.2 Regulators 257 5.5.3 Generators 257 5.5.4 Retailers 257 5.5.5 Grid Companies 258 References 258 Index 260 Front Matter ....Pages i-xxvi An Introduction to the Chinese Power System and Its Reform (Michael G. Pollitt)....Pages 1-21 Lessons for China from International Experience of Power Sector Reform (Michael G. Pollitt)....Pages 23-102 Power Market Reform in China: Lessons from Guangdong (Michael G. Pollitt)....Pages 103-152 How Industrial Electricity Prices Are Determined in a Reformed Power Market: Lessons from Great Britain for China (Michael G. Pollitt)....Pages 153-213 Prospects for Reform of China’s Electric Power Sector (Michael G. Pollitt)....Pages 215-239 Back Matter ....Pages 241-260