New moves in China’s power market reform chess game

A new paper by OIES Senior Research Fellow Anders Hove examines the latest developments in China’s electric power sector, including new capacity, power market reform policies issued this year, and their impact on the country’s climate goals:

• The government’s emphasis on energy security is contributing to a burst of coal power construction across China, in regions with ample coal capacity to meet peak and balance variable renewables. This appears to be driven primarily by the desire of provincial officials to lock in more infrastructure investments now, while coal plants are encouraged.
• As the coal overcapacity problem worsens, financial losses at coal plants are driving the push to adopt a specific capacity payment for coal plants. The capacity payment policy announced in November 2023 could provide further incentive to build more coal capacity, which might eventually lead officials to weaken requirements for fully utilizing wind and solar energy, and even to discourage construction of new wind and solar capacity.
• The coal overbuild, while aimed at improving reliability, will also lead to higher costs, especially compared to alternatives such as increasing power trading among provinces and regions, or increasing demand response by allowing greater price volatility in short-term power markets.
• Coal overcapacity could restrict the interest in investment in new gas capacity and, in the absence of high-volume spot electricity markets, could reduce the dispatch of existing gas-fired power assets.
• China remains committed to carbon neutrality and its renewable capacity is also expanding at an accelerating rate, including distributed solar photovoltaics (PV) and energy storage to balance the intermittency of renewables. Wind and solar will exceed China’s 2030 targets years ahead of schedule.
• Nevertheless, tying up financial resources in excess coal capacity could ultimately slow the energy transition, such as through adoption of policies that restrict additions of new renewables or lead to lower utilization of existing renewables.

By: Anders Hove