Market-based drivers key to energy success

Market-oriented reforms are set to define major directions of the energy sector's development in the coming years, said experts, highlighting content discussed at the recently concluded third plenary session of the 20th Central Committee of the Communist Party of China.

Experts said the third plenary session reiterated the significant role of the market in driving the development of new energy, industrial decarbonization, ensuring stable energy supply and establishing a new energy system.

Specifically, it emphasized advancing independent operations in monopolistic sections and market-oriented reforms in competitive areas of the energy sector, and refining mechanisms for private enterprises to participate in national projects effectively. It advocated for reforms in pricing across the water, energy and transportation sectors, optimizing tiered pricing systems for residential water use, electricity and gas consumption, as well as enhancing refined fuel pricing mechanisms.

Concurrently, efforts to accelerate the planning and construction of a new energy system with improved policies for integrating power generated from new energy sources into the grid and regulating renewable energy consumption were highlighted in the discussions of the third plenary session.

Everbright Securities said monopolistic operations in the power sector primarily refer to the grid segment. It said the previous round of electricity reforms since 2015 already proposed "controlling the middle while opening up both ends", aiming to achieve independent operation of the grid and transparency in revenue. The current challenge lies in the pressure from integrating new energy into the grid, necessitating increased investment, enhanced digitization and greater flexibility, posing higher requirements for the stable and profitable operations of the grid network.

"The new decision on advancing independent operations in monopolistic sections, mainly the grid sector, is a step forward in the 2015 electricity market reform to deal with challenges, mainly stability and profitability issues, after more power from renewable sources connects to the grid. The grid now has almost achieved the level of independent operations with minor adjustments that need government intervention, such as required absorption ratio of power from new energy resources," said Lin Boqiang, head of the China Institute for Studies in Energy Policy at Xiamen University.

Competitive market segments have seen the marketization of thermal power operations in the previous round of reforms, said Everbright Securities. However, methodologies for marketizing new energy — as well as power pricing mechanisms that coordinate electricity from new energy resources and thermal power sources — are not yet fully developed.

In terms of advocating electricity price reforms mentioned in the third plenary session, experts said further efforts are needed to focus on improving the electricity trading market, forming competitive pricing models for new energy and integrating electricity with carbon pricing.

Regarding the enhancement of refined fuel pricing mechanisms, Su Qilong, general manager of the Dalian Petroleum Exchange, said that while the current pricing system has stabilized oil supply in the domestic oil market, recent geopolitical conflicts have led to volatile international oil prices that do not suit domestic supply and demand dynamics.

Su suggested increasing transparency in the pricing mechanism, proposing further reduction of adjustment periods beyond the current 10-day cycle, and optimizing controls on price ceilings and floors.

Liu Yijun, a professor at China University of Petroleum, said residential gas prices influence the overall gas price reform process. One key aspect is the linkage mechanism that coordinates prices from suppliers and users. Currently, residential gas prices generally remain low with insufficient frequency of adjustments, and some regions lack such mechanisms, which puts pressure on suppliers. These areas require further optimization and improvement.

Addressing the improvement of policies for integrating and regulating new energy consumption as outlined in the decision made by the third plenary session, Li Qionghui, a researcher from the State Grid Energy Research Institute, said, "China is witnessing the emergence of a diversified new energy absorption and consumption mechanism, encompassing required grid absorption of power from new energy sources, market-oriented consumption, integrated suppliers-grid-users-storage systems and distributed consumption."

In May, an action plan issued by the State Council — the nation's Cabinet — proposed relaxing the required absorption ratio of power generated from new energy sources from 95 percent to 90 percent for the grid in certain regions, contingent upon dynamic annual assessments of absorption conditions. Li said that this adjustment will further accelerate the marketization of electricity generated from new energy resources.