Guanlan | Several Thoughts on Deepening Power Market Reform in the Middle and Late Period of the 14th Five-Year Plan

Since the third round of power system reform of my country's "China Declaration No. 9" started on March 15, 2015, my countryElectricity MarketThe 9th year of exploration of the Exploration of Integration has entered its ninth year. From the initial slow progress and careful trial and error, to the initial formation of a large-scale and stable market system, gradually establishing a market-oriented system for diversified power commodities such as spot electricity energy, auxiliary services, capacity value, green electricity trading, financial derivatives, etc., and clarifying the strategic direction of establishing a national unified power market by 2030. Facing the major national energy and power strategic goals in 2030, during the 14th Five-Year Plan period, my country's power market-oriented reform must simultaneously promote "vertical deep digging of the guiding potential of diversified market mechanisms" and "regional coordination of horizontal expansion of market-oriented resource scheduling" to promoteNew power systemorderly and smooth transformation.

The overall principles and phased progress of the new round of power market-oriented reform

In accordance with the requirements of "controlling the middle and liberalizing both ends", my country's market-oriented power reform implements the reform strategy of "medium- and long-term trading as the main and spot trading as the auxiliary", promotes the orderly liberalization of electricity generation and use, and gradually improves the market operation framework of "medium- and long-term + spot + auxiliary services +..." to improve resource allocation efficiency and guide the low-carbon transformation of power. my country's market-oriented power reform process takes 2 to 3 years as a stage, constantly trial and error, correct errors, innovate and improve, and gradually open up the market-oriented trading situation.

The first phase (2015~2017): After the top-level design of the power market-oriented reform was introduced in 2015, there was a two-year "idle period" for the reform to brew the beginning environment, avoiding the repeat of the historical failure of reform in 2002;

The second phase (2017~2020): The development of medium- and long-term power trading and spot market pilot work in 2017 is a sign that my country has truly entered market-oriented reform, and has achieved landmark results such as the verification of transmission and distribution price, the trial operation of spot pilot long-term continuous settlement and finalization of medium- and long-term trading rules within three years;

Phase 3 (2020~2023): In the context of a sharp increase in the pressure on power supply, my country promotesCoal and electricityIn principle, all coal-fired power generation has entered the market, and all industrial and commercial users have entered the market. The situation of the "plan" and "market" attributes of the power market have increased and decreased. With the support of the ultra-high voltage transmission network, the conditions for establishing a national unified power market system have been basically mature. The national market construction will drive local (provincial/regional) market construction, and local market exploration basic mechanisms will promote national market construction, reduce market construction costs, and improve the efficiency of large-scale resource allocation.

my country's power market-oriented reform has achieved remarkable results

Market system construction

my country uses medium- and long-term transactions to replace the planned power generation system, and connects spot trading to achieve market-oriented clearance of electricity energy, which can reduce the resistance to reform and achieve a smooth transition from "plan" to "market". The first batch of eight electric spot pilot areas in the country have carried out trial operation of clearing and settlement. During the trial operation, the power grid operation was safe and the market operation was stable. As of January 2023, 21 provinces, cities and regions across the country have launched pilot spot markets, covering nearly 80% of the country's electricity consumption. At the same time, my country has accelerated the construction of ancillary service markets within and between provinces, improved key details such as service pricing, product types, subject scope, and transaction rules, mobilized the service enthusiasm of various types of flexible adjustment resources, and adapted to the demand for the leap-up development of high-proportion new energy. Provinces such as Shandong, Guangdong, and Yunnan are exploring capacity mechanisms to supplement the "medium- and long-term + spot + auxiliary services" market system, and provide supply guarantee mechanism combination returns and enhance the long-term capacity margin of the new power system.

Liberalize market-oriented electricity prices

In October 2021, when coal prices rose sharply and caused large-scale power shortage, the National Development and Reform Commission issued the "Notice on Further Deepening the Market-oriented Reform of the on-grid Electricity Price of Coal-fired Power Generation", requiring that all coal-fired power generation enter the market in principle, and the floating range of the transaction price of the coal-fired power generation market will be expanded from the current upward increase of no more than 10% and downward increase of no more than 15% to the upward increase of no more than 20% (the market transaction electricity price of high-energy-consuming enterprises is not subject to the increase of 20%), and the spot electricity price is not subject to the above range. While stabilizing electricity prices, it further releases the guiding ability of market-oriented electricity prices to "can rise and fall". From the perspective of market operation, the average transaction price of medium and long-term electricity energy is lower than the average price of the spot market, and the average transaction price of the spot market is lower than the real-time average price. Taking the Guangdong power market as an example, the average transaction price of the medium and long-term market in Guangdong Province in 2022 is 0.499 yuan/kWh, the average spot price was 0.572 yuan/kWh, the real-time average spot price was 0.602 yuan/kWh, and the price fluctuation range is 0.048~1.181 yuan/kWh. Locking prices with medium and long-term trading and stabilizing market expectations, reflecting market supply and demand conditions with spot trading and optimizing resource allocation combinations can strengthen the role of an "efficient market".

Market-oriented trading power

In 2022, the national market trading electricity volume was 5.25 trillion kilowatt-hours, an increase of 39% year-on-year, accounting for 60.8% of the total electricity consumption in the society, an increase of 15.4 percentage points year-on-year. Among them, the market-oriented electricity transaction volume exceeded 1 trillion kilowatt-hours for the first time, an increase of nearly 50% year-on-year. The market's role in promoting a larger-scale optimal allocation of power resources has been continuously enhanced. From the perspective of transaction form, my country's market-oriented trading of electricity energy is mainly based on medium- and long-term bilateral negotiated transactions, accounting for about 78% of the total transaction volume, and the electricity volume of spot transactions accounts for a relatively small proportion, reflecting the market operation idea of "medium- and long-term trading as the main and spot trading as the auxiliary". Judging from the trial operation of cross-provincial and cross-regional markets, the southern regional spot market started a trial operation without settlement on July 23, 2022, and carried out two consecutive days of power adjustment in December, initially achieving the orderly connection between regional electricity spot trading and power production operation; in January 2023, the Beijing Electric Power Trading Center fully utilized the continuous operation role of the inter-provincial medium and long-term markets, and carried out a total of 52 incremental transactions in multiple months, monthly and monthly, with a transaction scale of 54.7 billion kWh; on March 27, 2023, the "Overall Plan for Medium and Long-term Trading in the Southern Regional Power Market in 2023" was released, and it is estimated that the market-oriented transaction scale in the southern region can reach about 111.96 billion kWh throughout the year.

Market-oriented transformation

The gradual improvement of the power market system and market-oriented electricity price mechanism provides opportunities and platforms for various power resources to discover their own functional value, guiding power transformation. In accordance with the market role of stable long-term supply and demand in medium- and long-term transactions, spot transactions guide short-term supply and demand balance, flexible adjustment of auxiliary service transaction incentives, and green power transactions discover the environmental value of green power, the competitive landscape of power resources will be gradually adjusted in terms of new energy consumption and parity development, output and load regulation of source and load resources, and economic incentives for flexible adjustment of resources, and the development of new energy from guaranteed acquisition to market-oriented consumption and pricing, and the administrative peak shaving of conventional power supplies to market price signal guidance, further expand the scope of auxiliary service products and entities, promote the new energy industry to enter a mature commercialization stage, and explore effective mechanisms to encourage flexible thermal power, pumped storage, new energy storage, demand response and other regulatory resources to actively ensure the balance of the power system.

The shortcomings in the system and mechanism of the power market

Imperfect auxiliary services market will drag down the spot market

The spot market is based on the principle of marginal electricity price clearance, which is conducive to priority access to the new energy. High-cost thermal power units may be called in the spot market only during the tight period of power supply and demand (if the unit is not called in the spot market, the output plan can be implemented according to medium- and long-term transactions). Some of the capacity of such thermal power units is idle and low-voltage operation, which in turn causes the cost of power generation to rise, affecting the profits of medium- and long-term transactions. In this regard, such units may adopt a low quotation strategy to obtain clearance of power generation space in the spot market, and ensure that the overall profit of "medium- and long-term + spot" transactions will not be greatly affected by maintaining high load operations. Although this "malicious" bidding behavior can reduce the short-term market clearance price, it has a destructive impact on the smooth operation of the market order and the long-term benefits of the power generation side. At this time, introducing the auxiliary service market as a supplement to the spot market can give the unit additional profit opportunities. However, if the auxiliary service mechanism is unreasonable, such as service pricing, cost sharing, product design, etc., the unit's idle capacity participation in auxiliary services plus the profit from medium- and long-term transactions is not as good as the overall "medium- and long-term + spot" income obtained by the unit after the quotation is lowered, it will not be able to attract the unit's idle capacity to participate in flexible adjustment services, and it will be difficult to achieve the purpose of designing the auxiliary service market to supplement the spot market, thereby dragging down the development of the power spot market.

At present, my country's auxiliary service market is still in the early stage of exploration. On the one hand, the pricing of auxiliary services in my country is relatively low. In 2021, my country's auxiliary service compensation expenses totaled 30.7 billion yuan, accounting for about 0.9% of the total electricity bill in the society, far lower than 2.5% of the US PJM market and 8% of the UK; on the other hand, my country's electricity auxiliary service expenses are mainly partially distributed within the power generation side, and have not transmitted cost pressure to users. In December 2021, the National Energy Administration issued the new version of the "Regulations on Grid-connected Operation Management of Electric Power (Guo Nengfa Supervision Regulations [2021] No. 60) and the "Regulations on Power Auxiliary Services Management" (Guo Nengfa Supervision Regulations [2021] No. 61), revising and improving the guidance rules on the construction of auxiliary service markets such as market entities, service products, pricing principles, and sharing mechanisms, but there is still a big gap to the feasible operation level of the implementation of the provincial market.

The scarcity value of reliable capacity under the pressure of power supply is not fully paid attention to

The continuous major power safety incidents of large-scale coal shortage and electricity restrictions in 2021 and severe power shortage in Sichuan's high temperature and drought in 2022 have raised the importance of "supply guarantee" to a new level. In the process of building a new power system and market-oriented power reform, my country's practice of relying on a huge coal-electric unit system to ensure power supply reliability is ineffective. On the one hand, changes in the supply and demand structural characteristics of the new power system have higher requirements for reliable and flexible resources. Coal-fired power has poor performance in rapid climbing, short-term adjustment, start-stop adjustment, etc., and other types of reliable and flexible resources are gradually being valued, but the deployment scale is far from reaching the level that determines the reliability of the power system; on the other hand, the power market lacks an effective pricing mechanism for reliable power capacity. Although the floating range of coal-fired power (medium and long-term) electricity prices has been relaxed and the upper limit of spot electricity prices has been raised (the upper limit of clearance prices in Shandong and Shanxi is 1.5 yuan/kWh), the "top" floating of medium- and long-term electricity prices and the upper limit of short-term spot electricity prices for coal-fired power units are "not high enough" and cannot provide reliable coal-fired power units with benefits equivalent to the value of supply guarantee services. After experiencing the "pain" of my country's power system and mechanism reform, coal-fired power is gradually changing its role and will still play an important role in supporting the support for a long time in the future. If there is a lack of reasonable value returns, especially the incentives for reliable capacity service income, the company's own sustainable operations and the power supply safety of the power system will face great challenges.

Building a national unified power market faces many obstacles

A major obstacle to the construction of a unified national power market is the administrative barriers that connect between provinces. Provincial governments are responsible for local economic development, so they often give priority to local development interests. In the power department, each province is responsible for important matters such as power development planning, operation and scheduling of the provincial power market, and the approval of transmission and distribution prices, and tends to give priority to the development and utilization of local power resources to drive local economic growth. Although my country has established a complete cross-regional and cross-provincial grid foundation, encouraged cross-regional renewable energy consumption, and carried out trial operation in the southern regional power market, the market-oriented reform of the inter-provincial power has not yet touched the core issues of the power system with the provincial-level as the leading unit. Local governments still participate in cross-provincial and cross-regional power transactions with the completion of policy indicators and tasks as the main starting point. Limited regional coordination and administrative scheduling incentives have limited inter-provincial power transmission. The situation of promoting efficient flow of regional resources from a global perspective and a market perspective is far from mature.

The imperfect functions of the national platform for optimizing the allocation of power resources and the differences in marketization progress in various places are not conducive to the national unified power market playing an important role in achieving the "dual carbon" goal. The provincial power trading system has a good optimization and guiding role in the basic balance of electricity within the province and the allocation of electricity within the province. However, the coordination capabilities of "intra-provincial electricity", "outside-provincial electricity" and "outside-provincial electricity", are insufficient. The transaction mainly relies on long-term contracts designated by the government, and it is difficult to dynamically and accurately reflect the true value of electricity. my country's inter-provincial power trading mechanism has not yet been improved and mature, and the ability of national-level power trading platforms to play a global role in coordinating regional resource dispatch and clearing is also limited. At the same time, the transaction connection problem caused by the different progress in the market stages in different provinces can easily cause conflicts between stakeholders.

Several suggestions on the reform of the power market in the middle and late period of the 14th Five-Year Plan

"Dimensional Deep Digging": Taking the spot power energy market as the axis, improve the auxiliary service market mechanism to adapt to the leap-up development of new energy, and improve the capacity compensation mechanism as a transitional means to ensure supply of new power systems

The combination mechanism of "spot + auxiliary services + capacity" corresponds to the value of electricity energy (kilowatt-hours), electricity adjustment (ΔkW) and effective capacity support (kilowatt-hours). The reasonable price mechanisms of the three markets are connected to discover the service value of "electricity" (plus the green electricity market can reflect the environmental value of electricity), which is conducive to more intuitively clarifying the rights and responsibilities of market entities and guiding various power costs, thereby mobilizing the enthusiasm of various resources to participate in the balance of the power system.

Improving flexible regulation and reliable supply capabilities is the most urgent and core task in building a new power system. According to the physical characteristics of the new power system and the structural contradiction of transformation, the spot electricity energy market time-sharing electricity price should truly reflect the temporal and spatial value of electricity, and guide market entities to adjust their own strategies (such as power generation unit output arrangements, user electricity use plans, energy storage charging and discharge, etc.); the auxiliary service market should improve product pricing and cost sharing mechanisms, attract adjustable units to participate in auxiliary services with reasonable returns, and enrich the types of auxiliary service products, such as rapid climbing, dynamic response, to calm the volatility of new energy, and ensure the quality of electricity; through the transition of capacity compensation to the capacity market, floating compensation is made to resources that provide real-time and effective power capacity services (compensation is for service effects rather than capacity itself), to avoid the negative problems of extremely high scarce electricity prices or the difficulty of short-term power generation costs under market price limits when power supply is tight, and to diversify the price risks of market entities. Under the framework of the national unified power market, my country should accelerate the construction of a comprehensive market mechanism that meets the emission reduction and supply demand of new power systems, covering electricity energy, auxiliary services and capacity mechanisms.

"Horizontal expansion": Explore the establishment of inter-provincial secondary markets, improve regional power spot market mechanisms, and coordinate and strengthen inter-provincial power resource mutual assistance

In August 2017, State Grid launched a pilot program for spot trading of surplus renewable energy across provinces; in November 2021, State Grid issued the "Inter-Provincial Power Spot Trading Rules (Trial)", which further optimized and improved the inter-provincial power market trading system based on the practice of cross-regional surplus renewable energy spot pilot program. The "Guiding Opinions on Accelerating the Construction of a National Unified Power Market System" (Development and Reform and Reform [2022] No. 118) issued by the National Development and Reform Commission pointed out that when conditions are ripe, support the integrated development of the provincial (autonomous region, municipal) market with the national market, or multiple provinces (autonomous region, municipality) jointly form a regional market and then integrate and develop with the national market. The inter-provincial secondary market is a connection transition between the current inter-provincial spot power trading mechanism and the national unified power market system. Compared with inter-provincial bilateral transactions, it allows multilateral transactions between provinces to be conducted separately on the basis of national market or system operation arrangements. On the basis of priority balance and clearance of low-cost resources within the province, the market in the country recently bids for the excess electricity (not only the surplus renewable energy electricity) voluntarily participating in by provinces in the country. This operation model of the secondary market between provinces allows better sharing of resources on a larger scale, while retaining differentiated provincial power market design, price formation and operational autonomy, facilitating a gradual transition to the national unified power market system. It should be noted that during the market transition, the supervision of the market by national competent departments should be strengthened, and the price tools and transparent consultation and coordination should be used to resolve conflicts of interest in provincial/regional market design connections should be made.