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The market-oriented reform of electricity price should deal with four major problems

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The market-oriented reform of electricity price should deal with four major problems

In October, the National Development and Reform Commission issued the "On Further Deepening Coal-fired Power Generation".feed-in tariffNotice of Market-oriented Reform (hereinafter referred to as the "Notice"). The ''Notice'' includes four reform contents and four safeguard measures: orderly liberalize the on-grid electricity price of all coal-fired electricity, expand the range of market transaction electricity prices, promote industrial and commercial users to enter the market, and maintain the stability of residential and agricultural electricity prices; Comprehensively promote the construction of the power market, strengthen the connection with the time-of-use electricity price policy, avoid unreasonable administrative intervention, and strengthen the supervision of the coal power market.

The reform measures in the "Notice" are another leap forward in the reform of the power system since the release of the "Several Opinions of the Central Committee of the Communist Party of China and the State Council on Further Deepening the Reform of the Power System" in 2015. The four major problems currently facing the power industry, namely, the inability to ease rising fuel costs, the "dual-track system" distorts resource allocation, the "pinch" of market mechanism construction, and the retardation of market entities, have all obtained a long-term response mechanism through the "Notice.

Conduction Fuel Costs Mitigate Generation Losses

Starting from the end of 2020, the prices of primary energy sources such as natural gas and coal began to soar due to the overshoot of the dollar, the recovery of the world economy, and domestic de-capacity. In mid-October this year, according to China's coastal thermal coal purchase price index, the comprehensive price of 5500 kcal thermal coal reached 1457 yuan/ton, nearly 2.5 times the low price in March.

Against this backdrop, the variable cost of coal-fired generating units has risen sharply. It is estimated that after considering factors such as the long-term electricity and coal association, the price of coal entering the power plant in October is about 1200 yuan/ton of standard coal, and the corresponding variable cost is 0.45 yuan/degree, which is higher than the national average coal-fired on-grid electricity price (including market-oriented and non-market-oriented coal-fired electricity) 0.36 yuan/degree before the reform. The difficulty of variable cost recovery affects the enthusiasm of coal power output, which is the main reason for a series of power supply problems at the end of September and the beginning of October.

The Circular expands the floating range of transaction prices in the coal-fired power generation market from no more than 10% upward and no more than 15% downward in principle to no more than 20% upward and downward in principle. The market transaction price of high-energy-consuming enterprises is not subject to the 20% upward limit, orderly promoting all industrial and commercial users to enter the power market and providing relief channels for the cost dilemma of power generation enterprises: first, by relaxing the upper limit, it is clear that "electricity prices can rise"; the second is to expand the "who to whom electricity prices will rise" through the entry of all industrial and commercial enterprises into the market ".

Full entry of industry and commerce into the market to reduce the "double track" distortion

The problem of "two-track system" has always been a major obstacle to the optimal allocation of resources in China's electricity market. The "large dual-track system" refers to the differential treatment between residents, agriculture and other security users and industrial and commercial users in terms of prices and power generation plans. Due to complex factors such as people's livelihood, it needs to be gradually digested. The "small two-track system" refers to the existence of two types of users within the industry and commerce who voluntarily enter the market and purchase electricity from power plants and electricity sellers at market prices, and who still purchase electricity through the power grid and sell electricity at catalog prices.

The "small dual-track system" does not involve the livelihood factors of the "big dual-track system", but it has caused many chaos in the power market. For example, some users withdraw from the market after the market price rises, forcing the power grid enterprises to settle the price according to the catalogue, only enjoy the market price reduction income, do not bear the market risk. In addition, due to the lack of close convergence between medium-and long-term prices and time-of-use tariffs in some areas, only users who use more electricity during peak hours are willing to enter the market and reduce the cost of electricity through market prices lower than the catalog peak tariff, while users who use more electricity during valley hours continue to stay in the catalog tariff to enjoy the trough discount. This phenomenon causes the peak and valley electricity price to cut the peak and fill the valley adjustment effect is greatly reduced, and at the same time leads to the loss of power grid enterprises.

The "Notice" requires all industrial and commercial users to enter the market, which greatly reduces the space for arbitrage using unreasonable "dual-track system". While ensuring market fairness, it greatly improves the efficiency of price-guided resource allocation.

Construction of accelerated mechanism for rapid expansion of transactions

The construction of China's electricity market started from "selling electricity side to liberalize medium-and long-term trading without curve", which is different from the foreign experience of "starting from the spot market and supplementing the medium-and long-term trading with curve". The advantage of this approach is that the technical threshold in the initial stage is low, the disadvantage is that it does not conform to the physical laws of power commodities, and the subsequent improvement is difficult.

At this stage, some problems of imperfect market mechanism have been highlighted. In 2017, China launched a spot pilot, but the process was bumpy and there were problems such as unbalanced funds in the settlement trial run. The degree and mode of implementation of medium-and long-term power trading varies from place to place, and some areas have problems such as the unimplemented price mechanism and the unclear communication of peak and valley signals.

All industrial and commercial users enter the market by the power grid agent, which will cause the rapid expansion of the power market and force the solution of the problem of imperfect market mechanism. In 2020, China's industrial and commercial users involved in direct transactions will account for about 39% of the total industrial and commercial electricity, and this proportion will gradually increase with the implementation of reform measures until all industrial and commercial electricity is covered.

Market construction speeds up and catalyzes the growth of each subject.

From the point of view of the maturity of the main body of the market, China's electricity market also has many shortcomings, especially in the power grid, electricity sales and users of the three sides. On the power grid side, restricted by some objective conditions, there are problems such as unclear interface between competitive business and non-competitive business. This is a factor that affects the fair and effective operation of the electricity market. On the electricity sales side, market-oriented e-commerce companies rely on the purchase and sale price difference all the year round, and the phenomenon of "channelization" is serious. They lack the willingness and ability to provide value-added services, and do not play a better role in guiding users to participate in the coordination and optimization of the power system. On the user side, some users have poor risk awareness, do not accept that electricity prices "can rise and fall", and are not willing to participate in new businesses such as demand response and integrated energy services.

After the "Notice" lands, power grid companies will inevitably face clearer regulatory requirements and accelerate their adaptation to the position in the pattern of "opening up both ends and managing the middle"; e-commerce will face a broader market and greater innovation space; Users will face more accurate electricity price terminal signals.

There are still many problems in the reform

The Notice opens a new stage in China's electricity market, with risks and opportunities. Many problems still need more attention and research.

First, coal is the root cause of the recent power supply problem, and the coal and electricity market should be coordinated and straightened out. The root cause of the negative operation of power generation enterprises is the soaring coal price. The relaxation of the upper limit of transaction electricity price can only play a certain role in relieving, and it has the negative impact of the rising electricity cost of the whole society. Only when coal supply returns to a reasonable level can coal prices rise and coal power return to its proper role as a basic and reliable power source in the power system.

Second, the supply of affordable low-cost electricity is unstable. Low-cost power such as hydropower is an important source of low-cost electricity for residents, agriculture and other security users in China. However, with the rapid growth of residential electricity consumption, there have been many provinces where low-cost power supplies are not enough to meet the needs of residents in the province, requiring power grid companies to purchase market electricity at high prices to make up for the gap, resulting in unbalanced funds; in terms of time, there is still The problem that the low-cost power supply does not coincide with the indemnificatory power consumption curve. When the gap appears at the peak, unbalanced funds will also be generated.

Third, the threat of market power on the power generation side will surface. The power market in many provinces in China has the problem of excessive concentration, that is, the proportion of installed capacity of individual power generation enterprises is large and the total number of power generation enterprises is small. Therefore, even if fuel prices fall, power generation companies can maintain high electricity prices in some way, and thus obtain excess profits. This poses a serious threat to the fair and effective operation of the electricity market.

Fourth, the functions and roles of power grid enterprises are facing profound changes. The business structure of power grid enterprises will change from the two-track system of "unified purchase and sale of transmission and distribution services" to the "single-track two-class" system of "transmission and distribution service agent purchase service. Power grid enterprises will face a series of new situations, and many businesses are in a state of neither experience nor legal and policy norms, which may bring certain risks.