Interpreting the resistance and promotion of incremental distribution network reform

With the issuance of Document No. 9 and a series of supporting documents, a new round of power system reform, which is hailed as a "tough nut to crack", has officially kicked off. The biggest highlight of this reform is the proposal to steadily advance the reform of the power sales side and orderly open up the power distribution and sales business to social capital.

Compared with the liberalization of electricity sales, the pace of liberalization of distribution networks is slower because it touches the core interests of power grid companies. It was not until October 11, 2016 that the "Measures for the Orderly Liberalization of Distribution Network Business Management" was officially issued. In December 2016, the first batch of 105 incremental distribution network business reform pilot projects were determined; in November 2017, the second batch of 89 incremental distribution network business reform pilot projects were determined; in April and July 2018, the third batch of 126 incremental distribution network business reform pilot projects were successively determined. The total number of pilot projects has now reached 320. At present, the National Development and Reform Commission and the National Energy Administration (hereinafter referred to as the two ministries) are organizing local governments to apply for the fourth batch of pilot projects.

The pilot reform of incremental distribution network has been implemented for more than two years. Overall, the progress is relatively slow. Although the two ministries have taken many measures, including the proposal that "the pilot reform project of incremental distribution business should achieve full coverage of cities at prefecture level and above nationwide", the specially established "pilot progress report every half month, monthly notification" and "regular direct report of direct contact projects" system, as well as a series of work such as supervision, investigation and interviews with various places, the results are minimal and the slow progress of the pilot reform of incremental distribution network has not been reversed. The main manifestations are:

First, most of the first batch of pilot projects have stalled. As of August 2018, less than 10% of the pilot projects have actually started operations; and the social capital in some project entities has withdrawn or is seeking to withdraw.

Second, the enthusiasm for submitting the second batch of pilot projects has declined (both the quantity and quality are inferior to the first batch).

Third, most of the second and third batches of pilot projects have not yet been launched; and project owners have frequently failed to win bids due to an insufficient number of companies participating in the bidding.

Fourth, the submission of the fourth batch of pilot projects is being promoted, and it is encouraged to "extend the pilot projects to the county level", but there is a strong wait-and-see sentiment in various places.

The pilot reform of incremental distribution network faces difficulties and resistance

The incremental distribution network reform pilot faces difficulties and resistance in the following aspects:

The biggest resistance to the pilot reform of incremental distribution network comes from power grid companies. Power grid companies do not want anyone to "grab the territory" or "divide the cake" with them, so the incremental distribution network pilot projects that have been built are all controlled or invested by power grid companies. Among the 320 incremental distribution network pilots, few projects without the participation of power grids have made substantial progress, and even encountered various "accidents". Power grid companies mainly set obstacles in the division of power supply areas, disposal of existing assets, and access to distribution network projects. The wavering attitude of local governments has also affected the advancement of the project.

In response to this situation, the two ministries interviewed power grid companies and some local governments, and made public announcements, seriously pointing out that some local governments and power grid companies did not fully understand the key issues and key links of the reform, and there was a deviation from the central reform spirit. At the same time, the two ministries issued the "Implementation Measures for the Division of Distribution Areas for Incremental Distribution Business (Trial)" and the "Notice on Further Promoting the Reform of Incremental Distribution Business" (Fagai Jingti [2019] No. 27), and took targeted response measures. At present, the top leaders of the State Grid have repeatedly stated that they will improve their political stance and firmly support the power reform. The attitude towards the power reform has changed from "responsibility for defending the territory" to "open cooperation"; in addition, some local governments that were previously wavering have also "woke up" and actively supported and participated in the incremental distribution network reform. Although there will still be many contradictions in the implementation of specific pilot projects, overall, the resistance and obstacles from power grid companies and local governments will be reduced.

The unreasonable structure of transmission and distribution prices has resulted in basically no profit margin for distribution prices. The Guiding Opinions on Formulating Distribution Prices for Local Power Grids and Incremental Distribution Networks (hereinafter referred to as the “Guiding Opinions”) clearly stated: “The sum of the distribution price of the distribution network borne by the user and the transmission and distribution price of the upper-level power grid shall not be higher than the current provincial power grid transmission and distribution price corresponding to the same voltage level directly connected to the user. Before the distribution price is determined, the provincial power grid common network transmission and distribution price corresponding to the voltage level connected to the power sales company or power user shall be temporarily deducted from the provincial power grid common network transmission and distribution price corresponding to the voltage level connected to the distribution network.” However, the transmission and distribution prices that took more than a year to determine in this round of power reform still have the problem of unreasonable transmission and distribution price structure in most provinces and cities: the transmission price of high voltage levels (500 kV and 220 kV/330 kV) is too high, and the price difference between voltage levels below 220 kV is too small. In the situation where local governments have not yet issued pricing methods for incremental distribution network distribution prices and distribution prices cannot be determined, there is basically no profit margin for distribution prices, and even some distribution networks have no voltage level difference and cannot charge distribution fees.

Although the guidance has "opened a window" for the adjustment of distribution network prices: "If the difference between the transmission and distribution prices of different voltage levels and the actual costs is too large, the provincial price authorities may apply to the State Council price authorities to adjust the provincial power grid transmission and distribution price structure based on actual conditions." However, the actual operation is difficult and time-consuming.

Some pilot projects are of poor quality and difficult to implement; investment promotion has not met expectations and investment cannot be recovered. Pilot projects are one of the important achievements of local reforms, and many local governments have shown great enthusiasm for applying for pilot projects. However, some places did not fully understand the reform policies during the application process, and blindly reported pilot projects as general investment projects, affecting the implementation of later projects. At present, some pilot projects have failed to bid, potential investors have withdrawn, projects have stagnated, and there are difficulties in promoting them in the later stages. Among the 320 approved projects, there are many pilot projects, especially those in the second and third batches, which do not meet the conditions for conducting pilot reforms of incremental distribution business in terms of land area and electricity load.

At the same time, many pilot projects are currently industrial parks, industrial parks or economic development zones, etc., and the electricity demand is generally low at first and then high, and may not even be high in the later period, resulting in low electricity sales for a long period of time and income far below expectations. Especially for new parks, the electricity load is closely related to investment attraction. If investment attraction is not in place, there are few or slow enterprises entering the park, and the electricity demand is difficult to meet expectations, the owner's investment cannot be recovered for a long time, and even a large loss occurs, which not only affects the subsequent operation of the project, but also seriously shakes the confidence of market players in investing in distribution network projects.

Incremental distribution network enterprises fulfill their obligation to provide guaranteed power supply services, but the corresponding rights are difficult to guarantee and implement. According to the "Administrative Measures for Orderly Liberalization of Distribution Network Business", distribution network enterprises, like power grid enterprises, have the obligation to provide guaranteed power supply services to residential users, agricultural users and industrial and commercial users who do not participate in market-based transactions in the region. At the same time, they have the right to obtain government-prescribed guaranteed power supply subsidies and purchase electricity from power generation enterprises on a priority basis at government-set prices. The reality is that distribution network enterprises must strictly fulfill their obligations, that is, settle accounts with guaranteed users according to the approved catalog electricity prices, but the corresponding rights are difficult to guarantee and implement, resulting in distribution network enterprises having difficulty recovering the distribution costs of guaranteed users, and even losses.