What are inter-provincial barriers and who plays an important role in inter-provincial transactions?

In analytical articles on power trading and renewable energy consumption, we often read suggestions to “break down inter-provincial barriers”. So, what are inter-provincial barriers, who plays an important role in inter-provincial trading, and why do relevant stakeholders set up this barrier? Let’s listen to Hello Jun’s analysis.

What are the inter-provincial barriers to electricity trading?

Compared with inter-provincial barriers to electricity trading (hereinafter referred to as "inter-provincial barriers"), we may be more familiar with the concept of international trade barriers. International trade barriers are restrictive measures imposed by a government on foreign goods and services to protect its own industries. Its means include imposing tariffs, setting product technical standards, and implementing import quotas, etc.

In this article, inter-provincial barriers to electricity trading refer specifically to measures taken by the power-related competent departments and related enterprises in the power-transmitting or power-receiving provinces in cross-provincial electricity trading in my country to raise transmission and distribution prices or impose administrative measures to restrict transactions in order to protect the economic or corporate interests of the province.

It should be clarified that if all components of the electricity price are normal, the receiving area cannot accept external electricity with a total price higher than the local electricity price level, or cannot accept the intermittent nature of renewable energy in external electricity, which is not within the scope of discussion of inter-provincial barriers in this article. This is because this is a choice made by users in the receiving area without interference, and it reflects the market rule of survival of the fittest.

The inter-provincial barriers to electricity trading have similarities with international trade barriers, but also differences:

From a regional perspective, inter-provincial barriers can be that the receiving province gives priority to developing, purchasing and dispatching electricity from its own power plants; or that the sending province does not encourage the export of its own electricity. The object of discussion of international trade barriers is the country, while the object of inter-provincial electricity transactions is the province. This is essentially related to the governance method of my country's power system of "province as entity" (detailed below).

From the perspective of the means of setting barriers, the means of inter-provincial barriers to electricity trading can be reflected in the high-voltage transmission and distribution prices within the province, or in administrative means such as whether to allow participation in transactions or limit the amount of power transmission. Tariffs, technical standards and quotas are the main means of international trade barriers.

From the perspective of transaction entities, for a long time, the two parties in inter-provincial power transactions were mainly power grid companies that had unified purchase and sales and held the power dispatching power. In recent years, the proportion of market-based transactions involving power plants and large users has gradually increased. In contrast, many of the two parties in international trade transactions are independent enterprises and institutions.

Who are the parties involved in inter-provincial electricity trading?

Inter-provincial electricity trading depends on the interaction of multi-level participants at the national and local levels.

At the national level, the National Development and Reform Commission and the National Energy Administration formulate guidelines for cross-provincial and cross-regional electricity trading, stipulate the calculation method of electricity prices, review the corresponding transmission and distribution prices, and formulate electricity trading policies.

Every year, the State Grid Corporation of China and China Southern Power Grid Company will formulate a plan for the transmission and sale of electricity across provinces and regions and submit it to the National Development and Reform Commission for approval. After consultation with local authorities, the NDRC agrees with the plan of the power grid company. This plan also includes the national plan for the transmission and sale of electricity across provinces and regions, the amount of electricity agreed by local governments, and the amount of electricity achieved through marketization.

The Beijing and Guangzhou Power Exchanges are the executive bodies for inter-provincial power transactions and are also responsible for formulating market-based power trading rules within the region. The two centers not only execute planned electricity but also organize market-based transactions, with the latter accounting for an increasing proportion. From 2018 to the first half of 2019, the proportion of inter-provincial power transactions completed by the Beijing Power Center increased from 36% to 40%. During the same period, the proportion of inter-provincial power transactions in the southern region increased from 13.6% to 23.6%.

Many of the power generation companies that actually participate in inter-provincial power transmission are the “five big and four small” companies and large local state-owned enterprises.

At the local level, the Economic and Information Technology Commission/Industry and Information Technology Commission is usually responsible for formulating power dispatch plans, and local power grid companies cooperate in implementing dispatch. Sometimes the Economic and Information Technology Commission/Industry and Information Technology Commission will also intervene in direct power transactions. The National Power Regulatory Report shows that in 2014, the Industry and Information Technology Commission of Southern Province A issued a direct transaction plan on behalf of both power generators and users, and in 2015, the Industry and Information Technology Commission of Southern Province B set the transaction price.

Local energy bureaus and the Development and Reform Commission also exert influence on external power purchases to a certain extent. For example, in 2014-2015, the Energy Bureau of the eastern province C stipulated the annual, short-term and temporary power caps for the province's power companies to participate in cross-provincial and cross-regional market transactions, and required the province's power companies to obtain the consent of the provincial energy bureau in advance when they had power purchase needs.

Why do provincial barriers exist?

Some researchers have analyzed that the reason for the formation of inter-provincial barriers is that local governments at the receiving end give priority to the development and dispatch of power plants in their own province in order to ensure that GDP, tax revenue and employment remain in their own province. This view makes sense. For example, Guangdong is a major power-receiving province for West-East Power Transmission. In the province's 13th Five-Year Energy Plan, the annual growth rate of local new power installed capacity from 2016 to 2020 is 6.4%, while the growth rate of West-East Power Transmission is only 2.7% (in 2019, the province adjusted its 13th Five-Year Energy Plan and added a number of local gas-fired power and other projects).

Guangdong plans to start construction of more than 12 million kilowatts of offshore wind power by the end of 2020. Many of the planned wind farms are located in Shantou, Jieyang, Shanwei and Zhanjiang, where the per capita GDP ranks relatively low in the province. The vigorous development of offshore wind power in these areas is due to their rich wind resources and the consideration of reducing the economic strength gap between cities. In the period of relative surplus of electricity, the competition between the power transmission and receiving ends has begun from the planning stage.

In order to allow the province's high-energy-consuming industries to use low-priced electricity, the relevant departments on the power transmission side have also prevented the province's power plants from participating in inter-provincial power transactions or raised the price of power transmission within the province. According to the analysis of Zhineng Energy Research and Power Trading, in April 2017, relevant departments in Yunnan put pressure on local power plants and required them not to trade in the Guangzhou Power Trading Center. At the same time, the 500kV transmission price in Yunnan Province reached 0.0915 yuan/kWh, which is much higher than the national regulation of 0.03 yuan/kWh, and even higher than the inter-provincial transmission price of 0.082 yuan/kWh of the Southern Power Grid Ultra-High Voltage Company.

So, in addition to economic factors, what factors within the power system drive the formation of inter-provincial barriers? Under the power industry management model with provinces as entities, the receiving provinces have more responsibility than power for the cross-provincial trading plan. The province-based entity is a mechanism established in my country in the 1980s due to power shortages. If local areas want to develop electricity, they can only rely on provincial planning and raise funds for electricity. That is, provincial power companies conduct independent accounting, self-operation, self-financing, and unified dispatch.

When the power of a province is deducted from the power from outside, the receiving province is more passive in dispatching the units in the province, because the power from outside may not be executed according to the agreement. For example, in 2004, the price of coal in Shaanxi was high, and the power plant could not adjust the electricity price, so some of the power was shut down. Even the large users in Shaanxi were forced to cut off the power supply. In February, Shaanxi's power transmission only completed 46.8% of the plan. As a result, the receiving provinces need to temporarily call on other resources to ensure the balance of power supply and demand.