Comparison of coal-fired power price formation mechanisms in various regions

In October 2019, the reform of the coal-fired power price formation mechanism kicked off. The National Development and Reform Commission issued a document proposing that the coal-fired power grid-connected electricity price will no longer implement the coal-fired benchmark electricity price mechanism, but will be changed to a "benchmark price + floating up and down" mechanism. In the short term, this poses greater challenges to coal-fired power companies that are already struggling. On the other hand, with the deepening of energy transformation and the increasing proportion of new energy, coal-fired power will bear more deep peak regulation. The proposal of "ancillary service electricity price" and "capacity compensation mechanism" also provides policy guarantees for the possible positioning of coal-fired power in the future, bringing more development opportunities.

According to the requirements of the National Development and Reform Commission, all regions need to issue documents to refine the coal-fired power price formation mechanism plan. As of now, Polaris Power Network has incompletely counted the implementation plans for the reform of the coal-fired power price formation mechanism in 19 regions based on public information. The plans of various regions are in the same general direction as the guidance of the National Development and Reform Commission, but there are still significant differences in the implementation details, especially in terms of "ancillary service electricity prices" and "capacity compensation mechanisms".

In the guidance of the National Development and Reform Commission, "ancillary service electricity prices" and "capacity compensation mechanisms" were mentioned and were regarded as "hidden benefits" by most people in the thermal power industry, who believed that they would bring development opportunities and some profits to thermal power companies.

Due to the instability of new energy sources such as photovoltaics and wind power, before the large-scale development of energy storage, coal-fired power, as the main power source, also had to undertake emergency peak-shaving and other functions. In 2019, many large thermal power units in my country were also included in the coal-fired power emergency peak-shaving reserve power source. Before these units were included in the annual production plan, they could be started and operated when the power supply was tight, such as in winter, and shut down for standby during other periods.

In the future, as the proportion of new energy sources increases, coal-fired power units will bear more system peak regulation, frequency regulation, voltage regulation and standby functions. How to share the cost of deep peak regulation of coal-fired power units and how to establish an effective price mechanism to encourage more thermal power units to carry out flexibility transformation has become a question worth discussing. To this end, the National Development and Reform Commission's guiding opinions clearly proposed to improve the mechanism for forming auxiliary service electricity prices. For provinces with seriously low utilization hours of coal-fired units, a capacity compensation mechanism can be established. The capacity electricity price and the electricity price are formed through market-oriented means. The establishment of these systems will provide policy guarantees for the new positioning of coal-fired power.

In the local implementation documents released so far, nine regions including Shanxi, Jiangsu and Fujian did not mention the "capacity compensation mechanism". Yunnan, a major hydropower province, has made clear the time for establishing the system: before the end of 2020, a capacity compensation mechanism will be established, and the capacity and volume electricity prices will be formed through market-based means.

Hebei and Shandong provinces proposed to implement a two-part electricity price for coal-fired back-pressure units for people's livelihood heating. The capacity electricity price will be implemented during the shutdown period in the non-heating season, and the electricity price will be implemented at other times. Among them, Shandong Province also made it clear that it would explore the formulation of a capacity compensation policy for coal-fired units in the power market. In the long term, it will explore the establishment of a capacity market, through which coal-fired power generation units can recover part of their costs so that they can be used by the market during peak demand, ensuring the long-term sufficiency of power generation resources.

Regarding the formation mechanism of ancillary service electricity prices, Shandong Province's document pointed out that after the spot market is officially operational, the frequency regulation price of coal-fired units will be formed through the spot market frequency regulation trading mechanism, and a mechanism for sharing frequency regulation costs between market users and power generation entities will be explored to compensate for the reasonable cost of power generation of coal-fired power generation units and ensure the safe and stable operation of the power system.

With the large-scale development of new energy, the profit space of thermal power has been squeezed. Against the backdrop of coal-fired power capacity reduction, the bankruptcy and "1 yuan dumping" of thermal power companies under the five major power generation companies have emerged one after another in recent years. The establishment of a capacity market and ancillary service market mechanism can provide thermal power companies with more ways to increase revenue, which is also an inevitable choice for the future development of coal-fired power.

Comparison of implementation plans for the reform of coal-fired power price formation mechanism issued by various regions

In addition, the National Development and Reform Commission's guidance clearly stated that after the reform, the base price of coal-fired power will be determined according to the local current benchmark on-grid electricity price for coal-fired power generation, with a floating range of no more than 10% up and no more than 15% down in principle, and no floating in 2020. Many places have also continued this statement.

So, how low will the coal-fired power prices be this year? If the price is allowed to increase in the future, how high will the coal-fired power prices rise? See the figure:

Comparison of on-grid electricity prices for coal-fired power generation in various regions

(Source: Polaris Power Network Author: sunshine)