Exploring the root causes of power market construction

After the Spring Festival, this round of electricity reform will be almost 5 years old! In the past 5 years, electricity reform policies and measures have been issued frequently, and the electricity market structure has undergone tremendous changes compared to the original one. There are new links, new entities, and new businesses that did not exist before. Of course, there are also new problems and new controversies. These contents have aroused extensive discussion in the industry. This article intends to draw a concise clue from the trend of the "13th Five-Year Plan" electricity market reform, and make a brief analysis of the outstanding issues in the construction of the "14th Five-Year Plan" electricity market, and at the same time make a prospect for the prospects of electricity reform.

(Source: Energy Research Club ID: nyqbyj Author: Feng Yongsheng, Associate Researcher, Institute of Financial and Economic Strategy, Chinese Academy of Social Sciences)

After the Spring Festival, this round of electricity reform will be almost 5 years old! In the past 5 years, electricity reform policies and measures have been issued frequently, and the electricity market structure has undergone tremendous changes compared to the original one. There are new links, new entities, and new businesses that did not exist before. Of course, there are also new problems and new controversies. These contents have aroused extensive discussion in the industry. This article intends to draw a concise clue from the trend of the "13th Five-Year Plan" electricity market reform, and make a brief analysis of the outstanding issues in the construction of the "14th Five-Year Plan" electricity market, and at the same time make a prospect for the prospects of electricity reform.

1. Electricity reform in the 13th Five-Year Plan: Struggling between marketization and administrative directives

Dealing with the relationship between the market and the government is the core of economic system reform, and power reform is no exception. However, there was no consensus on what the power market would look like and what benefits it would bring to the industry and the national economy at the beginning of policy formulation and during implementation. At the same time, as the economic situation during the 13th Five-Year Plan period has been facing a complex internal and external environment and has been under downward pressure, the power industry has had to shoulder the responsibility of stabilizing the economy while reforming itself.

In the context of supply-side structural reform, reducing the energy cost of the real economy has become a "hard" constraint of electricity reform. Simply put, supply-side structural reform is to focus on reducing the cost of factor inputs and expanding effective output from the perspective of the total production function. As a basic and strategic energy input factor in my country, the power industry is naturally given the task of "lowering electricity prices". More importantly, decision makers have many reasons to believe that the power industry has the ability to lower electricity prices. I will not go into details here, but only analyze the two major means of lowering electricity prices.

Market-based electricity price reduction and administrative electricity price reduction are the two major means used in conjunction with this round of reforms (supply-side structural reform and power system reform).

In theory, market-based electricity price reduction is the most ideal, especially if the loose supply and demand conditions can be used well, it is likely to produce good results. However, the reality is full of bleakness. The ambiguity and ambiguity of the market-based plan make the effect of market-based electricity price reduction full of uncertainty.

On the one hand, the electricity market still lacks the most basic market system. The wholesale market only has electricity transactions. The market construction is progressing slowly. It maintains medium- and long-term transactions that are different from the traditional planned electricity system. The spot pilot is still struggling with the starting point and direction issues; the retail market seems to be somewhat at a loss in the context of "relaxation". On the other hand, the electricity price transmission mechanism is still not smooth, which is due to both the reasons for the determination of transmission and distribution prices and the problems in implementation. Therefore, the market-oriented electricity price reduction during the "13th Five-Year Plan" period is indeed difficult, but the demand for price reduction is urgent, and the only way to take on this task is to reduce electricity prices administratively.

In the past five years of power reform, the most direct "power reform dividend" felt by users probably comes more from administrative price cuts. This seems to be the case. Administrative price cuts directly target user sales prices, have a wider impact, and are more perceptible. Taking Guangdong, which has achieved the most outstanding results in power reform, as an example, if we count from March 2015, the sales price of general industrial and commercial users of 35kV and above has been reduced more than ten times in a row (including catalogue prices, government funds and surcharges), with a cumulative reduction of about 27%; in fact, the price adjustment started before the start of the power reform. If we count from December 2014, the cumulative maximum reduction is about 33% (based on the commercial electricity price before the user categories are merged).

This means that if market-oriented reforms want to gain more recognition and acceptance from society, relevant policies must provide considerable room for price cuts in less than five years. In fact, it is difficult for market-oriented policies to provide such a large reduction. In 2018, when Guangdong's electricity trading was the most "intense", the annual bilateral transaction price dropped by about 8 cents/kWh, which was less than 20% of the benchmark on-grid electricity price; in 2019, it was significantly lower than this level; and in 2020, the reduction was further reduced.

Fortunately, there is a limit to administrative price cuts. It is foreseeable that the frequency and intensity of administrative price cuts will decrease at the end of the 13th Five-Year Plan, and will be replaced by the promotion of market-based electricity transactions. In mid-2019, the National Development and Reform Commission proposed to fully liberalize the power generation and consumption plans of commercial power users; at the beginning of 2020, the State Council's executive meeting required that all industrial enterprises above a certain scale be allowed to participate in market-based transactions.

A practical problem is that the already significantly reduced catalogue electricity prices will objectively inhibit the incentives of market players to participate in market-based electricity transactions. From the perspective of local governments, it is also questionable whether there is sufficient motivation to promote a larger range of electricity transactions. Therefore, although the central government’s policy has clearly stated that it will fully liberalize power consumption plans, actual implementation may face challenges.

2. Electricity reform in the 14th Five-Year Plan: Facing challenges and persisting in exploration

With the liberalization of access to medium- and long-term transactions and the expansion of medium- and long-term transaction volume, the issue of power market construction will become more prominent, especially the most basic market model selection. In theory, there will be two possible scenarios for market construction: one is that medium- and long-term transactions dominate the spot market; the other is that the spot market fundamentally changes the nature of medium- and long-term transactions. In the context of China's reality, the latter scenario is unlikely to occur during the "14th Five-Year Plan", but the former scenario is likely to become a reality.

First, the medium- and long-term transactions dominate the spot market, as stipulated in the supporting documents of Document No. 9, and even in the documents promoting the spot pilot, it is made clear that "medium- and long-term transactions are the main ones, and spot transactions are supplementary", which makes the market-oriented transactions basically positioned in medium- and long-term transactions. Secondly, the planned electricity release method adapted to this positioning was adopted, thus forming a dual-track system that is not easy to transition to the power market. Thirdly, the choice of the spot pilot model deviates from the actual foundation and feasible path of the power industry, either facing institutional obstacles that are difficult to break through, or distorting the basic design.

In the market construction of the "14th Five-Year Plan", if the current path is continued, the spot pilot model will at most become a new scheduling model serving medium- and long-term transactions; and medium- and long-term transactions will at most become a deformed planned electricity system wrapped in a dual-track system. Even if the so-called curve transactions are added, as long as the medium- and long-term signing behavior is not guided by spot prices, it is essentially still a way of allocating electricity, but limited competition has been added to the electricity allocation.

Why does this happen?

The underlying reason is that the market model selection has always lacked top-level design and systematic thinking, and has not fully considered the logical starting point of China's power market reform and various possible models and path options. The direct reason is that the guiding ideology is chaotically guided by different international experiences. Simply put, the view advocating medium- and long-term transactions is largely influenced by European experience; the view advocating centralized spot trading is particularly influenced by American experience.