Thinking on rationalizing the price mechanism and promoting industrial development under the time-of-use electricity price policy

China Energy Storage Network: In order to deepen the reform of electricity prices and improve the electricity price formation mechanism, the National Development and Reform Commission issued the "Notice on Further Improving the Time-of-Use Electricity Price Mechanism" (Development and Reform Price [2021] No. 1093) in July 2021, proposing to optimize the time-of-use electricity price mechanism, widen the peak-valley price difference, and give full play to the time-of-use price signal, which will play a certain positive role in guiding users to shave peaks and fill valleys, improve the power supply and demand situation, and promote the consumption of new energy. However, under the "dual-track" electricity price system in which planning and market run in parallel in China, the gap in time-of-use cross-subsidy is increasing year by year. How to straighten out the electricity price formation mechanism? Where is the way to ensure the survival and development of industries such as coal-fired power, energy storage, and distribution and sales of electricity?

Rationalize the electricity price formation mechanism

my country has long implemented a "dual-track" electricity price system in which planning and market forces run in parallel. Grid companies implement a profit model of determining transmission and distribution prices for market-traded electricity, while they still maintain a profit model of purchasing and selling prices for off-market electricity. Although the user-side catalogue electricity price takes into account the peak-valley multiple fluctuation, in the electricity price composition, the on-grid electricity price for power generation, transmission and distribution prices, government funds and surcharges fail to reflect the time-sharing factors that are consistent with the user side. After deducting the on-grid electricity price for power generation and government funds and surcharges from the user's peak, flat and valley time period catalogue electricity price, a "time-sharing cross-subsidy" of peak electricity consumption for off-market electricity consumption is formed in the off-market electricity revenue, as shown in the electricity price calculation example for general industrial and commercial users of a certain voltage level in the following table.

In this regard, power users with high load rates or electricity consumption concentrated in off-peak hours (hereinafter referred to as "off-peak electricity users") usually have the motivation to continue to implement the catalog electricity price to avoid price risks in the electricity spot market; while power users whose electricity consumption is mainly concentrated in peak hours (hereinafter referred to as "peak electricity users") are mostly willing to participate in the spot market to purchase parity market electricity to reduce overall electricity costs. As a result, the purchase and sale price difference income originally provided by peak electricity users to off-peak electricity users has a gap in the case of the annual increase in market-based electricity, resulting in the power grid companies paying the off-peak electricity users for time-sharing cross subsidies.

The base electricity volume on the power generation side of my country has long been subject to government pricing, and the medium- and long-term contract electricity volume can form a transaction price within the range of "base price + up and down floating", and the deviation electricity volume outside the contract is subject to the flat spot market price of time-sharing fluctuations. However, because traditional coal-fired power companies are involved in variable fuel costs and are responsible for ensuring the consumption of new energy and heating, if the peak and valley ratio is taken into account, it may be difficult to mobilize the enthusiasm for power generation in some periods, which may easily lead to arbitrage behavior by new energy companies, which does not meet the expected goal of discovering prices through the market, and is not convenient for resolving the problem of time-sharing cross-subsidy deficits.

In the transmission and distribution link, the current flat-term transmission and distribution price cannot adapt to the contradictions in the transition from a planned system to a market system. As the market continues to open up to commercial users, there is a greater risk of capital shortfalls. Therefore, in the context of strengthening the implementation of the time-of-use electricity price mechanism and promoting the construction of the electricity spot market at the national level, it is urgent to start from the transmission and distribution link, explore the time-of-use transmission and distribution price mechanism that is connected with the purchase and sale price difference model under the planned system, and at the same time, do a good job in the supporting price linkage adjustment mechanism, and gradually reduce the scale of "invisible" cross-subsidies between users, and take multiple measures to ensure the smooth transition of the planned electricity price to the market electricity price system, and further rationalize the electricity price formation mechanism. The details are as follows:

First, optimize the elements of electricity prices and explore time-of-use transmission and distribution prices. On the basis of "allowable costs plus reasonable profits", combined with the relationship between the power transmission between voltage levels, the cross-subsidy costs borne by industrial and commercial users, load rate-simultaneity rate and other factors, initially form the provincial power grid flat-section transmission and distribution prices; at the same time, refer to the price curve of the unified settlement point of the spot market and other typical bases that can reflect the power supply and demand situation in different time periods, and scientifically divide the peak, flat and valley periods; finally, with the goal of reducing the deficit funds of time-of-use cross-subsidy as much as possible, fully consider the matching of electricity price elements with catalog electricity prices, the price elasticity of representative user demand at each voltage level and other constraints, and optimize the formation of provincial power grid time-of-use transmission and distribution prices.

Second, set up balancing accounts by category and establish a linkage adjustment mechanism. In view of the fact that my country will maintain the dual-track electricity price system of "planning + market" for a long time, it is necessary to set up transmission and distribution revenue balancing accounts by category, collect electricity charges according to different modes and adjust electricity price standards in a timely manner. For market electricity revenue, the collection is completed according to the time-of-use transmission and distribution price standard. When there is a gap or surplus in cross-subsidy funds, it will be included in the unified adjustment of transmission and distribution prices in the next regulatory cycle; and for the planned electricity volume that continues to implement the purchase and sale price difference, in addition to the cross-subsidy problem, with the increase of high-priced units such as gas-fired power and nuclear power, the average on-grid electricity price on the upstream power generation side fluctuates greatly, and the purchase and sale price difference is prone to face a significant compression, which requires further linkage adjustment of the user-side catalog electricity price.

The third is to reduce the scale of cross-subsidies and restore the real level of electricity prices. There is a certain inversion between the price of electricity for residential use and the cost of power supply in my country. If the time-of-use signal that can be optionally executed is superimposed on the current tiered electricity price, the scale of subsidies borne by industry and commerce will continue to increase, which is not conducive to alleviating the cross-subsidy contradictions between different user categories. It is possible to consider gradually canceling the first-tier "invisible" electricity price subsidies that fully cover residential electricity use, and converting them into universal service funds that are regularly applied for by low-income and disadvantaged groups, so as to promote targeted, quantitative and accurate subsidy funds, which will help restore the real cost level of electricity prices and further reduce the additional electricity burden on industrial and commercial users.

Promoting orderly development of industries

my country's energy and load resources are roughly distributed inversely. As a high proportion of new energy is connected to the power grid, it has brought development opportunities to many industries in the system. At the same time, various contradictions in electricity supply and demand have also surfaced, including the painful period of coal-fired power companies' transformation, poor practical benefits of energy storage projects, and the survival of pilot projects for incremental distribution business reform. Against the background of strengthening the implementation of the time-of-use electricity price mechanism and promoting the construction of the electricity spot market at the national level, it is urgent to optimize the market mechanism to guide it, deepen the application of energy storage technology, strengthen power demand-side management, make full use of the value of resources on different time scales, carry out practical research according to local conditions, and promote the orderly development of the industry. The details are as follows:

First, we need to improve the design of market mechanisms and implement the work of ensuring supply and stabilizing prices. There are differences in energy endowments between the east and west of my country. Since the cancellation of the coal-electricity price linkage mechanism, the cost of electricity coal, which has been running at a high level, has not been effectively channeled. In addition, as downstream energy demand continues to be strong, competition in the upstream market has intensified, which has, to a certain extent, given rise to short-term power outages in some areas. It is necessary to further break down regional resource barriers, gradually improve the cross-provincial spot trading model, improve the functional division of dispatching at the network and provincial levels, promote the optimal allocation of power resources from a finer time scale and a larger spatial scale, and carry out transactions such as electric energy, auxiliary services, and power generation rights transfer in different time and space to achieve a balance between surplus and shortage of electricity. At the same time, we will continue to ensure the demand for coal for power generation and heating, stabilize the upstream coal market price, and study and introduce a trading price mechanism that links the coal market with the electricity market in areas where coal-fired power companies are suffering from substantial losses, compensate for the reasonable cost of power generation, and take multiple measures to alleviate the urgency of burning "coal".