What are the difficulties in promoting a national unified electricity market?

As mentioned in the previous article of this magazine, "Grid investment has increased significantly, what will be the future results?", grid companies are all central enterprises, but their positioning is profitability, and revenue and profit are the main evaluation indicators. In this way, grid companies hope to establish a national unified market, so that a larger range, larger scale, and larger amount of electricity will pass through their transmission and distribution systems, on the one hand, improving the efficiency of the transmission and distribution systems, and on the other hand, increasing their transmission and distribution revenue.

In terms of the goals pursued, the "Guiding Opinions" are consistent with those of power grid companies.

"Block" mainly refers to local governments, and local governments pursue multiple goals, including but not limited to economic development, improvement of people's living standards, better environment, increased employment rate, tax growth, and increased investment (including investment promotion).

The "weakness" of local governments is first and foremost whether the local power supply is safe, that is, whether there is a local power source and whether there is a strong enough power grid system. This is the basis and prerequisite for local governments to achieve various goals.

The so-called "segmentation"

The power transmission and distribution franchise belongs to the power grid companies, while the selection of power source investment and the preliminary review of projects are in the hands of local governments. If there is an oversupply of electricity in a place and there is no power grid support, there will be "power shortage" in the area, and the electricity cannot be sold, and no income can be generated, and the cost cannot be recovered. Conversely, if there is a shortage of electricity in a place, even if there is surplus electricity in the surrounding areas, without the support of the power grid, the electricity cannot be imported, and there will be "power shortage".

If the power grid companies and local governments fail to reach an agreement, "power congestion" and "power shortage" will coexist. For example, on April 25, 2012, Shaanxi Power and State Grid Shaanxi Branch had a "fight" over line construction. The surface was a dispute over the line, but the underlying cause was that Shaanxi, which was "power-deficient", and Mengxi, which was "power-congested", tried to get rid of the State Grid and directly connect the power suppliers in Inner Mongolia and the power users in Shaanxi.

Whether all the problems caused by "fragmentation" have optimal or even Pareto solutions depends on the results of the "fragmentation game".

The so-called "block game"

Even if there is a local power supply, the electricity may not reach the user, so the "block" is at a disadvantage from the beginning in the game, and has to beg the "line" to increase investment in the local area. The determination of the scale of power grid investment depends not only on the top-level design and overall planning of the "line", but also on the compromise and operation of the "block". The impact of increased investment on subsequent local distribution prices depends on the investment final accounts of the "line" and the calculations of the superior pricing department. The "block" has little say and bargaining power, otherwise, the later game will be more subtle and difficult.

When local electricity is in short supply, the "block" should actively support the import of electricity from outside the area. When electricity is in oversupply, the "block" is also motivated to transmit electricity to other areas, while increasing the income of the "strip". Why does the electricity market often fail?

First, market impulses are difficult to penetrate across provinces. The two most important entities in the electricity market, namely power generators and power users, can only sell electricity to the grid at the planned grid connection price in the era of unified purchase and sale by power grid companies. Power users then purchase electricity from the grid at the planned sales price, and the difference in price is the gross profit of the power grid company. Even if the power plant and the power user are separated by a wall, they cannot bypass the power grid company and directly supply electricity at low cost. Therefore, direct transactions across provinces and regions are even less feasible.

The above-mentioned "armed fight" in Shaanxi in 2012 attempted to bypass the State Grid and connect buyers and sellers for direct transactions. However, it violated the Electricity Law and was ultimately "aborted" due to institutional barriers.

After the second electricity reform, the distribution network costs of each province were regularly verified and announced, and were relatively stable. In some pilot provinces, the power trading market developed rapidly. Trading data from various regions showed that the expansion of the trading market reduced the electricity costs of trading users, but the reduced costs all came from the profit concessions of power generation companies.

In the second half of 2021, coal prices soared, and electricity price adjustments lagged seriously, and the increase was far smaller than the coal price increase, resulting in serious losses for thermal power companies. Although a small number of power generation companies reduced losses through the spot market, many power generation companies directly shut down some units, the power balance in the province was damaged, and the power market was seriously unbalanced.

In this context, without coercion and mobilization, the power exporters and the "blocks" they are located in obviously lack the enthusiasm to transport electricity out of the province or region.

Second, it is difficult to reach an agreement through multi-party communication. Electricity transactions across provinces and regions require negotiation and communication among multiple parties. The "blocks" that export electricity expect to earn as much as possible from electricity prices, while the "blocks" that import electricity expect to receive the lowest possible electricity prices, at least not higher than the existing electricity prices of electricity users. If the price difference is too small, the power grid may not be profitable. Coupled with various other demands, the cost of multi-party communication is very high, and it is very difficult to reach an agreement.

Third, it is difficult to achieve a win-win situation for multiple interests. There are many entities involved, including power generation companies, output-end "blocks", power users, input-end "blocks", power grid transmission and power distribution in various provinces.

Among them, the power user price at the input end (given) = the on-grid electricity price at the output end + the inter-provincial transmission price of the power grid + the distribution price at the input end + transmission and distribution losses + government funds + related taxes.

When the input-end power user price, input-end power distribution price, power transmission and distribution losses, government funds, and related taxes are given in advance, whether the inter-provincial transmission network can recover stable investment depends only on whether the output-end on-grid power price can be reduced enough. If the output end is unwilling to reduce it enough, the investment and construction of the inter-provincial transmission network will not be able to move forward.

At that time, if Shaanxi Electric Power and Inner Mongolia West Power Grid broke away from the State Grid, the price for electricity users at the input end (not given) = the on-grid electricity price at the output end + the price of self-built inter-provincial dedicated line transmission + transmission losses + government funds + related taxes.

In other words, after the direct connection, power users no longer have to pay "input distribution price + distribution loss", and the transmission cost of "self-built inter-provincial dedicated line" may be lower, and the two "blocks" can easily achieve a win-win situation. If the State Grid joins, adding "input distribution price + distribution loss" and the possibly higher inter-provincial dedicated line transmission price, there will be too many parties to achieve a win-win situation.

The so-called "block competition"

That is, there is competition between regions. Provinces with power shortages may compete together for imported power, and provinces with surplus power may compete for exported power. There is also competition between exporting provinces and importing provinces.

For example, in order to increase local GDP, local governments tend to use locally produced electricity, prefer to import external electricity during periods of high load, and expect imported electricity to be more economical. With coal prices rising and electricity supply tightening across the country, all provinces will make ensuring local electricity supply their top priority.

"Block competition" and the resulting intervention by local governments will limit direct transactions in the electricity market according to market rules.

The so-called “central-local game”

That is, the game between local governments and relevant central departments. Under the relatively centralized system of the central government, various central departments hold various powers such as relevant policies, funds, projects, quotas, investments, subsidies, etc., and the power industry still "runs to the departments for money." In terms of project approval, price determination, investment allocation, line planning, green certificate indicators, carbon emission quotas, etc., there is both "competition among the localities" and "game between the central and local governments."

The electricity market is originally a direct transaction between power generation companies and electricity users. Today, with the Internet technology highly developed, whether it is spot, futures, or ancillary services, supply and demand parties should achieve instant transactions through bidding under the principles of voluntariness, equality and fairness. However, there are too many relevant entities in China's electricity market that stand between the two parties to the transaction, and too many rules and restrictions, which give rise to too high transaction costs.