China Takes Big Step in Letting Market Decide Clean Power Prices

(Bloomberg) -- China is preparing to scrap fixed pricing on renewable power, and let the market decide how much users pay for clean electricity.

The central government has agreed that electricity generated by renewables should be freely traded, leaving it up to local authorities to propose and implement market pricing by the end of the year, the National Development and Reform Commission and the National Energy Administration said in a statement on Sunday. Generators will be cushioned from excessive price swings by balancing payments, they said.

In the meantime, old and new renewable power will be differentiated based on a June 1 cutoff, the agencies said. Wind and solar installed before then will be compensated according to current rules, but projects commissioned after that date will be assessed on terms that may be less favorable.

The new policies represent a breakthrough that “reflects a continued push by Chinese authorities to shift the maturing renewable energy sector away from subsidies,” said Yan Qin, an analyst at ClearBlue Markets, a Toronto-based carbon consultancy. 

Biggest Emitter

China is both the world’s biggest emitter of greenhouse gases and the largest operator of renewable power. Installed capacity of renewables including wind and solar climbed to 1,410 gigawatts last year, allowing the country to hit its 2030 target six years early. But while power prices have fallen, the market hasn’t been able to absorb all of the extra clean energy. Regional governments, meanwhile, are keen to keep power costs low as the country struggles with a slowing economy.

In a separate statement, the two agencies said the policy shift won’t have any impact on prices paid by residential and farming customers, and that prices for industrial and commercial users won’t change much in the first year. 

The rules are aimed at more flexible pricing, but they’re careful about “not pushing up power tariff costs for end users,” said Qin.

The June 1 cutoff could see a rush of installations by developers keen to retain existing price protections. 

The balancing payments, a mechanism similar to contracts for difference in the UK, will be used to smooth market pricing. If electricity drops below an agreed level, the grid will reimburse generators for the shortfall. If the price exceeds that threshold, generators will pay back the difference.

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