Reform of the electricity market should be accelerated to establish the energy mix through market competition based on the comprehensive costs of power generation

China, the United States and Germany lead the world in terms of total installed wind and solar photovoltaic capacity. And China has surpassed the US as the world's largest installer of cumulative wind capacity in 2011 and surpassed Germany as the world's largest installer of cumulative solar PV capacity in 2015. As of today, China's total installed wind and solar PV capacities both exceed 200 million KW, with both accounting for more than 30 percent of the global total installed capacity.

However, even after more than 10 years of breakneck expansion and receiving a hefty amount of government subsidies, wind and solar PV power still account for a low proportion in China's energy mix. Coal is still the main source for electricity generation in China with coal-fired electricity accounting for 65 percent of total electricity generation in 2019.

In the early period of wind and solar PV development in China, due to the high generation costs for wind and solar PV, the government issued generous subsidy policies to nurture their growth. China's Renewable Energy Law, which came into effect in 2006, stipulates that the funds used to pay for subsidized feed-in tariffs for renewable energy sources are to be derived from a surcharge on nationwide retail electricity sales. From the perspective of optimal taxation, if there's no pollution tax or carbon tax on fossil fuels, it is necessary for the government to allocate green subsidies to wind and solar PV power projects.

In the Copenhagen World Climate Conference in 2009, China's then premier Wen Jiabao announced a 15 percent minimum target for the share of non-fossil energy in overall energy consumption by 2020. To achieve the target, China set generous fixed feed-in-tariff for wind power in 2009 and for solar PV in 2011 to stimulate their large-scale capacity installation. The high subsidy pushed explosive investment in wind and solar. Since the introduction of fixed feed-in-tariff policy, the cumulative installed capacity for wind power explodes from 8.4 GW in 2008 to 185 GW in 2018, and the cumulative installed capacity for solar explodes from 1 GW in 2010 to 175 GW in 2018.

However, the supply and demand of electricity must be balanced in real-time. Due to a lack of stability in wind and solar PV power generation systems－electricity can only be generated when there's wind or sun. The explosive increase of wind and solar power lead mismatch between supply and demand, which further resulted in high curtailment rates for wind and solar power. The rates peaked in years from 2015 to 2016.The national average rate of abandonment for wind power reached 15 percent in 2015 and 17 percent in 2016, and that for solar PV power reached 12.6 percent in 2015 and 10.3 percent in 2016. In Northwest China, North China and Northeast China, which have the highest wind and solar PV installations, the curtailment rates are even higher. In the first half of 2016, the rate reached as high as 47 percent in Gansu province, 45 percent in the Xinjiang Uygur autonomous region and 39 percent in Jilin province. The curtailment rate for solar PV power reached around 32 percent in Gansu and Xinjiang. The rates have dropped dramatically following the implementation of targeted measures and policies to solve the problem.

Since the renewable subsidy policy regime shifted from fixed feed-in-tariffs to auction of feed-in-tariffs in 2018, the prices of wind and solar PV power are determined by competitive bidding instead of being administratively set. As the consequence, the renewable subsidy substantially declines, not only reducing the subsidy burden of the government but also alleviating the problems of both over-investment in renewable capacity and high curtailment rate. Looking ahead, problems pertaining to wind and solar PV power development should be solved by market forces, through removing the restrictions on price and quota of electricity generation.

First, reform of the electricity market should be accelerated to allocate the scarce resource of electricity generation through market competition. In China's power system, electricity demand and supply are balanced mainly within each province, where provincial governments have full control of the planning of power generation and allocation within their jurisdictions. Each year, based on an annual forecast of power demand, the provincial government determines the quota of the annual generation or utilization hours for different power units. Since the electricity market reform launched in 2015, more than half of the coal power plants have participated in electricity market transactions, but most provinces or cities have yet to include wind power and solar PV power into the transactions. Progress will be made in that regard as reform in the electricity market accelerates. Furthermore, in 2019, China launched its first batch of eight real-time spot electricity markets in eight provinces, as part of the country's accelerated efforts to liberalize power pricing. Once installation investments are made, the marginal cost for wind and solar PV power generation will be near zero, giving them great low-cost advantage in the real-time spot electricity markets.

Second, currently, China has segmented electricity markets for each province. If a cross-region electricity market could be established, it would break up the interprovince barriers for renewable electricity transaction and greatly help dispatch the excess wind and solar PV power generated from the provinces with abundant renewable resources and capacity. In addition, the development of wind and solar PV power relies on the development of energy storage technologies. Hence energy storage market, as well as the market of auxiliary service of frequency modulation and voltage modulation, should be further established to solve the intermittency and instability problems of wind power and solar PV.

Third, the pricing mechanism of energy sources should be further optimized. Whether wind and solar PV power can play a critical role in the energy mix reform eventually depends on their production costs. For now, the pricing mechanism for various energy sources is distorted. Take coal power plants as an example. The production cost seems quite low, but if we take into account the pollution tax and carbon price that should have been levied, the production cost would be higher than that of wind and solar PV power. Therefore, to what degree wind and solar PV power can replace coal as the source for electricity generation depends on the real costs of these energy sources, after factoring in a pollution tax, carbon price, energy storage cost and peak regulation cost.

If the above electricity market reforms could be realized, China's transition of energy structure will be promising as the renewable cost continuously decreases. The costs of offshore wind power, onshore wind power, solar thermal power and solar PV power generation using renewable energy power generation technologies have all substantially decline since 2010. According to the data provided by International Renewable Energy Agency, by 2021, the global average cost of solar PV power generation will be lower than the onshore wind power, reaching a global average of 3.9 cents per kilowatt-hour, and have room for further decline.

That said, apart from the power generation cost, the comprehensive cost of new energy deployment has other systematic costs to factor in. For instance, the cost of system stabilization will rise with the increasing number of wind and solar PV installations. Furthermore, currently, wind and solar PV power generation projects are located in wind and solar resource rich regions. With installed capacity continuously increasing, those regions will gradually reach saturation point, and the cost for acquiring quality resources will only go up. Simply put, the power generation cost of wind and solar PV will further decrease, whereas other systematic costs including the cost of stabilizing the system, land and other good-quality resources will increase. Therefore, how much of a role wind and solar PV power generation can play in China's energy mix adjustment depends on their comprehensive costs over the long term.

The author is an associate professor of National School of Development at Peking University and deputy director of the Environment and Energy Research Center at Peking University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.