7.4 An Evaluation of Progress
in China’s Power System
Reform
7.4.1 The Problems Facing Electricity
System Reform
As far as policy background is concerned, the
Decisions of the Central Committee of the
Communist Party of China on Major Issues
Concerning
Comprehensively
Deepening
Reforms was adopted in November 2013 at the
third plenary session of the 18th Central Committee. The Decisions clearly state that “economic restructuring is still the focus of deepening
reform comprehensively. Appropriate handling
of the relationship between the government and
the market is still the core issue of economic
reform, which will enable the market to play a
decisive role in allocating resources and the
government to play its role better… In natural
monopoly industries, in which state-owned capital continues to be the controlling shareholder,
we will carry out reform focusing on the separation of government administration from enterprise management; the separation of government
administration from state assets management,
franchise operation and government oversight;
the separation of infrastructure networks from
operations; and relax control of competitive
businesses based on the characteristics of different industries; and make resource allocation more
market-oriented… and improve the mechanism
whereby prices are determined mainly by the
market. Any price that can be determined by the
market must be left to the market, and the government should not improperly intervene. We
will push ahead with pricing reforms of water,
oil, natural gas, electricity, transport, telecommunications and other sectors, while relaxing
price control in competitive areas”.
At the sixth meeting of the Leading Group for
Financial and Economic Affairs held in June
2014, the Four Energy Revolutions were mentioned for the first time, i.e. the revolutions in
energy demand, energy supply, energy technologies and of the energy system. Regarding the
revolution of the energy system, it is stated
explicitly that “the commodity attributes of
energy should be restored. A market structure
and market system featuring effective competition, and a mechanism whereby energy price is
determined mainly by the market, should be
built”.
Since the electricity system reform of 2002,
which separated generation from transmission,
the absence of many power market mechanisms
has continued to hinder progress. These missing
mechanisms include: a trading mechanism, the
absence of which reduces resource use efficiency;
a market-oriented pricing mechanism, which is
missing because price relationships are not
rational; government functions have not been
fully defined, which prevents the regulatory
system from regulating the power market effectively; nationwide and sector-wide planning and
coordination mechanisms are not in place; the
development and use of new energy and renewables is encountering difficulties due to an
incomplete market development mechanism;
law-making and amendments are lagging behind,
restricting power marketisation and its healthy
development; and the market credit system is
developing slowly.
After observing and comparing China’s power
industry management system with that of OECD
countries, Vivid Economics pointed out that the
institutional framework for China’s power
industry is very complex. No agency has complete control over the power industry or the
authority to coordinate other agencies’ actions.
Unlike regulators in OECD countries, the power
regulatory function in China is exercised by the
National Energy Administration (NEA), which is
administered in turn by the National Development and Reform Commission. The NEA is not
an independent body. A problem arises from
such a management system: planning and pricing
decisions at the central and local levels may be
influenced by political objectives. This top-down
planning approach for power grids and the lack
of coordination with provincial and regional grid
companies may lead to inefficient investment
decisions and poor coordination between generation and transmission investments. These
investment patterns create pockets of generation
where electricity supply is abundant, but other
Special Report 4: China’s Energy System Revolution
501
in China’s Power System
Reform
7.4.1 The Problems Facing Electricity
System Reform
As far as policy background is concerned, the
Decisions of the Central Committee of the
Communist Party of China on Major Issues
Concerning
Comprehensively
Deepening
Reforms was adopted in November 2013 at the
third plenary session of the 18th Central Committee. The Decisions clearly state that “economic restructuring is still the focus of deepening
reform comprehensively. Appropriate handling
of the relationship between the government and
the market is still the core issue of economic
reform, which will enable the market to play a
decisive role in allocating resources and the
government to play its role better… In natural
monopoly industries, in which state-owned capital continues to be the controlling shareholder,
we will carry out reform focusing on the separation of government administration from enterprise management; the separation of government
administration from state assets management,
franchise operation and government oversight;
the separation of infrastructure networks from
operations; and relax control of competitive
businesses based on the characteristics of different industries; and make resource allocation more
market-oriented… and improve the mechanism
whereby prices are determined mainly by the
market. Any price that can be determined by the
market must be left to the market, and the government should not improperly intervene. We
will push ahead with pricing reforms of water,
oil, natural gas, electricity, transport, telecommunications and other sectors, while relaxing
price control in competitive areas”.
At the sixth meeting of the Leading Group for
Financial and Economic Affairs held in June
2014, the Four Energy Revolutions were mentioned for the first time, i.e. the revolutions in
energy demand, energy supply, energy technologies and of the energy system. Regarding the
revolution of the energy system, it is stated
explicitly that “the commodity attributes of
energy should be restored. A market structure
and market system featuring effective competition, and a mechanism whereby energy price is
determined mainly by the market, should be
built”.
Since the electricity system reform of 2002,
which separated generation from transmission,
the absence of many power market mechanisms
has continued to hinder progress. These missing
mechanisms include: a trading mechanism, the
absence of which reduces resource use efficiency;
a market-oriented pricing mechanism, which is
missing because price relationships are not
rational; government functions have not been
fully defined, which prevents the regulatory
system from regulating the power market effectively; nationwide and sector-wide planning and
coordination mechanisms are not in place; the
development and use of new energy and renewables is encountering difficulties due to an
incomplete market development mechanism;
law-making and amendments are lagging behind,
restricting power marketisation and its healthy
development; and the market credit system is
developing slowly.
After observing and comparing China’s power
industry management system with that of OECD
countries, Vivid Economics pointed out that the
institutional framework for China’s power
industry is very complex. No agency has complete control over the power industry or the
authority to coordinate other agencies’ actions.
Unlike regulators in OECD countries, the power
regulatory function in China is exercised by the
National Energy Administration (NEA), which is
administered in turn by the National Development and Reform Commission. The NEA is not
an independent body. A problem arises from
such a management system: planning and pricing
decisions at the central and local levels may be
influenced by political objectives. This top-down
planning approach for power grids and the lack
of coordination with provincial and regional grid
companies may lead to inefficient investment
decisions and poor coordination between generation and transmission investments. These
investment patterns create pockets of generation
where electricity supply is abundant, but other
Special Report 4: China’s Energy System Revolution
501