7.5 Principles and Roadmap
for Future Reform
22
The power market comprises multiple markets
and multiple market failures. The primary
objective of these markets is to match supply
with demand through optimal dispatch and
investment. This is delivered through electricity,
capacity and balancing markets, which face
market failures in the form of the carbon pricing
externality, regulation of natural monopolies and
the need for policy credibility to underpin
long-term and long-lived investment decisions.
These market structures and failures will exist in
a net zero emissions future, but their relative
importance and sophistication will change with
greater electricity demand and a greater share of
supply from renewables.
While the six characteristics of market efficiency (in terms of price signals) and policy
efficiency (in terms of correcting for market
failures) described above are essential from the
design perspective, their importance will vary
based on regional, national and local circumstances. For example, countries with large
endowments of non-intermittent, low-carbon
generation
23 will have less need to implement
all six elements, although they are still likely to
require some evolution of efficient pricing
mechanisms and supporting policy frameworks.
These countries will have less need for a
short-term balancing and ancillary services market and are likely to require less sophisticated
capacity markets.
24 However, for most countries
relying on variable renewables to decarbonise
power, there will be significant pressure for
reform of the power sector.
For centrally planned economies like China,
the challenge will be to achieve the right balance
between market forces and policy interventions.
On the one hand, central planning through the
Five-Year Plan process provides policy certainty,
security of supply and the ability to distribute the
burden of costs away from consumers to other
parts of the system. On the other hand, market
forces, through efficient market design and supporting policy frameworks, are likely to be a less
expensive and more adaptive approach, especially in the context of dynamic and changing
power demand and technologies. The value of
such an adaptive approach is even greater, given
the likely scale and pace of change required to
achieve net zero emissions in the second half of
the century.
Progress towards efficient net zero emissions
power markets will not be smooth. It is likely to
happen at different speeds in different geographies, with countries experimenting with different approaches; for example, the different
approaches taken by the UK and Germany, with
the former relying on capacity auctions and the
latter on creating strategic reserves to deliver
long-term capacity and resilience in the system.
25
However, the direction of travel is clear, with
many countries already making progress towards
more efficient power market structures and policies, driven in large part by the efficiency gains
they provide. This trend is only likely to intensify
with greater electrification of energy use and with
the greater imperative to decarbonise power in a
way that keeps costs down and delivers a secure
supply of electricity.
22
Following the publication of the Opinions of the Central
Committee of the CPC and the State Council on Further
Deepening the Reform of the Electric Power System
(Zhongfa No. 9, 2015), which provides a roadmap
for power system reform in China over the coming years,
the National Development and Reform Commission,
the National Energy Administration and other ministries
and commissions released specialist action plans. In this
section, we include the opinions and suggestions of foreign
experts, especially Vivid Economics and Shell International, which help us to analyse the future direction
and actions of power reform from the perspective of international experts.
23
For example, hydropower in Norway, bioenergy in
Brazil, nuclear power in France and the abundant fossil
fuel and huge carbon capture and sequestration potential
of North America and other countries.
24
For example, to deal with seasonal intermittency rather
than the more frequent intermittency associated with
variable renewables like wind and solar.
25
Strategic reserves provide capacity and flexibility by
keeping mothballed or older (usually thermal) generation
plants available, whereas capacity auctions provide a
fixed revenue for long-term capacity and flexibility in the
system.
Special Report 4: China’s Energy System Revolution
513
for Future Reform
22
The power market comprises multiple markets
and multiple market failures. The primary
objective of these markets is to match supply
with demand through optimal dispatch and
investment. This is delivered through electricity,
capacity and balancing markets, which face
market failures in the form of the carbon pricing
externality, regulation of natural monopolies and
the need for policy credibility to underpin
long-term and long-lived investment decisions.
These market structures and failures will exist in
a net zero emissions future, but their relative
importance and sophistication will change with
greater electricity demand and a greater share of
supply from renewables.
While the six characteristics of market efficiency (in terms of price signals) and policy
efficiency (in terms of correcting for market
failures) described above are essential from the
design perspective, their importance will vary
based on regional, national and local circumstances. For example, countries with large
endowments of non-intermittent, low-carbon
generation
23 will have less need to implement
all six elements, although they are still likely to
require some evolution of efficient pricing
mechanisms and supporting policy frameworks.
These countries will have less need for a
short-term balancing and ancillary services market and are likely to require less sophisticated
capacity markets.
24 However, for most countries
relying on variable renewables to decarbonise
power, there will be significant pressure for
reform of the power sector.
For centrally planned economies like China,
the challenge will be to achieve the right balance
between market forces and policy interventions.
On the one hand, central planning through the
Five-Year Plan process provides policy certainty,
security of supply and the ability to distribute the
burden of costs away from consumers to other
parts of the system. On the other hand, market
forces, through efficient market design and supporting policy frameworks, are likely to be a less
expensive and more adaptive approach, especially in the context of dynamic and changing
power demand and technologies. The value of
such an adaptive approach is even greater, given
the likely scale and pace of change required to
achieve net zero emissions in the second half of
the century.
Progress towards efficient net zero emissions
power markets will not be smooth. It is likely to
happen at different speeds in different geographies, with countries experimenting with different approaches; for example, the different
approaches taken by the UK and Germany, with
the former relying on capacity auctions and the
latter on creating strategic reserves to deliver
long-term capacity and resilience in the system.
25
However, the direction of travel is clear, with
many countries already making progress towards
more efficient power market structures and policies, driven in large part by the efficiency gains
they provide. This trend is only likely to intensify
with greater electrification of energy use and with
the greater imperative to decarbonise power in a
way that keeps costs down and delivers a secure
supply of electricity.
22
Following the publication of the Opinions of the Central
Committee of the CPC and the State Council on Further
Deepening the Reform of the Electric Power System
(Zhongfa No. 9, 2015), which provides a roadmap
for power system reform in China over the coming years,
the National Development and Reform Commission,
the National Energy Administration and other ministries
and commissions released specialist action plans. In this
section, we include the opinions and suggestions of foreign
experts, especially Vivid Economics and Shell International, which help us to analyse the future direction
and actions of power reform from the perspective of international experts.
23
For example, hydropower in Norway, bioenergy in
Brazil, nuclear power in France and the abundant fossil
fuel and huge carbon capture and sequestration potential
of North America and other countries.
24
For example, to deal with seasonal intermittency rather
than the more frequent intermittency associated with
variable renewables like wind and solar.
25
Strategic reserves provide capacity and flexibility by
keeping mothballed or older (usually thermal) generation
plants available, whereas capacity auctions provide a
fixed revenue for long-term capacity and flexibility in the
system.
Special Report 4: China’s Energy System Revolution
513