Solutions:
• build the national market by creating
provincial markets, then integrate several
provincial markets at their transmission endpoints, before finally integrating all provincial
markets;
• Integrate provincial markets in order of
mutual openness, then relax access conditions
for inter-provincial market trading, before
unifying market rules; and
• build inter-provincial markets and the
national market according to the principle of
“medium- and long-term markets first, then
the spot market”.
Fifth, how to eliminate historical price
provincialisation. The tariff in some provinces that
are traditionally low-price regions could increase
after integration with the national market, which
carries the risk of creating social unrest.
Solutions:
• start with provincial markets, expand the scope
of the national market and level the electricity
tariff in different markets step by step;
• in the early stages of market creation,
low-priced power could be partially reserved
for industrial users to avoid a drastic impact
on their costs after the market is built; and
• set tariff buffers and a protection mechanism
for domestic and other public users.
Sixth, how to settle the problem of stranded
costs. In the process of creating power markets,
some power producers that were previously
protected by the planning system may suffer
damage to their interests or even go bankrupt,
leaving them unable to recover their investment.
For example, companies that invested in power
plants under the planning system and have outstanding loans might not recover their investment
because they are badly positioned for market
competition due to their high costs.
Solutions:
• develop a variety of power products, such as
contracts for difference and medium- and
long-term contracts and futures, to avoid tariff
fluctuations and ensure stable revenues for all
market participants;
• use short-term planned power allocation to
prioritise power plants that are still recovering
their investment, or have recovered their
investment but are in difficulty, to give them
some stability; and
• restructure the assets of power plants and
power generation companies separately, in
accordance with the principle of sharing
reform costs.
7.5.2 Principles of Reform
To achieve the economic benefits of liberalised
electricity markets, international best practice
suggests implementing a set of principles for
efficient network provision.
26
First, proceed towards full liberalisation of the
wider power system. Efficient investment in and
operation of the overall power system is a necessary precondition for the efficient supply of electricity. This requires liberalisation of sectors
suitable for competition (fuel production, generation, retail), use of markets to procure key services
(capacity, balancing), and the pricing of externalities (such as air pollution and carbon emissions).
Second, align network-provider incentives
with public policy objectives. Make the incentives dependent on the provision of a reliable and
affordable supply of electricity by controlling
monopoly behaviour and ensuring that prices
reflect underlying costs:
• Reform power network institutions. Power
networks are natural monopolies. It is therefore critical that their incentives are aligned
with public policy objectives. A monopoly is
incentivised to underinvest in new infrastructure and to charge prices that are higher
than its costs. A state-owned company may
be incentivised to prioritise short-term political objectives, rather than longer-term public
26
This part is provided by Vivid Economics. See Vivid
Economics, Low Carbon Power Markets: Lessons from
International Experience for the DRC-Shell Markets
Work Stream, 2017.
Special Report 4: China’s Energy System Revolution
515
• build the national market by creating
provincial markets, then integrate several
provincial markets at their transmission endpoints, before finally integrating all provincial
markets;
• Integrate provincial markets in order of
mutual openness, then relax access conditions
for inter-provincial market trading, before
unifying market rules; and
• build inter-provincial markets and the
national market according to the principle of
“medium- and long-term markets first, then
the spot market”.
Fifth, how to eliminate historical price
provincialisation. The tariff in some provinces that
are traditionally low-price regions could increase
after integration with the national market, which
carries the risk of creating social unrest.
Solutions:
• start with provincial markets, expand the scope
of the national market and level the electricity
tariff in different markets step by step;
• in the early stages of market creation,
low-priced power could be partially reserved
for industrial users to avoid a drastic impact
on their costs after the market is built; and
• set tariff buffers and a protection mechanism
for domestic and other public users.
Sixth, how to settle the problem of stranded
costs. In the process of creating power markets,
some power producers that were previously
protected by the planning system may suffer
damage to their interests or even go bankrupt,
leaving them unable to recover their investment.
For example, companies that invested in power
plants under the planning system and have outstanding loans might not recover their investment
because they are badly positioned for market
competition due to their high costs.
Solutions:
• develop a variety of power products, such as
contracts for difference and medium- and
long-term contracts and futures, to avoid tariff
fluctuations and ensure stable revenues for all
market participants;
• use short-term planned power allocation to
prioritise power plants that are still recovering
their investment, or have recovered their
investment but are in difficulty, to give them
some stability; and
• restructure the assets of power plants and
power generation companies separately, in
accordance with the principle of sharing
reform costs.
7.5.2 Principles of Reform
To achieve the economic benefits of liberalised
electricity markets, international best practice
suggests implementing a set of principles for
efficient network provision.
26
First, proceed towards full liberalisation of the
wider power system. Efficient investment in and
operation of the overall power system is a necessary precondition for the efficient supply of electricity. This requires liberalisation of sectors
suitable for competition (fuel production, generation, retail), use of markets to procure key services
(capacity, balancing), and the pricing of externalities (such as air pollution and carbon emissions).
Second, align network-provider incentives
with public policy objectives. Make the incentives dependent on the provision of a reliable and
affordable supply of electricity by controlling
monopoly behaviour and ensuring that prices
reflect underlying costs:
• Reform power network institutions. Power
networks are natural monopolies. It is therefore critical that their incentives are aligned
with public policy objectives. A monopoly is
incentivised to underinvest in new infrastructure and to charge prices that are higher
than its costs. A state-owned company may
be incentivised to prioritise short-term political objectives, rather than longer-term public
26
This part is provided by Vivid Economics. See Vivid
Economics, Low Carbon Power Markets: Lessons from
International Experience for the DRC-Shell Markets
Work Stream, 2017.
Special Report 4: China’s Energy System Revolution
515