Regional trade barriers create hurdles for China’s power market reforms

China's power market reforms have entered a new phase with the launch of spot markets and some cross-provincial trading, but local trade barriers hinder the progress in the long-distance transmission of renewables from remote regions to urban demand centers.

Domestic trade barriers are the outcome of disparities in economic development between different provinces and administrative regions, and local governments have significant control over their electricity markets and economic policy.

This makes inter-provincial cooperation one of the key challenges to meet China's goal for a preliminary uniform power market by 2030, with a basic design framework by 2025, which in turn underpins the country's move towards the next phase of integrating renewables into its energy mix.

In China, renewable resources are predominantly located in remote northern and western regions characterized by lower economic growth, smaller populations, and reduced energy demand. Conversely, the southern and eastern regions are more developed with denser populations and higher energy demand.

China's renewable energy curtailment rate -- the share of electricity output wasted due to poor grid connectivity -- has been growing in these remote supply regions, driven by unprecedented growth in wind and solar capacity, along with increasing reluctance among provinces to engage in electricity trading.

In the first half of 2024, renewables supplying regions curtailed more than 5% of their respective renewable generation, reaching the threshold set by the government, according to a study by S&P Global Commodity Insights in Sept. 25, which also showed that these regions accounted for nearly 80% of total curtailed renewable generation.

"The Chinese government officially acknowledges the grid curtailment threshold in renewable resource regions will expand to 10%, if project economics permit, up from 5%, which has been safeguarded since 2018," Commodity Insights said in the September study.

When curtailment rates hit the threshold, it can trigger the idling of capacity, new project approvals are halted and the overall build-out of renewables gets capped. While efforts are on to build ultra-high voltage, long-distance transmission infrastructure and create a nationwide power market, trade barriers remain a hurdle.

Trade barriers

Some provinces building the renewables mega-projects include Gansu, Ningxia, Xinjiang, Qinghai and Inner Mongolia. They have been trying to attract companies to relocate factories to their provinces to access green electricity, to boost local economies, employment and tax income.

Cheap renewables and subsidies have attracted some aluminum and steel producers, solar PV manufacturers and datacenters to relocate to hydro-abundant Yunnan and Sichuan, or solar and wind-abundant Inner Mongolia and Ningxia.

But most companies have been reluctant due to higher supply chain costs to distribute finished products, and some regions like Xinjiang could trigger even more complicated issues like Western scrutiny of human rights, according to market participants.

The renewables-rich regions have also cited concerns around meeting their own renewable consumption target set by the central government, due to excess electricity exports, because power supply agreements have firm supply obligations.

Meanwhile, the southern and eastern coastal provinces have been on the defensive to sustain their high economic growth and prevent aggressive industrial relocation. Some local governments in industrialized provinces have been reluctant to import large volumes of renewable electricity, as the thermal power sector is an important part of the local economy.

Buyers and sellers of electricity usually need local government approval to sign power purchase agreements, but market sources said it has been very difficult to obtain consent to sign cross-regional medium or long-term PPA, indicating invisible trade barriers.

This local protectionism overrides economic sense. Importing electricity from the renewables-rich regions is cheaper than local coal-fired electricity or local renewables in the industrialized provinces, another recent Commodity Insights study showed.

Central government intervention

In October 2023, China's National Energy Administration released a plan to rectify malpractices in power trading and support market reform, explicitly calling for the lifting of barriers that prevent the private sector from participating in cross-regional power trading.

However, over a year later little has changed.

On Nov. 29, state-backed trade body China Electricity Council published a report titled The Blueprint of a Nationwide Uniform Power Market, which called for policymakers to allow generation utilities, retailers and electricity users in different provinces to sign bilateral agreements directly, reduce government involvement and circumvent trade barriers.

Song Hongkun, deputy director at the National Energy Administration, wrote in China Power News, a government mouthpiece, on Dec. 3 that regional supply and demand in the energy sector are still imbalanced.

"However, the current allocation of power resources is still influenced by the sector's monopolies and the barriers that hinder cross-provincial trading activities. Developing this nationwide, uniform power market can help to eliminate local protectionism and market fragmentation," he said.

Song is an advocate of power market reforms, and has been one of the key proponents of China's gas market reform since 2017.

He said the central government needs to intervene and "rectify malpractices associated with local protectionism, trade barriers between provinces, and unreasonable constraints of power market entry."