The Challenges of China's Electricity Market Reform

Renewable energy is the key to reducing China's carbon emissions, and for many years experts have seen electricity markets as essential to the promotion of clean energy. 

In this episode, we check in with a leading U.S. expert on China's power sector, Michael Davidson, to discuss two recent papers he has published on the topic of power markets and renewable energy in China.

Michael Davidson is an Assistant Professor in the School of Global Policy and Strategy and the Department of Mechanical and Aerospace Engineering at the University of California San Diego. His research and teaching center on the engineering implications and institutional conflicts inherent in deploying low-carbon energy at scale, with a particular focus on China, India, and the U.S. He holds a PhD in engineering systems from MIT and was previously a research fellow at the Harvard Kennedy School.

For further reading:

http://mdavidson.org/

Hongye Guo Michael R. Davidson, Qixin Chen. Da Zhang, Nan Jiang, Qing Xia, Chongqing Kang, Xiliang Zhang, Power market reform in China: Motivations, progress, and recommendations, Energy Policy, October 2020, at https://linkinghub.elsevier.com/retrieve/pii/S0301421520304444.

Pre-publication version: https://drive.google.com/file/d/1jya_iJmW-YqKZqqNg9552LNc-3EYGNY7/view

Davidson, M. R. and Ignacio Pérez-Arriaga, Avoiding Pitfalls in China’s Electricity Sector Reforms, The Energy Journal, 2020, at http://www.iaee.org/en/publications/ejarticle.aspx?id=3504.

Pre-publication version: https://escholarship.org/uc/item/5cx330qg

Some useful definitions:

Electricity spot market: For most commodities, a spot market refers to buying and selling of a commodity for immediate delivery. For electricity, the spot market usually consists of two markets with different lead times: the day-ahead and intraday markets. Market players on the day-ahead market trade in electricity for the following day. For intraday markets, the hour-ahead market is most common.

Dispatch: Since electricity cannot be stored in power lines, the entity operating the power grid must continuously adjust the output of its power plants (or energy storage units) to meet fluctuations in electricity demand. This process is called the dispatch of power plants.

Economic dispatch: Economic dispatch is the short-term determination of the optimal output of a number of electricity generation facilities, to meet the system load, at the lowest possible cost, subject to transmission and operational constraints. The main idea is that, in order to satisfy the load at a minimum total cost, the set of generators with the lowest marginal costs must be used first, with the marginal cost of the final generator needed to meet load setting the system marginal cost.

Curtailment: Curtailment is the percentage reduction (usually by the grid operator) of output of a renewable power plant below what it could have otherwise produced. It is calculated by subtracting the electricity that was actually produced from the amount of electricity the plant could have produced given available wind or solar resources.

Capacity factor: Also known as the capacity utilization factor, this is the ratio of the actual output from a power plant over the year (kWh) to the maximum possible output from it for a year (kWh) under ideal conditions. If a power plant has a maximum output (capacity) of 1,000,000 kW, and it operates at a capacity factor of 100% of the year, it would produce 1,000,000 kWh x 24 days x 365 hours = 8,760 GWh. In China, capacity factor is usually mentioned in terms of the number of operating hours per year, but the concept is the same (just divide operating hours by the number of hours in one year and the resulting percentage is the capacity factor). A higher capacity factor generally translates to a lower cost of electricity, since capital costs will be spread across more operating hours.

Wholesale vs retail power markets: A wholesale market allows trading between generators, retailers and other financial intermediaries both for short-term delivery of electricity (see spot market) and for future delivery periods. A retail electricity market exists when end-use customers can choose their supplier from competing electricity retailers. In China, this retail market would typically exist mainly for large industrial consumers.

Acronyms:

SERC: State Electricity Regulatory Commission (defunct)

NDRC: National Development and Reform Commission (responsible for all aspects of economic planning and regulation)

NEA: National Energy Administration

Background on the California 2000 electricity crisis:

https://www.cbo.gov/sites/default/files/107th-congress-2001-2002/reports/californiaenergy.pdf

In 2001, the Congressional Budget Office analysis stated that: "Long-term solutions to California’s electricity problems will most likely require three changes: removing barriers to the addition of generating capacity, eliminating bottlenecks in the electricity transmission system, and removing regulatory restrictions on the sale of power throughout the broad western market... On the demand side, the prospects for successful restructuring would also improve if consumers faced the full costs of electricity and were better able to adjust their use of power in response to changing prices." The report went on to recommend real-time metering (mostly implemented), devices in homes to monitor power use and automatically schedule or interrupt consumption when prices are high.

Here's a blog from leading California expert and California Independent System Operator board of governors member Severin Borenstein, of the University of California Berkeley, that offers specific criticisms of the present state of the California market with respect to consumer participation and utility/ISO communication with consumers: "Why don't we do it with demand?" https://energyathaas.wordpress.com/2020/08/24/why-dont-we-do-it-with-demand/

Lastly, here is a fascinating summary from David Roberts of Vox discussing the need for more solar (not less), microgrids, and islanding capability to deal with blackouts and fires in California: https://www.vox.com/energy-and-environment/2019/10/28/20926446/california-grid-distributed-energy