6 Things to Know About China’s Power Sector Reform

Dance to the Revolution 2015-06-01

If you follow China’s energy news, I’m sure by now you’ve heard of China’s “Document No. 9” on deepening power sector reform released last week by the Central Committee of the Communist Party and the State Council. You can read a RAP analysis that gives an overview of the reform policy. Here I want to point out a few key issues that are NOT mentioned in the document and my own assessment:


  1. Separation of distribution and transmission was discussed in the drafting stage of the document, but ultimately dropped – showing the tremendous power of the State Grid.


  1. Independent system operator was not mentioned. Very few words on optimizing dispatch. Reflecting the fact that dispatch in China is still done in a central-planning manner (same operating hours for all generators in a generation type, regardless of efficiency). Dispatchers in China are usually fresh college grads, who do their work not based on data or statistical analysis, but in a jaded, machine-like manner. Dispatchers have little authority, so even though China has wind priority dispatch policy, it’s not implemented.


  1. Doesn’t mention new utility business model, or disaggregating and reorganizing some of the utilities.


  1. On the contrary, under a separate “Made in China 2025” initiative, China is preparing mergers of state-owned enterprises! This goes against absolutely everything the government has been saying so far about increasing market competition. In February, China Power Investment Corp and State Nuclear Power Technology Corp announced they were exploring a merger, to create a group which analysts estimate would have total assets of more than $96 billion. — VERY bad trend.


  1. The Document stresses “gradual opening up”, which translates to very little action on the ground. Trial competitive bidding for on-grid power tariffs may not resume for 3-5 years. The T&D tariff drop in pilot areas: Shenzhen, and soon, Inner Mongolia, is a drop in the bucket compared to the grid companies’ huge profit. They keep, on average, 47% of the electricity price paid by industrial users in China. (Note that industrial users pay the highest electricity price in China, residential is lower, agricultural lowest).


  1. The biggest difference the Document No. 9 would make is through direct purchasing. And the biggest beneficiary of this reform would be those big (soon to be consolidated) industrial companies. For example, the Aluminum Corporation of China (Chalco), the nation’s largest producer of the industrial metal, consumes around 50 billion kWh of power a year, of which around 70 per cent was bought from power grids and the rest mainly from power plants in which it had stakes. Now it would be able to purchase power directly from the generators.


Screen Shot 2015-03-25 at 6.41.37 PMfigure source: LBNL, Key China Energy Statistics, 2012.