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Building a Unified

National Power

Market System

in China

Pathways for spot power markets

The IEA examines the

full spectrum

of energy issues

including oil, gas and

coal supply and

demand, renewable

energy technologies,

electricity markets,

energy efficiency,

access to energy,

demand side

management and

much more. Through

its work, the IEA

advocates policies that

will enhance the

reliability, affordability

and sustainability of

energy in its

31 member countries,

11 association countries

and beyond.

This publication and any

map included herein are

without prejudice to the

status of or sovereignty over

any territory, to the

delimitation of international

frontiers and boundaries and

to the name of any territory,

city or area.

Source: IEA.

International Energy Agency

Website: www.iea.org

IEA member

countries:

Australia

Austria

Belgium

Canada

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Japan

Korea

Lithuania

Luxembourg

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Slovak Republic

Spain

Sweden

Switzerland

Republic of Türkiye

United Kingdom

United States

The European

Commission also

participates in the

work of the IEA

IEA association

countries:

Argentina

Brazil

China

Egypt

India

Indonesia

Morocco

Singapore

South Africa

Thailand

Ukraine

INTERNATIONAL ENERGY

AGENCY

Building a Unified National Power Market System in China Abstract

PAGE | 3

IEA. CC BY 4.0.

Abstract

Power markets are an instrument used globally to ensure electricity security while

maintaining affordability and incentivising decarbonisation. The People’s Republic

of China (hereafter, “China”) has been making big steps towards implementing

markets, and the goals announced in 2020 of carbon dioxide emissions peaking

before 2030 and carbon neutrality before 2060 have added momentum to expand

their footprint. Provinces have taken a leading role in designing and implementing

markets. To improve sharing of resources, the guidance to implement a unified

national market system pushes for more co-ordination between provinces.

The main audience of this report is policy makers in China and all experts

intending to contribute to power sector reforms. Other readers will also find

information on the how the power sector and, in particular, power markets operate

today in China and may evolve in the next decade.

This report examines the role of power markets in China and the pathways to

develop a national market. The analysis focuses on short-term markets because

they have the potential to unlock flexibility the system needs in light of renewables

growth and changing weather patterns. The report provides recommendations to

improve markets’ co-ordination across the country as well as within the provinces.

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BuildingaUnifiedNationalPowerMarketSysteminChinaPathwaysforspotpowermarketsTheIEAexaminesthefullspectrumofenergyissuesincludingoil,gasandcoalsupplyanddemand,renewableenergytechnologies,electricitymarkets,energyefficiency,accesstoenergy,demandsidemanagementandmuchmore.Throughitswork,theIEAadvocatespoliciesthatwillenhancethereliability,affordabilityandsustainabilityofenergyinits31membercountries,11associationcountriesandbeyond.Thispublicationandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.Source:IEA.InternationalEnergyAgencyWebsite:www.iea.orgIEAmembercountries:AustraliaAustriaBelgiumCanadaCzechRepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIrelandItalyJapanKoreaLithuaniaLuxembourgMexicoNetherlandsNewZealandNorwayPolandPortugalSlovakRepublicSpainSwedenSwitzerlandRepublicofTürkiyeUnitedKingdomUnitedStatesTheEuropeanCommissionalsoparticipatesintheworkoftheIEAIEAassociationcountries:ArgentinaBrazilChinaEgyptIndiaIndonesiaMoroccoSingaporeSouthAfricaThailandUkraineINTERNATIONALENERGYAGENCYBuildingaUnifiedNationalPowerMarketSysteminChinaAbstractPAGE3IEA.CCBY4.0.AbstractPowermarketsareaninstrumentusedgloballytoensureelectricitysecuritywhilemaintainingaffordabilityandincentivisingdecarbonisation.ThePeople’sRepublicofChina(hereafter,“China”)hasbeenmakingbigstepstowardsimplementingmarkets,andthegoalsannouncedin2020ofcarbondioxideemissionspeakingbefore2030andcarbonneutralitybefore2060haveaddedmomentumtoexpandtheirfootprint.Provinceshavetakenaleadingroleindesigningandimplementingmarkets.Toimprovesharingofresources,theguidancetoimplementaunifiednationalmarketsystempushesformoreco-ordinationbetweenprovinces.ThemainaudienceofthisreportispolicymakersinChinaandallexpertsintendingtocontributetopowersectorreforms.Otherreaderswillalsofindinformationonthehowthepowersectorand,inparticular,powermarketsoperatetodayinChinaandmayevolveinthenextdecade.ThisreportexaminestheroleofpowermarketsinChinaandthepathwaystodevelopanationalmarket.Theanalysisfocusesonshort-termmarketsbecausetheyhavethepotentialtounlockflexibilitythesystemneedsinlightofrenewablesgrowthandchangingweatherpatterns.Thereportprovidesrecommendationstoimprovemarkets’co-ordinationacrossthecountryaswellaswithintheprovinces.BuildingaUnifiedNationalPowerMarketSysteminChinaAcknowledgementsPAGE4IEA.CCBY4.0.Acknowledgements,contributorsandcreditsThestudywaspreparedbytheRenewableIntegrationandSecureElectricityUnit(RISE)intheDirectorateofEnergyMarketsandSecurityoftheInternationalEnergyAgency(IEA).ThestudywasdesignedanddirectedbyJacquesWarichet.TheworkbenefitedfromstrategicguidancebyKeisukeSadamori,DirectorofEnergyMarketsandSecurity,andPabloHevia-Koch,ActingHeadofRISE.TheleadauthorsofthereportwereJacquesWarichet,ZoeHungerford,CamillePaillardandZhiyuYang.ThemodellingworkwasperformedbyZoeHungerford.HaneulKimandJinpyungKimcontributedtotheanalysis.AnnaKalistaprovidedessentialsupport.OtherIEAcolleaguesprovidedvaluableinputsandfeedback(inalphabeticalorder):XiushanChen,ConorGask,RenaKuwahata,RebeccaMcKimm,ErmiMiao,JonathanSintonandDanWetzel.ThisreportwasproducedwiththefinancialassistanceoftheEnergyFoundationundertheIEA’sCleanEnergyTransitionsProgramme(CETP).TheauthorswouldliketothanktheEnergyFoundationChinateam,inparticularFengZhouandLinanPengfortheirhelpinliaisingwithChineseexpertsandco-hostingtheeventscontributingtothesuccessofthiswork.Theauthorsaregratefulforthecommentsandfeedbackfromthefollowingexpertswhoreviewedthereport(inalphabeticalorder):PeterBørreEriksenEaEnergyAnalysesLarsMøllenbachBregnbækEaEnergyAnalysesHenrikBruunMartensRoyalDanishEmbassyinBeijingMaxDupuyRegulatoryAssistanceProjectNicolasFatrasUniversityofSouthernDenmarkSharonFengAzureInternationalWeiFengShenzhenInstituteofAdvancedTechnologyShuoGaoRMIGeirHermansenNorwegianAgencyforDevelopmentCooperationAndersHoveOxfordInstituteforEnergyStudiesFloraKanEU-ChinaEnergyCooperationPlatformRandiKristiansenUnitedNationsEconomicandSocialCommissionforAsiaandthePacificYanQinRefinitivKaareSandholtEnergyResearchInstituteofAcademyofMacroeconomicResearchSuneKåreSørensenRoyalDanishEmbassyinBeijingBuildingaUnifiedNationalPowerMarketSysteminChinaAcknowledgementsPAGE5IEA.CCBY4.0.HelenaUhdeEU-ChinaEnergyCooperationPlatformJiahaiYuanNorthChinaElectricPowerUniversityJingjieZhangChinaElectricityCouncilSiyuZhangStateGridEnergyResearchInstituteJacobZhaoBritishEmbassyinBeijingFengZhouEnergyFoundationQingZhouRMISpecialthanksgotothemembersoftheChinaEnergyTransformationOutlook(CETO)teamforsharingvaluableinformationwiththeauthors.TheauthorswouldalsoliketothankErinCrumforeditingthemanuscript;theIEACommunicationandDigitalOffice,inparticularAstridDumondandThereseWalsh;andthemapsteam,inparticularCharnerRamseyandEvanPelz,fortheirassistance.Finally,theauthorswouldliketoexpresstheirgratitudetotheChinaDeskfortheircontinuoussupport,aswellastotheStrategicInitiativesOfficeformakingthisstudypossible.ThanksalsotoAlejandroHernandez,formerHeadofRISE,forhelpingshapetheinitialworkproposal.ThisworkreflectstheviewsoftheIEASecretariatbutdoesnotnecessarilyreflectthoseofIEA’sindividualmembercountriesoroftheEnergyFoundationorofanyparticularcontributor.Commentsandquestionsonthisreportarewelcomeandcanbeaddressedtocamille.paillard@iea.org.BuildingaUnifiedNationalPowerMarketSysteminChinaTableofcontentsPAGE6IEA.CCBY4.0.TableofcontentsExecutivesummary.................................................................................................................7Backgroundandmotivation..................................................................................................12PowermarketsinChina’spowersectortransformation......................................................15ThepushforpowermarketsinChina......................................................................................16Spotpowermarketsattheprovincialandcross-provinciallevel.............................................22DesigninganationalspotpowermarketsupportingChina’spolicyobjectives...................36Modelsformarketintegration...................................................................................................36AssessingandselectingamodelforChina’snationalspotmarket.........................................47TransitioningtowardsanationalspotmarketinChina.........................................................56Implementingasecondarymarketmodel................................................................................56Reinforcingnationalinstitutionsforanationalmarket.............................................................62Recommendations................................................................................................................65Nationalco-ordinationofthepowersector..............................................................................65Advancingregionalandprovincialmarkets.............................................................................66Annex....................................................................................................................................69Modellingmethodology............................................................................................................69Abbreviationsandacronyms....................................................................................................75Unitsofmeasurement..............................................................................................................75BuildingaUnifiedNationalPowerMarketSysteminChinaExecutivesummaryPAGE7IEA.CCBY4.0.ExecutivesummaryChina’slatestpowersectorreformsplaceelectricitymarketsonthecentrestageMarketsaretakingagrowingroleinthepowersystemofthePeople’sRepublicofChina(hereafter,“China”).AlthoughadministrativemechanismshavebeenthemaindriverforChina’spowersectortoachieveChina’senergyandclimatepolicyobjectives,benchmarkingandcompetitionamongcoal-firedplantshaveimprovedtheefficiencyandenvironmentalattributesofelectricity.Thelastmajorroundofreformsstartedin2015gaveadecisivenudgetomarketstoincentiviseflexibilityasthepowersystemtransforms.Increasedparticipationinmarketsonboththesupplyanddemandsidescanbeexpectedtocontinueasthe14thFive-Yearplan(2021-2025)aimstogivealeadingroletomarkets.Powersectorreformsseekabalancebetweenoptimisationofresourcesacrossthecountryandprotectionoflocalindustries,betweenstable,affordableelectricitypricesandactivenewcapacityinvestment,andbetweenenergytransitionandsecureelectricitysupply.Overthelastthreedecades,severalroundsofreformstookplace.TheyinitiallyaimedateasinginvestmentinnewgenerationcapacitytosustainChina’seconomicgrowth,beforeaddressingtheefficiencyofthepowersupplysystemandenvironmentalaspects.Afterthepowershortagesof2021and2022,thesecuritynarrativehastakenagrowingroleinthenationalgovernmentguidance.Themid-to-long-term(MLT)marketsarethemostdevelopedformofmarketsinChina.Launchedunderthe2015reform,MLTcontractshavegraduallyreplacedtheadministrativeallocationofhourstogenerators.Today,MLTcontractscoverhalfoftheelectricityconsumedandaboutfour-fifthsofthetradedvolume.Althoughthemostcommoncontractshaveadurationofoneyeartoonemonth,shorterandlongerdurationcontractsareappearing,andthesecannowbetradeddirectlybetweenconsumersandgeneratorsoronpowerexchanges.Short-termmarketshavenotachievedtheirfullpotentialdespitethepossibilitiestheybringtounlockflexibility.The2015reformincludedthedeploymentofspotpowermarkets(day-aheadandintraday)toimplementeconomicdispatchandunlockflexibilityfromsupplyanddemandresources.Inmarket-basedsystems,theseshort-termmarketsplayacentralroleinpriceformationandsupportelectricitysecurity,forexampleduringtheEuropeanwinter2022-2023amidfallinggassupply.InChina,thefirstprovincialspotmarketpilotswerelaunchedin2019,withsomeofthemoperatingcontinuouslynow.Spotmarketsareexpandingacrossthecountry,buttheirshareintradeBuildingaUnifiedNationalPowerMarketSysteminChinaExecutivesummaryPAGE8IEA.CCBY4.0.remainssmallandtheconnectionwithotherestablishedmarkets(MLT,ancillaryservices)isinpracticestillbeingcompleted.Bettersharingofresourcesacrossthecountryrequiresnationalco-ordinationoflocalmarkets.TheunevengeographicaldistributionofresourcesanddemandinChinahasledtonationalprojectstotransferpoweracrossthecountry.Theseinterprovincialflowsaresupportedbyfirm,unidirectionalMLTcontracts.The2015reformgaveautonomytoprovincestodefinemarketsattheprovinciallevel.Theresultingmarketdesigns,whichmaydivergesignificantly,incombinationwithlocaleconomicincentivesfavourintra-provincialtrade.Cost-effectivesharingofresourceswillrequiremoreflexiblearrangementsandintegrationofthedifferentproductswithvaryinggeographicalandtimegranularity.Pilotsofinterprovincialandregionalspotmarketsarenowbeingdeployedandcanbethefoundationofamoreunifiedsystem.Chinaaimstobuildaunifiednationalpowermarketby2030Chinatargetsaco-ordinatedsystemofmarketsatthenationallevel.Whilepreservingtheroleofprovincesindesigningtheirlocalmarkets,theguidancereleasedin2022bytheNationalDevelopmentandReformCommission(NRDC)andtheNationalEnergyAdministration(NEA)–DocumentNo.118–requiresthecreationofamultilayermarketarchitecturewithanationalcomponent.Thissystem,tobeinitiallyestablishedby2025andcompletedby2030,aimstoco-ordinateexistingmarketsbeforeenablingtheirintegrationinthefuture.ExistingmarketscanbethefoundationofanationalmarketsysteminChina.Anationalspotmarketcanbebuiltbyadaptingandexpandingthealreadyestablishedprovincialandregionalmarkets.Initiatedin2017toenableexchangeandincreaseduseofrenewablepower“otherwisetobecurtailed”,thepilotinterprovincialspotpowermarketintheStateGridareacanbeextendedtobecomeanationalspotmarketaccordingtoaso-calledsecondarymodel,whereanationalmarketexistsinparallelwiththeexistinglocalmarkets.Thismarketwouldenablebettersharingofresourceswhilepreservinglocalautonomyinmarketdesignsanddispatchdecisions.Thisiswell-suitedforChinaaslocalmarketshaveadopteddifferentmodelsandareatunevenlevelsofmaturity.Thissecondarymarketstructurecanoperateinparallelwiththeexistingprovincialmarketsaswellastheplannedsouthernregionalmarket–whichaimstoexpandtheGuangdongprovincialmarkettointegrateallprovincesundertheChinaSouthernGridarea.Severalpathwayscanbetakentoestablishanationalspotpowermarket.Twomodelsofsecondarymarketsareconsideredtoenablebettersharingofresourcesacrossthecountry.Inasurplusmarket(similartothecurrentinterprovincialspotBuildingaUnifiedNationalPowerMarketSysteminChinaExecutivesummaryPAGE9IEA.CCBY4.0.market),onlysurplusesareexchangedbetweenthelocalmarkets.Ahigherlevelofco-ordinationcanbeachievedwith“volumecoupling”oflocalmarketssuchasthemodelintroducedbytheChinaEnergyTransformationOutlook(CETO).Bothmodelscanbeintermediarystepsbeforeahigherintegrationinthefuture.SeveralpathwayscanbetakentoimplementanationalspotpowermarketIEA.CCBY4.0.Notes:SGCC=StateGridCorporationofChina.Therecommendedpathwayisindicatedbytheplainarrows.Moredirectupgradesasrepresentedbythedashedarrowsarepossible.Anationalsurplusmarketisano-regretmoveonthepathtomoreintegrationinthefuture.Theimplementationchallengesmaybethedecisivefactortodecidethepathforward.Implementinganationalsurplusmarkethastheadvantageofquicklycapturingthebenefitsofregionalco-ordinationwhileenablingtomovelatertomoreintegratedformsofmarketssincealldevelopmentsmadetoestablishasurplusmarketcanbereusedandupgraded.Regionaltradeco-ordinationthroughanationalmarketcandeliversubstantialefficiencybenefitsandincreasedresilience.Regionaltradeimprovesresourcessharingacrosslargerareas.Thisbringsmanybenefitsintermsofresilienceandcancontributetoreducingneededinvestmentsingenerationassetsforreserve.Therearealsooperationalefficiencygains.IntheAnnouncedPledgesScenario(APS)in2035,reductionsinoperatingcostsrangefrom6-12%anddecreasesinCO2emissionsrangefrom2-10%comparedwithasituationwhereregionalco-ordinationisnotimproved(assumingthemarketorientationofdispatchiskeptatthecurrentlevels).Advancingeconomicdispatchinlocalmarketsdeliversevenhigherbenefitsthanregionalco-ordination.SpotmarketdevelopmentandfinancialMLTcontractshavemadedispatchmoremarket-based,whichalreadyshowsbenefits.Anadvantageofsecondarymarketmodelsistheabilitytodeploythenationalmarketwithlimitedneedforharmonisationofpractices,sostepstowardseconomicdispatchcanbetakenbyprovincesinparallelwiththeincreasedco-ordination.Achievingfulleconomicdispatchinthemodelledregions(withnoimprovementinregionalco-ordination)leadstoreductionsinoperatingcostsbyaround15%andinCO2emissionsby28%.RollingouteconomicdispatchBuildingaUnifiedNationalPowerMarketSysteminChinaExecutivesummaryPAGE10IEA.CCBY4.0.alongsidemarketreformprovidesfurtherbenefits,amountingtomorethandoublethebenefitoftheregionalco-ordinationalone.Reductionsinoperatingcosts,CO2emissionsandcurtailmentunderdifferentlevelsofco-ordinationandeconomicdispatchinChinaintheAnnouncedPledgesScenario,2035IEA.CCBY4.0.Notes:ED=economicdispatch;CETO=ChinaEnergyTransitionOutlookmodelbasedonvolumecouplingforregionalco-ordination.Reductionsarecalculatedrelativetoalow-co-ordinationbaselinescenariowithinterregionalexchangesbasedonhistoricallevelsanddispatchreflectingcurrentprogresstowardsmarketswitheconomicdispatchinsomeregionsandfullloadhourallocationstakingplaceintheremainder.Nationalinstitutionscanplayabiggerroleinco-ordination.Theleadingroleinthemovetowardsmarketsunderthe2015reformwaslargelyassignedtoprovincialauthoritiesandgridcompanies.Integratingtheexistingmarketstowardsaunifiednationalsystemwillrequireahigherlevelofco-ordinationandtheleadershipofstrongandindependentnationalinstitutions.Guidanceformarketdesignandmarketsupervisionbyanationalauthoritycanenablefutureharmonisationofpracticesandefficientfunctioningofmarkets.PowermarketscanacceleratethedecarbonisationoftheChinesepowersector.ElectricitygeneratedinChinaistwicethecombinedamountsoftheUnitedStatesandtheEuropeanUnion,andaccountsfor14%ofglobalcarbonemissions.Therefore,reducingcarbonintensityofChina’selectricityiscrucialforachievingthedualcarbongoalsofChina(peakingcarbondioxideemissionsbefore2030andcarbonneutralitybefore2060)andtheglobalclimategoals.Globalexperienceshowsthatwell-functioningpowermarkets,incombinationwithcarbonpricing,canacceleratedecarbonisation.AnationalemissiontradingsystemwaslaunchedinChinain2021.Furtherdeploymentofpowermarketscancreatetheframeworkinwhichacarbonpricingmechanismcantakeeffectandachievethedualcarbongoalssmoothly.-40-35-30-25-20-15-10-50Surplus,partialEDCETO,partialEDLowco-ordination,fullEDSurplus,fullEDCETO,fullEDReduction(%)Curtailment(percentagepoint)OperatingcostsCO2emissionsBuildingaUnifiedNationalPowerMarketSysteminChinaExecutivesummaryPAGE11IEA.CCBY4.0.KeypolicyrecommendationstoadvancepowermarketsthatsupportChina’spolicyobjectivesEstablishanationalspotmarketunderasecondarymarketmodelthatextendstheexistinginterprovincialspotmarketandenables,forthetimebeing,existinglocalmarketstomaintainautonomyinmarketdesignanddispatchdecisions.Thisenablesquicklycapturingthebenefitsofenhancedregionalco-ordination.Reinforcetheroleofnationalinstitutionstosupervisemarketimplementationandtosupportco-ordinationbetweennationalandlocalmarkets,aswellasco-ordinationamongnationalplans,marketsandoperationalprotocols.Liftbarrierstointerprovincialtradetoenablesmoothingvariabilityoverlargerareas.Tradingarrangementsmaybemademoreflexible,allowingadjustmentsclosertorealtime,andtransmissiontariffscanbeadapted.Continuetoincentivisetheimplementationofeconomicdispatchinlocalmarkets,throughdeploymentofspotmarketsandbyensuringlong-termandancillaryservicesmarketsallowforcontractualflexibility.TheshiftfromphysicaltofinancialcontractsontheMLTmarketisparticularlyimportanttothisend.BuildingaUnifiedNationalPowerMarketSysteminChinaBackgroundandmotivationPAGE12IEA.CCBY4.0.BackgroundandmotivationThepowersystemofthePeople’sRepublicofChina(hereafter,“China”)isthelargestintheworld,withanelectricityproductionof8849terawatt-hours(TWh)in2022,exceedingthecombinedannualgenerationoftheUnitedStates(4524TWh),theEuropeanUnion(2842TWh)andJapan(1017TWh).Dominatedbycoal,itaccountsalonefor14%ofglobalenergysectorCO2emissions,andover40%ofChina’senergy-relatedCO2emissions.Therefore,anychangecanhavesignificantoutcomes.PowersectortransformationisoneofthefoundationsofthecleanenergytransitionneededtoachieveChina’sgoalforcarbondioxideemissionspeakingbefore2030andcarbonneutralitybefore2060(“dualcarbongoals”).Asthemainglobalsupplierofcleanenergytechnologies,China’seffortstodecarboniseitspowersectorwillalsobekeytoensurecleansupplychainsworldwide.Asymbolicmilestonewasachievedin2022whenforthefirsttimeinChinathetotalinstalledcapacityofrenewablesexceededthatofcoal-firedpowerplants.Morethan30%ofthepowergenerationmixnowcomesfromrenewables,and14%fromwindandsolar.Electrificationofenergyendusesisalsoquicklychangingandexpandingthedemandside.Powersectorreformswillcontinuetoaccommodatethistransformationwhileensuringelectricitysecurityandcost-efficiency.TheInternationalEnergyAgency(IEA)hasbeenengagedformanyyearsinChina’spowersectortransformation,providinganalysisandrecommendationstoimplementthemarket-basedmechanismsoutlinedinthethirdroundofreformsof2015.The2019IEAreportChinaPowerSystemTransformationalreadyidentifiedtheestablishmentofspotmarkets(fromday-aheadtorealtime)andtradebetweenprovincesastwoofthemainelementstoimprovesystemoperationefficiencyinChina.Theanalysisincludedastate-of-the-artmodellingexercisetoquantifythebenefitsfortheChinesepowersystemin2035ofintroducingeconomicdispatch,increasinginterregionaltradeanddeployingadvancedflexibilityoptions.Theimplementationofanationalspotmarketwasassessedusinganeconomicdispatchprotocolperformedonanhourlybasis,againstabaselinescenariofor2018withadministrativeallocationofrunninghourstogenerators.Variationsaroundtheuseofinterconnectionsandexpansionoftransmissioncapacitieswereappliedtosimulatedifferentlevelsofinterregionaltrading.Themodellingalsoseparatelyquantifiedtheeffectsofadvancedflexibilitymeasuressuchasapplyingdemandresponse,smartchargingofelectricvehiclesandstorageinapowersystemwithoptimisedeconomicdispatch,interregionaltradingandadditionaltransmissioninvestments.BuildingaUnifiedNationalPowerMarketSysteminChinaBackgroundandmotivationPAGE13IEA.CCBY4.0.Thispreviousworkshowedthatsignificantbenefitscanbeobtainedintermsofreductionsofoperationalcosts,carbonemissionsandrenewablescurtailmentbymovingawayfromanoperationmodelbasedonadministrativeallocationandlimitedtradeacrossregions.Moreover,advancedflexibilitymeasureswerefoundtobecrucialforamodernChinesepowersystemwithahighshareofvariablerenewables(VRE).Anupdatedanalysiswasthenprovidedinthe2021IEAreportAnEnergySectorRoadmaptoCarbonNeutralityinChina,toalignwiththedualcarbongoals.Whilepreviousreportsdemonstratedthatachievingthesebenefitsentailsgivingalargerroletoshort-termelectricitytradingacrossthecountry–andthusestablishingstableandreliablewholesalespotmarkets–theycontainsomelimitations.First,previousanalysesconsideredonlyasituationwhereeconomicdispatchisperformedatthenationalscale,whichfailstotranslatethecomplexityoftheChinesepowersystem,givenitssizeanditsconstraintsatmultiplelayers.Second,theadministrativeallocationofrunninghourstogeneratorsasusedasareferencecasehasbeenevolvinginChina,aspoliciesencouragedparticipationofgeneratorsandlargeconsumerstoMLTmarkets.Lately,theintroductionofpilotspotpowermarketshasfurtherscaledbacktheminimumallocatedhoursofgenerators.Third,ourpreviousworkdidnotdiscusswhatmodelofmultilateraltradingwouldbebestsuitedforChineseprovincesandregions,northepathwaystowardsintegrationofthesediversemarkets,somealreadywellestablishedandinoperation,somenascentandsomeyettobedesigned.InJanuary2022,theNationalDevelopmentandReformCommission(NDRC)andtheNationalEnergyAdministration(NEA)issuedtheGuidingOpinionstoAccelerateUnifiedNationalPowerMarketSystem,alsoknownasDocumentNo.118.Thisdocumentpointsouttheneedtoimprovethecurrentsystemofmarketsandtoimproveco-ordinationacrossthecountryandcallsfortheestablishmentofa“unifiednationalelectricitymarketsystem”by2030.AlthoughDocumentNo.118doesnotexplicitlyrequireunificationofspotmarkets,thisreportgivesparticularattentiontothesemarketsinlightofthecentralroletheyplayinothermarket-basedsystemsaroundtheglobe.StructureofthereportThisreportaimstoillustratepathwaysforimplementingDocumentNo.118andintegratepowermarkets.Thisworkdoesnotprovidedetaileddesignoptionsbuthighlightsthemainrequirementstoensuremarketintegrationinanefficientandsecureway.Thestructureofthereportisasfollows.ThefirstsectiontakesstockoftheroleofmarketsintheChinesepowersector,withageneraloverviewfirstbeforelookingatspotmarketsinparticular.ReadersfamiliarwiththeChinesepowersectormayBuildingaUnifiedNationalPowerMarketSysteminChinaBackgroundandmotivationPAGE14IEA.CCBY4.0.skipthisfirstsection.ThesecondsectionlooksatafewpossiblemodelsforanationalspotpowermarketinChina.ThesemodelsareinspiredbyinternationalexperienceandtheirapplicationtotheChinesecaseisdescribed.Thethirdsectionmakesaselectionamongthetargetmodelsdescribedinthesecondsectionandlaysapathwayfromthecurrentsituationtotheselectedtargetmodel.Finally,recommendationsareprovidedforspotmarketsatboththenationalandprovinciallevels.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE15IEA.CCBY4.0.PowermarketsinChina’spowersectortransformationDevelopedmarkets,whereallparticipantsaremaderesponsibleforallcostsandbenefitsarisingfromtheiractions,cansupportpolicyobjectiveswhichcanbelocallydefinedaccordingtosocialpreferences,andinparticularguidetheelectricitysystemtowardssecure,affordableanddecarbonisedelectricity.OutsideofChina,over50%oftheglobalelectricityisgeneratedinpowersystemsrelyingonliberalisedmarkets,deliveringawealthofexperienceindesigninganddeployingmarkets.Until2015inChina,theshareofgenerationfromeveryplantandthepriceswereadministrativelydecidedinordertokeeppricesstableandsharebenefitsfairly.Initiatingthecurrentmajorroundofreforms,thereleaseofDocumentNo.9promotedpowermarketstofurtherimprovecost-effectivenessofgenerationandadapttothetransformationofthepowersystem.Thesemarketsmainlydevelopedattheprovinciallevel.Powertradeexpandedquicklyinrecentyears:in2022,61%oftheelectricitygenerationwastradedinmarkets,representinganincreaseof39%from2021.China’swholesalepowermarketisdominatedbybilateralMLTcontracts,whichrepresent79%oftotaltradedvolume.Spotmarketsareatnascentstagesandhavelimitedscope.Sincepilotswereinitiatedin2017,sevenprovincesrepresenting41%ofChina’spowerdemandruncontinuouslyoperationalspotmarketstoday.Tocapturethenumerousbenefitsofresourcesco-ordinationacrossprovinces,interprovincialandregionalmarketshavealsobeeninitiated.Widermarketandoperatingareasimproveflexibilityandallowoptimisingthevolumeandcostofrequiredreserves,therebyreducingtheneedfordispatchablethermalunits,abenefitthatgrowsastheshareofVREincreases.However,in2022,97%oftheMLTtradestookplacewithinprovincialborders,leavingalimitedroleformarketsacrossprovincestooptimiseresourcesharing.Anewimpulsewasgivenin2022withthereleaseofDocumentNo.118requiringtheestablishmentofaunifiednationalmarketsystem.ThissectiondescribesthehistoryandstateofplayofwholesalepowermarketsinChina.Itisdividedintotwoparts.Thefirstpartlooksatthedevelopmentofwholesalemarketsingeneralwhilethesecondpartfocusesonspotmarkets.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE16IEA.CCBY4.0.ThepushforpowermarketsinChinaSystemservicesandproductsinChina’spowersystemIEA.CCBY4.0.Notes:FLH=fullloadhours;MLT=midtolongterm;DA=day-ahead;ID=intraday;RT=real-time.Notallproductsandservicesaretradedonacompetitivemarket.Capacityandshort-termmarketsexistonlyinpartoftheprovincesandtheintradaymarketisnotrequiredbytheNEA.Flexibility-relatedancillaryservicesincludeservicessuchas“peakadjustment”or“deepramping”,whichbecomeunnecessaryonceshort-termmarketsareinoperation.ElectricitysecurityandgenerationefficiencydrivepowersectorreformsThepowersectorinChinastarteditstransitionfromplannedmodelin1987.In1997and2002,thecountrylaunchedmajorpowersectorreforms,firsttoseparatethesectorfromdirectadministrationcontrol,andthentounbundletheverticallyintegratedpowercompanyintogenerationandgridactivities.Asthegenerationbusinessopenedtoprivateinvestorsinordertoaddresssupplyshortages,“fairdispatch”,anadministrativeprocessensuringthatallplantswouldbeallocatedsimilaramountofFLHsovertheyear,wasadopted.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE17IEA.CCBY4.0.In2015,theStateCouncilissuedDocumentNo.9,markinganewroundofreformswithamaintargetofliberalisationofthedemandandsupplysides,whilegivingaprominentroletoefficiency,security,andreducingemissionsofgreenhousegasesandotherpollutants.ThereformssupportedtheestablishmentofMLT,spotandancillarymarkets,anddelegatedtoprovincesthepowertodecidetheirownapproachesandcarryoutpilotsbasedontheirdifferentelectricitystructures.Numerouspilotsacrossdifferentprovincesanddifferentreformorientationsbroughtaboutrapidgrowthinmarketsize.AccordingtotheChinaElectricityCouncil,thetotalvolumeoftransactionsinChina’spowermarket,mainlybasedonMLTcontracts,hasreached5254TWh,representing61%ofChina’stotalconsumption,morethantriplingfrom2017.Evolutionofmarket-basedelectricityvolumeandshare,2017-2022IEA.CCBY4.0.Source:IEAanalysisfromChinaElectricityCouncildata.TransitionrequireslinkinglegacypracticeswithmarketsMarketsinChinafacebarriersduetotheheritageoftheplannedeconomy.Chinaseeksabalancebetweenoptimisationofresourcesacrossthecountryandprotectionoflocalindustries,betweenstableelectricitypricesandactivenewcapacityinvestment,andbetweenenergytransitionandsecureelectricitysupply.Toencourageinvestmentsinnewcapacityandpreventpowershortages,Chinaadopted“fairdispatch”intheearly2000stoensurenon-discriminatoryFLHsexecutionforallpowerplants.Sincethen,administrativeallocationhasprogressivelymovedtowardsMLTcontractsbetweengeneratorsandconsumerswithadurationfromoneyeartoonemonth.Regulatedelectricityprices,however,challengedtheprofitabilityofgeneratorsasthecoalpricereachedahistorichigh10%20%30%40%50%60%70%010002000300040005000600070008000900010000201720182019202020212022TWhNon-market-basedvolumeMarket-basedvolumeMarket-basedshareBuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE18IEA.CCBY4.0.in2021,andanunprecedentedheatwaveshavedhydrocapacityin2022whileairconditioningpushedsummertimedemandupwards.FuturereformswillhavetobalancelocalandnationalinterestsProvincialautonomyinthepowersectoralsoconstitutesabarriertomarkets.Chinahasputprovincesattheheartofpowermarketreforms,allowinglocalgovernmentstomakerulesfortheirrespectivepowermarkets.Duetotheunbalancedgeographicaldistributionofnaturalresourcesanddemand,ChinahassoughttooptimisepowertransmissionatthenationalleveltoreducethecurtailmentratesofsolarPVandwindinnorthwestChina,andthethreatsofpowershortagesinotherregions,asmaterialisedinthesummersof2021and2022.Chinadeployeda(ultra-)high-voltagegridwithatransmissioncapacityover200gigawatts,whichtransmitted1770TWhacrossprovincialbordersin2022,representingafifthofthetotalnationalconsumption.ThebulkofthisenergytransferisassociatedtonationalprojectssuchastheWest-to-EasttransferandlargehydroplantssuchastheThreeGorgesDamincentralChina.Unbalancedresourcedistributionisamotivationforcentralinstitutionstoreinforceco-ordination,butprovincialgovernmentsremainlessproactivetopromoteaninterprovincialmarketthatmaychallengethelocalpowersector.Thenationalstrategyoftransmittingelectricityfromtheresource-richwesttothedemand-intensiveeastismainlycarriedoutthroughadministrativeordersandbilateralcontractssignedacrossprovinces1,whichserveasfirminputstoprovincialmarkets.Initialmoveshavebeenmadetoestablishinterprovincialcontracts,butthesearemostlyunidirectionalandforthelongterm,andunderregulatedprice.Transmissiontariffs,whichcumulatealongtheflowpaths(“tariffpancaking”),alsolimittheattractivenessofcross-provincialtransactions.EnergytransitionmayacceleratepowermarketreformsInlinewithitsambitiousdualcarbongoals,Chinaistransformingthepowersectorbymassivelydeployingrenewables.Renewablesdeploymentoutpacedanyothersourcein2022,withyear-on-yearcapacitygrowthexceeding28%forsolarand11%forwind.Ongoingandupcomingreformsmustaddressthelimitedincentivesforflexibilityofresourcesandinvestmentinnewdispatchablecapacitiesinparallelwiththerapidgrowthofrenewables.1Thesebilateralcontractscanbebetweenprovincialgridcompanies(grid-to-grid)orbetweenageneratorandagridcompany(point-to-grid).BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE19IEA.CCBY4.0.Chinaisincreasinglymakinguseofmarketstosupporttheenergytransition,suchastheEmissionTradingScheme(ETS)thathasbeeninplacefornearlytwoyearsandthegreenelectricitymarketthatfocusesonpowerpurchaseagreements(PPAs).Theselong-termbilateralcontractsbetweenrenewablegeneratorsandlargeconsumershelpsecurefundingforrenewableprojectsandhedgepricesfortheconsumers.Tounlockmoreflexibilitysourcesinatransformingpowersector,Chinaispayingagrowingattentiontocapacityremunerationmechanism(CRMs)andvirtualpowerplants(VPPs).AccordingtoNDRC’sannouncementduringtheNationalPeople’sCongressinMarch2023,CRMswillbeabletosupportprofitabilityofexistingplantsandinvestmentinadditionalcapacities,mostlytargetingcoalplants,thecurrentmajorsourceofflexibility.Encouragedinseveralpolicydocuments,includingtheNEA’sspotmarketrulespublishedinNovember2022,VPPsaggregatedistributedenergyresourcestoprovideshort-termflexibilityasroadtransport,heatingandothersectorselectrify.DocumentNo.118callsforaunifiednationalmarketby2030Thediversityofmarketinitiativesandtheirlackofco-ordinationareincreasingthebarrierstomarketoperation.On21January2022,theNDRCandNEAissuedtheGuidingOpinionstoAccelerateUnifiedNationalPowerMarketSystem,alsoknownasDocumentNo.118.Thisdocumentpointsouttheneedtoimproveco-ordinationoftheexistingmarketsandcallsfortheestablishmentofa“unifiednationalelectricitymarketsystem”by2030.Thefoundationsofthisnationalmarketaretheexistinginterprovincialmarkets,namelyacentralisedmarketplaceforbilateralMLTcontractsandapilotinterprovincialspotmarketintheStateGridCorporationofChina(SGCC)area.Thedetailedgoalssetoutbythedocumentaresummarisedinthetablebelow.ItisnotedthatDocumentNo.118doesnotexplicitlyrequireunifyingspotmarkets.Theconstructionofaunifiednationalpowermarketsystemisnowraisedatthelevelofnationalstrategy,beingreferredtoasa“keyreformtask”inthe14thFive-YearPlanforaModernEnergySystem(2021-2025).ItisalsolistedinfirstpositionintheNEA’skeyprioritiesfor2023regardingenergyregulation,withemphasisonpreparingadevelopmentplan,standardisingrulesandpushingforwardtheconstructionofregionalmarkets.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE20IEA.CCBY4.0.GoalssetfornationalmarketsinDocumentNo.118Items2025goals2030goalsImplementationofunifiednationalelectricitymarketEstablishpreliminarystructureofthemarketFundamentallyestablishaunifiednationalelectricitymarketRoleofprovincialandregionalmarketsCo-ordinatedoperationwithnationalmarketIntegratedoperationwithnationalmarketConnectionamongMLT/spot/ancillaryservicesmarketsDesignanintegratedsystemandpursuelinkedoperation--Interprovincialandregionaltrade/greenpowertradeSignificantlyexpandtradevolume--RenewableenergyEstablishapreliminaryfoundationformarketandpricemechanismsthatenablesthedevelopmentofrenewablesandenergystorageFullintegrationofrenewablesintothemarketGlobalpracticesshowtheneedtocontinuouslyimprovemarketdesignSince2021,powermarketsgloballyhavebeenstressedbythetightnessongasmarkets.InEurope,historichighpriceshitcustomershardandresultedindemanddestructioninindustry.ThiswasechoedinChinawithanincreasingfocusonenergysecurityinthe14thFive-YearPlanand20thPartyCongressaftertherecordhighcoalpricesinsummer2021.Asintensestakeholders’consultationstakeplaceinEurope,amajorlessonlearnedisthatmarketdesignsarenotstaticandshouldbecontinuouslyadaptedtoexogenouschangesandtosupportpolicyobjectives.Chinaisattentivelymonitoringtotakeonboardlessonsforitsownmarketdesignstobalanceelectricitysecuritywitheffectivepricesignals,pricestabilityandaffordability.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE21IEA.CCBY4.0.China’spowersectorreformmilestones,1985-2022IEA.CCBY4.0.Note:TF=TaskForce;SPCC=StatePowerCorporationofChina;SERC=StateElectricityRegulatoryCommission;CSG=ChinaSouthernPowerGrid;T&D=transmissionanddistribution;C&I=commercialandindustrial;min.CF=minimumcapacityfactor;RE=renewableenergy.Source:IEAbasedontemplatebyFatrasetal(2022),Asystematicreviewofelectricitymarketliberalisationanditsalignmentwithindustrialconsumerparticipation:AcomparisonbetweentheNordicsandChina.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE22IEA.CCBY4.0.Spotpowermarketsattheprovincialandcross-provinciallevelReformsaremakingcautiousstepstowardsamarket-drivendispatchofresources.Short-termmarketshavebeenacomponentofallpowersectorreformsinChina.In1998and2002,Chinalaunchedtworoundsofpilotsofregionalspotmarketsthatwerebothstoppedduetotheissueof“imbalancefunds”thatcanappearwiththe“dualtrack”system,inwhichin-andout-of-the-marketresourcesco-exist.Today,themostmaturemarketistheMLTmarketwherethedominantproductisannualcontractsrelyingonabenchmarkon-gridtariffsetadministratively.Chinaintroducedgenerationrightstradingin2011tocompensateinefficientplantssettobedecommissioned.Asphysicalcontractsareabarriertoflexibility,thismechanismcanalsobeusedtodecouplereal-timedispatchfromlong-termcontracts.Tofurtherunlockflexibilityandcost-effectiveness,DocumentNo.2752,theactionplanofDocumentNo.9(2015),aimedtocomplementtheMLTmarketswithliquidshort-termmarkets,whichmayalsoprovideareferencepriceforMLTcontracts.Ontheotherhand,authoritiesaredeployingrulestomitigatethepotentialvolatilityofspotmarketsby,forexample,limitingtheirsizeandimposingpricescaps.InitsannualinstructionsonMLTelectricitycontractsofDecember2022,theNDRCclearlyindicatesthatallin-the-marketconsumersshallsignMLTcontractsin2023forvolumesofnolessthan90%of2022consumption.EffectivelyconnectingMLTandspotmarketsremainsaheatedtopicofdebate.AsChinacontinuestoconsiderMLTasthefoundationofpowermarkets,policymakershavepushedfordiversificationofMLTproductsintermsoftradefrequency,timeframeandcurvesetting,andsoftenedtherequirementforphysicalexecution.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE23IEA.CCBY4.0.DispatchapproachinprovinceswithaspotmarketpilotInprovincesapplyingagrosspoolmodel:MLTcontractsarefinancial(CfD)Prioritisedgeneration(renewables,nuclearand,insomeprovinces,gas)servesasfirminputintheclearingprocess.Hydropowerprojectsbasetheirgenerationontheneedsofreservoirs.ApartfromallocatedFLHs,theyprovideancillaryservicesandcanparticipateinthespotmarket.LocalVRE/nuclear/gasmaydecidetoputacertainamountofgenerationinthemarkettobeeconomicallydispatched(andtobepaidbymarketprice),dependingonwhetheritisallowedbythelocalauthority.InFujian,applyinganetpoolmodel:MLTcontractsarephysicalPrioritisedgenerationinFujianreferstoVRE,hydro,nuclearandgas.TradingpartiesagreeoncurvesofMLTcontractstobephysicallyexecuted.Interprovincialalsoservesasfirminputtoclearing.Fujianruleisunclearonconnectionbetweenprioritisedgenerationandclearing.IEA.CCBY4.0.Notes:CfD=contractfordifference.Inanetpool,“All”referstoallnon-prioritisedgenerationwithintheprovince.DispatchdescribedisaccordingtothecommonrulesissuedbytheNEA(forconsultation)aswellasprovincialspotmarketrules,andmaybealteredbyadministrativeallocationofhourstogenerators.Lengthsofthebarsarenotproportionaltodispatchedvolumes.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE24IEA.CCBY4.0.Ancillaryservicesmarketswereafirstattempttosteerpowergenerators’flexibilityInChina,“peakadjustment”(or“deepramping”)referstodedicatedmeasurestoincentivisepowerplantflexibilityandreducerenewablescurtailment,andtheyareclassifiedasancillaryservices.Theseservicesaremeanttopayforforgoneenergyandenergyarbitrage,andaredistinctfromthegloballyusedservicesforfrequencyregulation,reactivepowercontrolandsystemrestoration.Marketsforpeakadjustmentwereinitiatedin2014anddesignedtooperateintheabsenceofspotmarketsbyprovidingeconomicincentivestogeneratorstooperatebelowtheircontractualoutputlevel.Thenortheastregionfirstimplementedapeakadjustmentmarketintheday-aheadrequiringthermalplantswithoutheatobligationstolowertheiroutputtoreducethecurtailmentofwindduringtheheatingseason,whenco-generationunitshavepriority.HavingextendedtoallsixregionsinChinabyJuly2022,thesemarketsoftenoperateattheregionallevelinsupportofthesystembalancingperformedbyregionaldispatchcentres.Recently,developmentsinancillarymarketsalsohappenatprovinciallevel,withmostprovinceshavinglaunchedprovincialpeakadjustmentmarkets.Mostfirst-batchspotpilotprovincesincludingZhejiangandGuangdong,andsomesecond-batchprovincessuchasJiangsu,havetransformedpreviouspeakadjustmentmarketstocoverreserveandregulationservices,asmarketsforloweringthermaloutputarenolongernecessaryoncethespotmarketsteersdispatch.ThefirstbatchofprovincialspotmarketpilotstestedvariousdesignsIn2017,theNDRCissuedtheNoticeonCarryingOutElectricitySpotMarketPilotProjects,knownasDocumentNo.1453,inorderto“acceleratetheconstructionofeffectivelycompetitivemarketstructureandsystem”,whichwasdescribedasthe“coretarget”inDocumentNo.9.Byselectingeightprovincesandregionsasthefirstbatchofpilotspotmarkets,thecommissionaimedat“changingthemeasuresofplanneddispatch,discoverthecommercialpriceofelectricity,formanin-the-marketmechanismforelectricpowerbalancingandletthemarketplayadecisiveroleinelectricpowerresourceallocation”.Differentmarketdesignswereadoptedinpilotprovinces,eachtryingtodevelopamarketbestsuitedtothestructureoftheirlocalpowersector(seeboxProvincialspotmarketdesign).ProgressofspotmarketpilotslaggedthetimelinesetinDocumentNo.1453.Thiscouldbeduetolackofmomentumattheprovincialleveltopushthereformforwardandthedivergingexpectationsofstakeholders.Localgovernmentsmighthaveexpectedspotmarketstolowertheelectricityprice,whichonlypartiallyreflectsthecentralgovernment’sintenttoBuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE25IEA.CCBY4.0.establishatruepricesignalofelectricity,asisstatedinDocumentNo.1453.Gridcompaniesworryingaboutchangingthestatusquocouldbeanotherreason.Despiteallchallenges,byJune2022,allfirst-batchpilotmarketsexceptforZhejianghadenteredintothecontinuousoperationaltestphase.Zhejiangplannedtocarryoutitscontinuousoperationaltestin2023.DocumentNo.9intendstogivespotmarketstheroletorevealtherealvalueofelectricitywithasufficientlocationalandtimegranularity.However,outofconcernsofvolatilityinwholesaleprices,upperandlowercapsweresetonpricesintheexistingpilots.Thesecapslimitthepricerangewellbelowtherangeallowedinspotmarketsaroundtheworldandremainanobstacletoaneffectivepricesignal.AninitialstepwasmadebyGuangdonginsummer2022totemporarilyremovetheuppercapinthespotmarketamidskyrocketingcoalandgasprices.ThemarketthensawtherecordhighpriceofCNY1366.95(Yuanrenminbi)permegawatt-hour(MWh),exceedingitsoriginalcapbyover30%,whichincentivisedgeneratorstoproduceatfullcapacitytomeetthesouthernprovince’ssummerconsumptionpeak.InShandong,negativeday-aheadpricesareofficiallyrecognisedtoreflectthegapbetweenhugedistributedsolarcapacityandlaggingenergystoragedeployment,andtoincentiviseinvestmentofthelatter.TimelineofspotmarketIntroduction(2017-2022)IEA.CCBY4.0.Source:IEAbasedontemplatebyFatrasetal(2022),Asystematicreviewofelectricitymarketliberalisationanditsalignmentwithindustrialconsumerparticipation:AcomparisonbetweentheNordicsandChina.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE26IEA.CCBY4.0.ProvincialspotmarketdesignThefirstbatchofpilotmarketswereselectedtoexploredifferentmarketdesignsunderalargediversityofelectricitysupplyanddemandbackgrounds:Grosspoolversusnetpool:Inagrosspool(theAmericanmodel),allgenerationisdispatchedbyacentralmarketoperator.Contractsmadebetweengeneratorsandusersareonlyfinancial,anddonotrequirephysicalexecution.Inanetpool(closertotheEuropeanmodel),generatingcompaniescanscheduletheirowngenerationbasedonphysicalMLTcontracts,whilesurplus/deficitistradedthroughavoluntarypool.Asitisgenerallyimplementedwithahighlocationalresolution,thegrosspoolmodelbettersuitstheprovinceswithhighnetworkcongestionandhighrenewablesshare.MLTfinancialversusphysicalcontracts:AccordingtotheNDRC,financialcontractsmaybesettledinbothpoolmodels,andphysicalcontractsshallbesettledonlyinnetpoolmarkets.Priceclearing:Provincesmaychoosetoclearthemarketonmarginalpricesofnodes,biddingzones,ortheentireprovince(system)basedonexpectedlocalcongestionlevel.Pricelimits:Allpilotmarketsapplybothlowerandupperlimitsonprice.Thelimitsareestablishedbasedonthemaximumgenerationcostand,incontrasttoemergingpracticesinspotmarkets,donottaketheapproachofvaluingscarcity(valueoflostload).Typeofgenerationallowedtoparticipate:MostChineseprovincesfollowthepolicyofguaranteedpurchaseofVRE,butsomepilotprovinceshavestartedtointroduceVREintothemarket.InShanxi,VREmaychoosetoactaspricetakerinthespotmarket.Inthreeotherprovinces,VREgenerationcanbeconsideredasanequalparticipanttothermalplants.MoreprovincesareplanningtointroduceVREintothespotmarket.InSichuan,thespotmarketisopentohydroplantsonlyin“wet”seasonsandtothermalplantsonlyin“dry”seasons,sodifferentpricelimitsapply.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE27IEA.CCBY4.0.MaincharacteristicsofthefirstbatchofprovincialspotmarketpilotsGuangdongZhejiangShanxiShandongSichuanGansuFujianMengxiAnnualsupply-demandgap(2021,TWh)-175-149112-15710523-29199(incl.East)GenerationmixThermal:60.11%VRE:16.58%Nuclear:9.43%Thermal:61.55%VRE:18.30%Hydro:11.34%Thermal:66.44%VRE:31.58%Hydro:1.98%Thermal:62.51%VRE:34.95%Nuclear:1.33%Hydro:66.36%Thermal:22.11%VRE:11.52%VRE:46.71%Thermal:37.56%Hydro:15.73%Thermal:51.52%Hydro:19.85%VRE:14.50%Thermal:57.77%VRE:34.95%Hydro:5.61%PoolGrossGrossGrossGrossGrossGrossNetGrossMLTcontractCfDCfDCfDCfDCfDCfDPhysicalCfDClearingNodalNodalNodalNodalSystemZonalSystemSystemPricelimits(CNY/MWh)0-1000<1200(gas)0-1500-80-130075-254(hydro)341-441(thermal)40-650118-5110-1500VREparticipationVolume+priceVolumeVolume+priceVolume+priceVolume+priceAncillary–regulationAncillary–reserveCapacitymechanismInplanMengxi(WestInnerMongolia)transitionedfromanetpooltoagrosspoolmodelinJune2022.Sources:PowerexchangesofShandong,Shanxi,Sichuan,Gansu,Fujian,Mengxi;ProvincialDRCofZhejiang;NEA.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE28IEA.CCBY4.0.Spotmarketpilotsshedlightonissuesrelatedtoout-of-the-marketresourcesThefirst-batchpilotsexperiencedsomechallengeswithimbalancesduetothe“dualtrack”.Adoptingagradualapproachandaimingatprotectingcertainparticipants,thespotpilotsdidnotincludeallgenerationsourcesnorendusersattheonset.Onthesupplyside,besidesin-the-marketgenerationsources,thereisalsoprioritised(out-of-the-market)generationwhoseproductionmustbeentirelypurchasedbythegridcompanyataregulatedprice.Eachprovincehastherighttoannounceitsprioritisedgenerationeveryyear.Inanefforttoincentiviselowcarbonsourcesandflexibleunits,adocumentissuedbytheNDRCin2019requiresincludinginprioritisedgenerationalllow-emissionsources(VRE,hydro,nuclear),frequencyadjustmentunits,andgovernment-mandatedinterprovincialtransmission.Co-generationplantsarealsoincludedinsomenorthernprovinces.Onthedemandside,commercialandindustrial(C&I)usersdidnotfullyenterthemarketuntilthereleaseofDocumentsNo.1439andNo.809in2021,whileagriculturalandresidentialusersarestillundertheregulatedpricescheme.Therearehencetwotracks(in-andout-of-the-market)inthedispatchsequencesofpilotprovinces.Imbalancefundinthe“dualtrack”systemIEA.CCBY4.0.Notes:Thisfigureshowstwocommonscenariosunderwhichimbalancefundsemerge.Lengthsofbarsarenotproportionaltoactualvolumeofgeneration/consumption.Theco-existenceofin-the-marketandout-of-the-marketparticipantsinthesepilotmarketscreatedsometimessignificantimbalancefunds.Whengapsemergebetweenpre-setlevelandactualvolumeofgenerationorconsumption,gridcompaniesasthemiddlepartyhavetofillthesegapswithin-the-marketelectricity.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE29IEA.CCBY4.0.Theimbalanceelectricitywillbebought/soldatregulatedpricesforout-of-the-marketparticipants,andatmarketpriceforin-the-marketparticipants,thusgeneratingimbalancefund,usuallyheldbygridcompanies.InShandong,CNY95.08million(USD14.02million)ofimbalancefundwasrecordedinafour-daysimulationtestwithsettlementinMay2020,mainlytriggeredbyVREthatgeneratedbeyondtheforecastcurve.Asout-of-the-marketdemandremainedrelativelystable,ShandongfacedchallengestobalancethevariationofitslargePVgenerationandrenewableelectricityimports,bothofwhicharenotsubjecttomarketprices.BasedontheexperienceofSingapore,government-mandatedcontracts(“vestingcontracts”)havebeenconsideredasawidelyapplicableoptiontoeliminateimbalancefunds.Gridcompanies,underthemandateofprovincialgovernments,arerequiredtosignCfDswithout-of-the-marketgenerationtocovertheout-of-the-marketconsumption.Theconceptiscomparabletotwo-wayCfDsproposedbytheEuropeanCommissionfortherevisionoftheinternalelectricitymarket,withasimilarintentiontolockinrevenuesforcertaingeneration.Recently,intheMLTcontractplanof2023(DocumentNo.1861),theNDRCrecognisedvestingcontractsasthesolutiontophaseoutprovincialout-of-the-marketgenerationtosupportDocumentNo.118implementation.ConnectingspotmarketstoothermarketsandmechanismsappearsasanecessityasvariabilitygrowsConnectingprovincialandinterprovincialMLTmarketswithspotmarketshasbeenanotherkeychallengeformanypilotregions.MLTcontractstypicallycovertimeframesfromoneyeartoonemonthandincludeanhourlydemand/supplycurvebuttendtobefirmcommitments(notadjustedaftersignature).Spotmarketsfacedifficultiesconnectingwithintra-provincialMLTmarketsduetotheslowtransitionfromafullMLTmarket.InShanxi,beforetheshort-termoperationaltestphase,MLTcontractsweresignedpriortospotpilotsstarted.Aftertheintroductionofthespotmarket,hourlycurveswerenegotiatedbetweengeneratorsanduserstwodaysaheadofrealtime(D-2).Astheprovincehasabundantgenerationcapacity,negotiationsusuallyturnedinfavourofconsumers,causingfinancialdeficitstogenerators.ConnectinginterprovincialMLTandintra-provincialspotisanotherchallenge,particularlyforimportingprovinces.InZhejiang,thelackofconnectionbetweentheprovincialmarketandtheinterprovincialMLTtradelaggedtheprovince’spilotprogress,illustratinganotherissuewiththedualtrack.WhiletheprovincefollowedDocumentNo.1439toallowallC&Iuserstoparticipateinthepowermarket,interprovincialelectricityisyettobereleasedintomarket.Asaresult,thegridBuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE30IEA.CCBY4.0.companyheldagreatamountofimportedelectricity(37%ofitstotalconsumptionin2020)butwasallowedtosellitonlytoprotectedendusers,whilethespotmarketsawasuddenriseofdemandthathadnomatchingsupply.Consequently,provincialandcentralgovernmentshavedeployedmeasurestoimproveexistingrulesbetweenpilots.ShanxiledthewaybysettingupataskforcededicatedtospotpowermarketdiscussionsinApril2019,whichhasworkedout12successiveversionsofprovincialspotmarketrulestoreflectthecommonexpectationsofmarketparticipants.MostpilotregionsincludingShandongandGansualsoadoptedtheideaofataskforcetoengagestakeholdersanditerateonspotmarketrulesduringthepilotperiod.Atthenationallevel,besidesorganisingahigh-leveltaskforce,theNDRCandNEAalsoorganisedweeklymeetingsonspotmarketpilotssinceMay2019andpublishedinternallyseveralSpotMarketPilotWorkGuidances.First-batchmarketswereinvitedbytheNEAtosharelessonslearnedwithsecond-batchmarketstoacceleratetheprogress.Regulartrainingsessionsareorganisedbyprovincialdispatchcentrestofamiliarisenewmarketplayerswiththespotpowermarket.NEAreleasesspotmarketrulesforprovinceswhilepilotsexpandandaimtointegraterenewablesToacceleratespotpowermarketpilots,theNDRCissuedDocumentNo.339namedOpinionsonFurtherPromotingSpotPowerMarketConstructionPilotsinMay2021.ComparedwithDocumentNo.1453,thisdocumentputsincreasingrenewablesconsumptionamongitsgoalsandaimstoexpandthescaleofspotmarketpilots.Sixprovinceswereselectedforasecondbatchofpilots.InMay2022,theNDRCissuedDocumentNo.129,settinggoalsforfirst-batchmarketstoenterintolong-termcontinuousoperationaltests(seeboxSpotmarketpilots:Fromteststopermanentoperation),second-batchmarketstostarttestsbyJune2022,andtherestoftheprovinces(thirdbatch)tostartpilotpreparationbytheendof2022.ByJanuary2023,21provinces/regionshadstartedspotmarketpilots,covering80%ofChina’stotalelectricityconsumption.InDecember2022,theNEApublishedtheBasicRulesforSpotPowerMarketandRegulationMethodsofSpotPowerMarketforconsultation.Aresultfromfirst-batchlessonsandaguidanceforexpansionofthesecondandthirdbatches,thedocumentsprovideaframeworkforprovincialspotmarkets,explicitlysuggestingadoptingagrosspoolmodel,whilemaintainingroomforprovincestodefinedetaileddesigns.Inparticular,someminimumrequirementsareprovidedforprovincialrules,suchasdefiningmarketcaps,establishingCRMs,improvingmarketregulationsregardingmarketpower,andmaintainingancillaryservicesasacomponentofpriceformationmechanism.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE31IEA.CCBY4.0.Thesedocumentsalsoincludethepromotionofrenewableparticipationinpowermarketsamongthemaintasksforspotmarketconstruction.Atearlystagesofspotmarketpilots,theNDRCinstructednon-hydrorenewablestoparticipateinthespotmarketaspricetakersbeforereleasingaguidancein2019withreductionofVREcurtailmentasagoalforspotmarketpilots.Spotmarketpilots:FromteststopermanentoperationChinaoftenusesprovincialorregionalpilotprojectstotestoutthefeasibilityandeffectivenessofapolicybeforenationalroll-out.Inspotmarkets,pilotsgenerallyfollowthethree-stepprocedurebelowasdescribedintheBasicRulesissuedbytheNEAinDecember2022.PilotphaseStepsDescription1.SimulationtestSimulationtestwithoutdispatchA“shadowmarket”phasewhenmarketentitiessubmitsimulationbidstoobservethenormalfunctionofmarketoperationsystem.Simulationtestwithdispatch“Induecourse”,productionanddispatchneedtobecarriedoutaccordingtosimulationresults,OperationaltestplansWorkingplansandrulesforoperationaltestswithsettlementneedtobeauthorisedorpublishedbeforeStep2.2.OperationaltestwithsettlementOperationaltest(Shortterm)A“semi-functional”phasewhenmarketentitiessubmitactualbidsinamarketoperatingunderworkingplansorprovisionalrulesoverafixedperiodoftime(weekly,monthly,quarterly).Long-term/Long-termcontinuousoperationaltestMarketoperationneedstocontinuouslysettleandformdispatchplanaccordingtoprovisionalrulesforayear(long-term)orwithoutanexplicitenddate(long-termcontinuous).PublicationofspotmarketrulesReleasingspotmarketrulesisthepre-requisiteforapilotmarkettoenterintopermanentoperation.3.PermanentoperationSource:NEA(2022),BasicRulesforSpotPowerMarket(forconsultation).BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE32IEA.CCBY4.0.StatusofChina’sspotpowermarketpilotsThismapiswithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,city,orarea.Source:NationalEnergyAdministrationanditsprovincialbranches.SpotmarketsbeyondprovincialbordersaimtosmoothvariabilityoverlargerareasbutremainconstrainedbyinflexibleMLTarrangementsAstheout-of-the-marketroleofinterprovincialelectricityinprovincialmarketsbecameoneofthebarrierstospotpilots,aninterprovincialspotmarketwasneededtopushforwardthereform.TheattempttoformaninterprovincialspotmarketbeganinAugust2017,whentheSGCC,inresponsetoa2016NDRCdocument,establishedaninterprovincialsurplusrenewablepowerspotmarketcoveringmultipleregionsundertheSGCCgridarea.ThismarketoperatedinBuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE33IEA.CCBY4.0.day-aheadandintradayandwasrestrictedtosurplus(“otherwisecurtailed”)renewableelectricitythatexceededadministrativelyallocatedgenerationplans.Bytheendof2021,over27TWhofelectricityhadbeentradedinthismarket.InNovember2021,theSGCCpublishedtheProvisionalRulesforInterprovincialSpotTrade,markingtheexpansionoftheinterprovincialmarkettocoverallgenerationsources,includingthermalandnuclear,whilealsoincludingtheMengxigridunderaseparateoperator.Similartoitspredecessor,thismarketdoesnotincludetheChinaSouthernPowerGrid(CSG)2andisasurplusmarketorganisedbytheNationalPowerDispatchandControlCentre(undertheSGCC)thatonlytradesthesurplusesthatexceededMLTmarketcurvesinday-aheadandintradaymarkets.Inessence,theMLTcontractsdefinetheinitialdispatchdecisionsbuttheremainingmarginonavailableunitscanbesoldontheinterprovincialmarket.Moreover,generatorsarenotallowedtosellelectricityiftheirprovinceisexpectedtobeinpowerdeficitatthetradingtime.Theinterprovincialmarketpilotcommencedafterthepublicationofitsprovisionalrules:themarketwentfromaone-dayoperationaltestinJanuary2022toasix-monthoperationaltestduringthesecondhalfof2022.Themarketsaw27.2TWhtradevolumein2022,almostequivalenttotheentirevolumeofitsfour-year-longpredecessor.StartinginJanuary2023,thismarkethasenteredyear-longcontinuousoperationaltestandisexpectedtocommencepermanentoperation“induecourse”.InterprovincialpowertradeAlmostall(97%)ofinterprovincialpowertradeinChinatakestheformofMLTcontracts.WhilesendersofinterprovincialMLTcontractscanbepowerplantsorgridoperators,onlygridcompaniescanserveascounterpartyinthereceivingend,afeaturethatalsoappliestotheinterprovincialspotmarket.AdocumentissuedbytheNEAin2019decidedthatsigningpartiesofthesecontractsmustconfirmnegotiatedday-aheadcurvesforthetradedelectricity,ontopofannualframeworkagreementssignedbetweenprovincialgovernments,toserveasfirminputstoprovincialspotmarkets.AttemptstoreforminterprovincialMLTtradetookplacewithlittlesuccess.In2016,theNDRCauthorisedconsumersinShandongtobidforinterprovincialelectricityfromnorthwestChina,transmittedbytheYin-Dong(Yinchuan-Dongying)high-voltagedirectcurrent(HVDC)line,althoughwithavolumecappedat10TWh.2ThetwowideareasynchronousgridsinChina,operatedbytheCSGandSGCC,arehistoricallyrelativelyisolatedfromeachother,currentlywithtwohigh-voltagedirectcurrentinterconnectionsbetweenthem.BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE34IEA.CCBY4.0.ThelackofgranularityofYin-DongMLTcontractssoonappearedtobeabarriertomeetthevariablelocaldemand,whichwasinfluencedbyVREandspotmarketprices.Thiswasespeciallyvisiblein2021and2022amidhighcoalprices.Inthemeantime,dispatchcentresatthesendingendreservedsomeofthegenerationforlocalsupplysecurity,furthercausinglossesinthereceivingend.Asaresult,monthlytradevolumedroppedfromover300gigawatt-hours(GWh)in2016to98GWhinJanuary2022.ConnectinginterprovincialMLTmarketstospotmarketsisanotherchallenge.Allmarketrulesforbidgridcompaniesinimportingprovincestoactasthesellerinprovincialspotmarkets.However,asgridcompaniesaretheonlybuyersininterprovincialtrade,theymaypossesselectricityinexcessofthedemandofprioritisedconsumption.Asaresult,insomeprovinces,C&Iusersdonothaveaccesstoimportedelectricityeventhoughthepricesoarsinthelocalspotmarket.Theneedsforinterprovincialpowertradetendstodifferacrossseasons.Allowingmorepoint-to-pointMLTandspottradeswillincreaseflexibilitybutaltersthebusinessmodelandoperationsofgridcompanies.Somespotpilotprovinceshavestartedtointroducemorepoint-to-pointtrades.InZhejiang,thelatestrulesallowconsumerstopurchaseinterprovincialcoal-firedelectricityunderagovernmentalframeworkagreement.Onlywhenmarket-tradedinterprovincialelectricityfallsbelowtherequiredvolumeforsecuresupplywillgridcompaniesbeallowedtopurchasefrominterprovincialmarket.DocumentNo.129,NoticeonAcceleratingthePromotionofSpotPowerMarketConstruction,demandsthatelectricitytradedontheinterprovincialmarketsbeincludedinprovincialspotmarketsatbothsendingandreceivingendstoavoidimbalanceinprovincialmarkets.Apotentialchallengeforinterprovincialtradingistransmissiontariffs.Currently,cross-regionaltransmissionispricedbysummingupalltransmissionchargesgeneratedalongthecontractpath,a“tariffpancaking”approachthatcandiscouragetransactions.Inaddition,tariffsforinterregionalinterconnectorsarebasedonenergyonlyandnotlinkedtocapacitynortimeofuse.Astheinterprovincialmarketexpands,currenttransmissiontariffsmayhavetoevolvetopromotecommercialtransactionsandensureasoundcostallocationbetweenstakeholders.SouthernGridleadstheeffortsforregionalmarketpilotsApartfromtheinterprovincialmarket,regionalmarketsalsoformanimportantcomponentinChina’spowersystem,asregionalgridcompaniesareresponsibleforsupply-demandbalancingandoperatemostregulatingresourcessuchaspumpedhydrostoragestations.Logically,regionsdevelopedancillaryservicesmarketstosupportthistask.Asforregionalspotmarkets,threeofthem(Jing-Jin-BuildingaUnifiedNationalPowerMarketSysteminChinaPowermarketsinChina’spowersectortransformationPAGE35IEA.CCBY4.0.Ji,YangtseDelta,GreaterBayArea)wereproposedinDocumentNo.828of2019,anactionplanfollowingDocumentNo.1453.ThethreemarketsrelatetoregionsofstrategicimportanceinChina:Jing-Jin-JicoversthecapitalBeijingandsurroundingprovincesofTianjinandHebei;YangtseDeltacoverseasterncoastalprovincesofJiangsu,Zhejiang,andShanghai;GreaterBayAreacoversGuangdong,HongKongandMacauinsouthernChina.BasedupontheGreaterBayAreaidea,thesouthernregionalspotpowermarkethasprogressedthemostsofar.NotincludedintheSGCCinterprovincialmarket,theCSGispushingforwardaregionalmarketthatcoversallfiveprovincesunderitsgrid,namelyGuangdong,Guangxi,Guizhou,YunnanandHainan.WiththeGuangdongspotpilotnamed“Southern(startingfromGuangdong)”spotpowermarketfromthebeginning,theCSG’sintentistointegratetheotherfourprovincesintotheGuangdongmarkettoformaregionalspotmarket.TheGuangdongpowerexchangewouldoperatethismarket,addingtotheexistingparallelregionalmarketcoveringMLTcontractsandancillaryservicesoverseenbytheGuangzhoupowerexchange.Theregionalspotmarketbeganitsfirstsimulationteston23July2022.AfterthepublicationofitsfirstspotmarketrulesinAugust2022,themarket’sfirsttwo-daysimulationtestwithdispatchwasexecutedinDecember2022.China’scentralgovernmenthasacknowledgedtheexpansiontowardsasouthernregionalspotpowermarketandaccordinglyreplacedthementionofthe“GreaterBayAreamarket”inDocumentNo.129,whichalsonoticedtheless-progressingmarketsofJing-Jin-JiandYangtseDelta,givingoutthegoalsofdraftingmarketconstructionplans,albeitwithoutacleartimelineyet.Thesetworegionsareproceedingatadifferentpace.Noneofthethreegridareas(Beijing,Tianjin,NorthernHebei)coveredundertheJing-Jin-Jimarkethavepublishedanyplansonspotmarketpilots.Ontheotherhand,allgridareasinYangtseDelta(Jiangsu,Zhejiang,Shanghai)havestartedspotmarketpilotsalready.Thesetworegionalmarkets,ifconstructed,willdeliverlearningsfromtwodifferentapproachestoregionalmarkets,i.e.constructinganewintegratedmarketorintegratingexistingmarkets,whichmayserveasreferencesforthepathwaytowardsanationalmarket.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE36IEA.CCBY4.0.DesigninganationalspotpowermarketsupportingChina’spolicyobjectivesFordecades,neighbouringsystemshaveenteredintotradingagreementstoshareresourcesandreserves.Ascountriestransition,thebenefitsbecomeevenmoreapparentassystemswithhighsharesofwindandsolarPVbenefitfurtherfromthesmoothingeffectoflargerareas.ThissectionlooksatmarketmodelstoenableahighershareoftradebetweentheentitiesthathaveestablishedspotmarketsinChina(mainlyprovinces,butalsoregions).Aparticularfocusisgiventosecondarymarketsatthenationallevel,whereanationalmarketexistsinparallelwiththeexistinglocalmarkets,sincethismatchestheobjectivesofDocumentNo.118.Localautonomycanbepreservedindefiningmarketdesignandoperatingprotocols.Asecondarymarketcanlaterbeadaptedintoaprimarymarket,wherealllocalmarketsarefullycoupled,makingthenationalmarketthedominatingmarket.Therefore,thesesecondarymarketscanbeseenaseitheratargetoratransitiontowardsfurtherintegration.Thissectionisdividedintwoparts.Thefirstpartpresentsdifferentmodelsformultilateraltradingamongprovincesandregions.Thefocusisontwotypesofsecondarymarketswithdifferentapproachestocouplingprovinces,asurplusmarketandamarketbasedonvolumecoupling(theCETOmodel,namedaftertheCETOwhereitwasfirstintroduced).Anintegrated(primary)marketmodelisalsopresentedasitcanbeatargetforChina,inthisroundofreformsorlater.ThesecondpartisbasedonaregionalmodelofthepowersystemofChinaby2035andlooksattheexpectedbenefitsofdeployingmarketsandmeasurestopromoteVRE.Itcontainsestimatesofthegainsintermsofoperatingcosts,emissionsandcurtailmentratesforanumberofconfigurationsusefulforthepresentedmodels.ModelsformarketintegrationInternationalexperienceillustratesseveralpathwaystobuildingaunifiednationalpowermarketsystemInternationalexperiencehasdeliveredanumberofmodelsformultilateralpowertrade,someofwhichareappropriateforreplicationintheChinesecontext.ThesemodelsdifferbythelevelofintegrationbetweenthedifferentlayersofthepowerBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE37IEA.CCBY4.0.marketsystem.Usually,ahigherlevelofintegrationleadstohigherwelfareasitimpliesmoreelectricitytradebetweenjurisdictions3andabetterallocationofresources(generationunits,transmissiongrids).ModelsofpowersystemintegrationandtradingarrangementsIEA.CCBY4.0.Source:AdaptedfromIEA(2019),MultilateralpowertradeinASEAN.Powersystemintegrationmodelscanberankedfromnascenttradingarrangementswherebilateralexchangestendtobescheduledinadvance(e.g.largehydropowerstationsinSichuanexportingtoeasternprovinces)toprimarymodelswheretransactionsaredeterminedacrossseveraljurisdictionsbyauniformmarketprotocolandthemultilateralmarketisthemainanddefaultplatformoftrade(e.g.theEuropeanUnioninternalelectricitymarketandPJMintheUnitedStates).Secondarymodelssitinbetweenandarecharacterisedbymultilateraltradingbetweenjurisdictionstakingplaceseparatelyandontopofdomesticmarketorsystemoperationarrangement(e.g.SIEPACincentralAmericaandSAPPinsouthernAfrica).Thereisnotasinglepathtowardsmarketintegrationandchoicesofmodelsdependonlocalconditions,eachcomingwiththeirownchoicesandchallenges.InthecaseofChina,bilateraltradingisalreadywellestablished,althoughnotharmonisedacrossthecountry.Harmonisingbilateraltradingbetweenprovincesorregionscanalreadyenablemoreefficientsystemoperations.ThisrequiresthedevelopmentofstandardisedbilateralMLTcontracts,wheelingmethodologiesandacommontradingplatform.However,thismodeloftradingfallsshortoftheambitionhighlightedinDocumentNo.118,whichsupportsatleastthe3Jurisdictionboundariescanbeinternationalorintranational.Inthecurrentcontext,jurisdictionboundariesarewithinChina(betweenprovinces/regions).Powertradebetweenjurisdictionsisreferredtoas“multilateral”.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE38IEA.CCBY4.0.establishmentofmultilateral,multidirectionaltradebetweenprovincesandregions.Thus,modelsundersecondaryandprimarytradingarrangementswouldsuitChina’scurrentreform.Formultilateral,multidirectionaltradetotakeplace,furtherco-ordinationisrequiredfordatasharingandcentralinstitutionsbecomenecessary,suchasacentralmarketoperatorandsettlemententity.Thesecentralinstitutionswilltakeoversomeoftheresponsibilitiespreviouslyassignedtointerconnectedentities.Thesecentralinstitutionscansupportincreasedtradingvolumesandestablishingpool-widereservestoencouragetradingelectricitybetweenprovincesandavoidoverbuildingofpowerplantslocally.Eventually,increasingtheflexibilityofdispatchprotocolswillallowcapturingthefullbenefitsoftheinterconnections.Bothsecondaryandprimarytradingarrangementshaveincommontheintroductionofanationalspotmarket(day-aheadandintraday).Inthisreport,thefocusisonthenationalday-aheadmarket(NDAM)asitisthemainmarketthatdefinessystemoperation.Inmarket-basedsystems,theday-aheadpricealsodeliversthereferencepricesignalsfortheothermarkets.Closertorealtimemarkets4(suchasanintradaymarket)arealsonecessarytomaximisetheuseofvariablerenewablegenerationandincentiviseflexibility,butcanbedevelopedlater,oncetheday-aheadmarketiswell-functioning.SecondarymarketarrangementscomplywiththegoalsofDocumentNo.118andmatchthecurrentmultilayerorganisationofmarketsDocumentNo.118suggeststheimplementationofamultilayerpowermarketframeworkwhereanationalmarketoperatesjointlywithprovincial/regionalmarkets.Twomodelsbelongingtothecategoryof“secondary”marketarrangementssuitthevisionofanationalmarketthatco-existswithlocal(provincial/regional)markets:asurplusmarketorvolumecouplingoflocalmarkets.Thesesecondarymodelsallowforbettersharingofresourcesonawiderscale,whilepreservingdifferentiatedlocalmarketdesignsandoperations.Atthelocallevel,eachjurisdictionadaptsitsownrulestoenableitsmarketagentstoparticipateinthenationalmarket.4Thedesignspaceforshort-termmarketsislarge.TheUnitedStates,EuropeandAustraliausedifferentcombinationsandtimelinesfortheirmarkets.AsChinesespotmarketsrelyonaday-aheadmarket,theAustralianmodel(classifiedasareal-time,energy-onlygrosspoolmarket)isnotelaboratedinthiswork.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE39IEA.CCBY4.0.MultilayerpowermarketsystemasenvisionedinDocumentNo.118Source:YanQin(2022),China’snationalETSandthepowermarket:howtheETScanachievesignificantemissionreductions.AnationalsurplusmarketcanbuildontheexistinginterprovincialspotmarketInasurplusmarketmodel,localmarketswithdifferentdesignsco-existwhilethewholeinterconnectionissupportedbyanationalmarketwhereexcessgenerationistradedonavoluntarybasis.Sinceonlysurplusistraded,localmarketsremainrelativelyautonomousfordeployingcapacitiesbuttheirusagecanbemademoreefficient.Thismodelhasbeensuccessfullyappliedamong6centralAmericancountriesinterconnectedwiththeSIEPACtransmissionlineandinSAPPwhichcovers12countries(seeboxesTheCentralAmericanElectricalInterconnectionSystemandTheSouthernAfricanPowerPool).Inthesetwocases,the“regional”aspectoftradingarrangementsreferstomacro-regionscomposedofseveralcountries.ThesurplusNDAMoperatesoncepre-dispatchinginthelocalday-aheadmarketshasbeenestablished.Localpre-dispatchresultsinpowerinjectionopportunitiesandsupplygapstransmittedtothenationalsurplusmarket,whichperformsanoptimisationatthenationalscale.Outputsofthenationalmarketarethenreturnedtothelocaldispatchcentresforagreementorre-optimisation.Thissequenceofoperationsallowslocalmarketstofirstcoverlocaldemandwiththeirownleastexpensiveresourcesandtosubstitutehigh-costgenerationbysurplusproductionfromlowercostmarkets.Pricesonthereceivingendcanthusreducecostswithoutanincreaseinpricesatthesendingend.Thisavoidsthecommonconcernof“undesiredpriceformation”(thatis,whenpricesincreaseinregionshavingtraditionallylowenergygenerationcosts)whenintegratingmarkets.ThelatterisarealconcerninChinaandhasledtoareluctanceofprovinceswithlowelectricityBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE40IEA.CCBY4.0.pricestotradewithneighbouringprovinces.ThesamereasonledtochoosingthistypeofsurplusmodelfortheWesternEnergyImbalanceMarketintheUnitedStates,anenergy-onlyreal-timemarketoptimisingresourcesharingacross6Americanstates.TheCentralAmericanElectricalInterconnectionSystemTheCentralAmericanElectricalInterconnectionSystem(SIEPAC)isanexampleofasecondarymarket,whichhasbeendesignedasa“seventhmarket”operatingontopofnationalmarketsofthesixcountriescovered(CostaRica,ElSalvador,Guatemala,Honduras,NicaraguaandPanama).ThosecountriessignedaRegionalMarketTreatyin1996andhavebeenfullyinterconnectedbya230-kilovolttransmissionlineof1800kilometressince2014.Regionalinstitutionswerecreatedandlocatedindifferentmembercountries:agoverningboardrepresentingthenationalgovernments;aregulator;aregionalmarketoperator;andagridowner.Theobjectivesbehindthisinitiativewerenotablytoensurethesecurityofsupplyandtooptimisetheallocationofresourcesinaregionhighlydependentonhydropower.AfterthecommissioningoftheSIEPAClineandtheharmonisationofrulesatthenationalandregionallevels,thevolumeofcross-bordertradehassignificantlyincreased.Sincethebeginningoftheproject,multiplebenefitswerereportedfortheregion,intermsofeconomicefficiency,electricitysecurityandregionalcooperationingenerationandtransmissionplanning.ElectricityintheSIEPACmarketismainlytradedonashorttimehorizon,eitheronthe“Opportunity”orspotmarket(day-aheadandreal-time),orontheRegionalContractsMarket.TheOpportunitymarketusesnodalhourlymarginalprices.Thenodalapproachwasindeedconsideredeasiertoimplementintheregionalcontextofscarcelymeshednetworks.LocationalmarginalpricesresultingfromtheOpportunitymarketareappliedtoeachnationalpre-dispatchasawholeandtoregionaltransactions.Operatinginparallel,theRegionalContractsMarketisformedium-termbilateralcontracts(lessthanoneyear,mostofthetimefromweekstomonths).In2021,morethantwo-thirdsofthetransactionstookplaceontheRegionalContractsMarket,andtherestontheOpportunitymarket.Intotal,injectionsintothesetwomarketsaccountedfor5.8%ofregionalelectricityconsumptionandprimarilycamefromCostaRica,GuatemalaandPanama,allimportanthydropowerproducers.Guatemalaannouncedin2021itsintentiontopulloutfromtheSIEPACmarket,adecisionthatcouldtakeyearstomaterialise.Oneofthereasonsadvancedwasthelackofenforcementrightsfromtheregionalregulator.IntheChinesecase,thesurplusmarketapproachwouldconsistoflocalspotmarketsperformingpre-dispatchbeforetradingexcessesordeficitsofgenerationonanationalspotmarket.Theentitiesexchangingsurpluscouldbebothprovincesandregionsdependingonexistinglocalmarkets.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE41IEA.CCBY4.0.ThesurplusconcepthasalreadyexistedinChinasince2017forthesaleacrossprovinces/regionsofotherwisecurtailedrenewablegeneration.ThislaidthefoundationofthepilotinterprovincialspotmarketintheprovincescoveredbySGCC,whichstartedtrialoperationin2022.Thus,establishinganationalspotsurplusmarketwouldbeanadaptedextensionofthesepilotexperimentsandcouldbuildonexistinginstitutions,suchastheNationalDispatchCentre,whichoperatestheinterprovincialpilotmarket.TheSouthernAfricanPowerPoolTheSouthernAfricaPowerPool(SAPP)isanotherexampleofaregionalpowermarketwithsecondarytradingandiscurrentlythemostadvancedregionalpowerpoolinAfrica.Createdin1995withthevisionofestablishingafullyintegratedandcompetitiveenergymarketwithintheSouthernAfricanDevelopmentCommunity(SADC),itcovers12countriesparticipatingthroughtheirnationalpowerutilities.Independentpowerproducerscanalsoparticipateinthemarket.Nineofthe12countriesareinterconnectedthrougharegionalsynchronisedgrid.Aregionalcompetitivemarketwasintroducedin2004,progressivelyincludingaday-ahead,anintraday,andaphysicalforward(monthlyandweekly)market,withmostofthetradetakingplaceontheday-aheadmarket.ThelateststepoftheintegrationprocesswastheimplementationofaregionalbalancingmarketinApril2022.TheSAPPregionisdividedintoseveralpricenodes(generallyonenodepercountryormoreforthosewithaconstrainedtransmissionnetwork).Intheday-aheadmarket,aco-ordinationcentrematchestotalbidsandoffersreceivedtodeterminethemarket-clearingprice(MCP),whichisthepriceusedtosettlealltransactions.ThisMCPdoesnottakeintoconsiderationtransmissionconstraints,thusleadingtodivergenceinpricesbetweennodeswhenthoseconstraintsarebindingandrestrictthephysicaltradeofpower.AlargemajorityoftheelectricitytradedintheSAPPregionisstillexchangedoutsidethecompetitivemarketunderbilateralcontracts(representingmorethan81%intheyear2020/2021),withutilitiesmainlyusingPPAstofulfilthebulkoftheirdemandrequirements,whiletheday-aheadmarketcoverssurpluses.AlthoughbottlenecksexisttoenhancethescaleoftradingintheSAPP(limitedtransmissionandgenerationcapacity,lackofaregionalregulatoryauthority),itsmorethan25yearsofexperienceinpromotingandco-ordinatingpowertradebetweenneighbouringcountriesprovidesaninterestingexampleofregionalintegration.WhilemanySADCcountrieshaverecentlyfacedrecurringdemandshedding,enhancingtheroleofSAPPhasbeenidentifiedasakeytasktoalleviatetheelectricitycrisisintheregion.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE42IEA.CCBY4.0.HigheruseofinterconnectionscanbeachievedwithvolumecouplingoflocalmarketsAnalternativesecondarymarketmodelistheapproachbasedonvolumecouplingdescribedintheChinaEnergyTransformationOutlook2022.Thismodelisthereforecalledthe“CETOmodel”throughoutthisreport.Theobjectiveofthisapproachistocaptureasquicklyaspossiblethebenefitsofnationalco-ordinationthroughimprovedutilisationofinterconnection,whilekeepinglocalautonomyinpriceformationanddispatch.Intermsofefficiencyofresourcesharingacrosstheinterconnection,thissecondarymodelisthereforemoreadvancedthanthesurplus.Similarlytothesurplusmodel,anNDAMisdeployedandco-existswithlocalmarkets,whichkeeptheirmarketstructureandcontrolovertheirmarketoperation.Forprovinceswherethereisnolocalday-aheadmarket,marketparticipantscandirectlyparticipateintheNDAM.Provincesarerepresentedinthenationalmarketasbiddingzones.InChinathesecannaturallybedefinedincorrespondencewithprovinces,and,dependingonlocalcongestionissues,someprovincescouldbesplitintomultiplezones.SeveralChinesepolicydocumentsrecommendchoosingzonalorlocationalmarginalpricingforprovincialspotmarketsdependingongridstructureandcongestion.Thischoiceforthelocalmarketisnotincompatiblewithanationalmarketwithazonalmodel,butsolutionstocalculateareferencepriceforeachbiddingzonewouldneedtobeelaborated.Incontrastwiththesurplusmarket,clearingofthenationalmarketisorchestratedpriortolocalmarketsanddeliversasmainoutputsthescheduledflowsofinterconnectorsbetweenbiddingzones.TheavailableinterconnectorcapacityisallocatedbasedontheimplicitneedsofthevolumesthatclearedintheNDAM(“implicitauction”or“implicitcapacityallocation”).Theresultinginterconnectorflowsarethentakenasfirminputsbylocalmarketoperatorsfortheirownclearingprocess,equivalenttofirmdemandorgeneration.Dispatchisperformedlocallyandtakesintoaccountthematchedordersfrombothnationalandlocalspotmarkets,long-termcontracts,and(whereapplicable)administrativeallocationofhourstoprioritygenerators.Incontrasttointegrated(primary)markets,volumecouplingallowscircumventingthesignificantchallengesofimplementingpricecouplingbetweenprovinces/regionswithdifferencesintheirpowermarketdesigns.VolumecouplingwasimplementedattheearlystagesoftheEuropeanpowermarketintegrationandisasolutionconsideredforconnectingtheUnitedKingdomafteritsexitfromtheinternalelectricitymarket.Althoughtheoptimisationresultingfromvolumecouplingisnotasefficientaspricecouplingintermsofallocationoftransmissioncapacitiesandpriceconvergencebetweenbiddingzones,itrepresentsapragmaticoptiontorampupresourcesharingacrossChinaandhasthepotentialforfasterandsimplerimplementation.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE43IEA.CCBY4.0.AnintegratednationalmarketcanbeanobjectiveforthenextphaseofmarketreformsInaprimarymarketmodel,theinterconnectedsystemsarefullyintegratedandmultilateraltradingisthedefaultoption.Allmarketparticipantsacrossthegeographicalscopeareexposedtothesamerulesandparticipatedirectlyinamultilateralmarket.Theparticipatingjurisdictionsneedtoagreepoliticallyandco-ordinatefurtherwithastrongerroleforcentralinstitutions.Inaddition,jurisdictionsneedtoharmonisetheiroperationalandtradingframeworksandmayhavetorestructuremarketstoensurefullcompetition.Spotmarkets(day-aheadandintraday)areakeysegmentofaprimarytradingmodel,asmoreintegratedpowersystemsallowtradinglargervolumesclosetorealtimebasedonsystemconditions.MaincharacteristicsofthreepossiblemodelsforanationalpowermarketinChinaSecondarymodelsPrimarymodelSurplusCETORationaleinanutshellIncreaserenewableenergyresourceutilisationwhilemaintainingdifferentiatedlocalmarketsImproveinterconnectionusewhileallowinglocalautonomyforpriceformationanddispatchInterconnection-widecompetitionandintegrationPowermarketssequence•Localpre-dispatch•Surplus/gapsofgenerationofferssubmittedtoNDAM•ClearingofNDAM,whichprovidesupdatedpowerflowstolocalmarket•Pre-clearingofNDAM•Resultinginterconnectorsflowstakenasfirminputbylocalmarkets•Clearingoflocalmarkets•NDAMreceivesbidsfromallmarketparticipants•ClearingofNDAMMarketoperator(MO)Local+nationalMOsLocal+nationalMOsNationalMOorcooperationoflocalMOsUseofinterconnectorcapacitiesLimited,basedonsurpluspowertradedImplicitallocationbyNDAMImplicitallocationbyNDAMCouplingbetweenbiddingzonesNocouplingVolumecouplingPricecouplingDuringanimplicitauction,transmissioncapacitiesareintegratedintotheclearingoftheNDAM(asopposedtoanexplicitauction,wheretransmissioncapacitiesareallocatedseparatelyfromtradedenergy).Implicitauctionsareoftenreferredtoas“marketcoupling”.Pricecouplingreferstoasituationwhereacouplingalgorithmcentrallycalculatesbothpricesandinterconnectorsflows,whereasunderavolumecouplingapproach,onlyflowsarecalculatedbasedonbidsreceived.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE44IEA.CCBY4.0.ApplyingaprimarymodeoftradeintheChinesecaseentailstheestablishmentofasingleday-aheadmarketwhereallgenerationanddemandarecleared.However,unlikethesecondarymodelspresentedabove,thereisonlyoneclearingprocedurehappeningintheday-aheadsotheexistingprovincialspotmarketsarenolongerrelevant.ThemostadvancedformofprimarytradingforChinawouldbetoimplementsuchamodelatthenationallevel,butotherlessintegratedoptionsexistthataremorerealisticunderthetimelineofDocumentNo.118.Forinstance,itispossibletoimagineaprimarymodeoftradewithinsomeregionalmarkets(thecurrentapproachtakeninthesouthernregionalmarket)whichwouldtradewithoneanotherundersecondaryarrangements.Movingtowardsaprimarymarketrequiressomedesignchoices.Twowell-knownexamplesofprimarytradingarrangementsaretheEUinternalelectricitymarketandthePJMmarketspanning13statesintheUnitedStates.InterconnectionsbetweenEuropeancountriesstarteddecadesagotoincreasepowersystemstabilityandsharingofreservesbetweenregionswithdiverseprofilesofelectricityproductionandconsumption.TheEUmarketconstructionwasmeanttoincreasecompetitionandtoremovebarrierstocross-bordertrading.Thiswasdonethankstoagradual–andstillongoing–integrationofmarketsthroughmarketcoupling(textbox).Similarly,theconstructionofPJMwasinitiallydrivenbytheobjectivetorealiseeconomiesofscalebetweenneighbouringstates,byoptimisingthecostsanduseofproductionandtransmissionassets.Marketarchitecturesmayvaryamongprimarytradingmodels.InthecaseoftheEUinternalmarket,althougheffortsweremadetoharmonisenationalmarketdesigns,theintegrationapproachhasleftfreedomfordifferentiatedoperationsbetweencountries.Onthecontrary,PJMfullyintegratedmarketswithunifiedoperations.InEurope,countriesparticipatinginthepricecouplingprocesshaveadoptedadecentralisedmodelwithself-schedulingofmarketentities,whichareresponsibleforbalancingsupplyanddemand(therebyreferredtoas“balanceresponsibleparties”).ThisdiffersfromthecentralisedmodelofPJMwhereacentralsystemoperatorexecutesthecentralunitcommitmentintheday-aheadmarket:inthatcase,schedulingofgeneratorsignoresbilateralphysicalcontractswhicharesettledfinancially,typicallywithCfDs(inagrosspool).Onthecontrary,theEUmodelforelectricitymarketshistoricallyreliedonnetpoolarrangements,i.e.physicalschedulingofgeneratorswasbasedonbilateralcontracts,andthedifferencebetweenscheduledandactualdemandwastradedonspotmarkets.Recently,thetrendinEuropehasbeentowardsahighershareoftradeonspotmarketswhileusingfinancialcontractsforpricehedging,thussignificantlyreducingtheshareofphysicalcontracts.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE45IEA.CCBY4.0.Anotherkeydifferencebetweenthesetwomarketsisthepriceformationmechanismadopted:zonalfortheEuropeanUnionandnodalforPJM(andinalltheorganisedwholesalepowermarketsintheUnitedStates).Thezonalpricingsystemresultsinauniformpricewithina“biddingzone”,whilethenodalapproachismorereflectiveofthephysicalconstraintsofthegridbyprovidingpricesthatmaydivergebetweennodesincaseofgridcongestion.Inazonalmarket,constraintswithinabiddingzoneareassumednottoaffecttrade.Therefore,biddingzonesshouldbedefinedbasedonstructuralconstraintsofthegrid.Itis,however,commonthatjurisdictionalbordersdefinebiddingzones,leadingtoinefficienciesandlessaccuratelocationalsignals.Althoughitisanappealingprospect,implementingaunifiednationalmarketframeworkinChinawithasimilarlevelofintegrationastheEUorPJMmarketwouldrequireyearsofefforts.Thus,itcouldbeseenasalong-termobjectivebeyondthe2030horizonsetinDocumentNo.118.Itis,however,importantthatChinamakesadesignchoiceearlyforthenationalpowermarketsystemthatkeepsthedooropenforfuturefurtherintegration.Along-lastingdiscussionhasbeenwhetherChinapowermarketsshouldfollowanintegrationpathwaysimilartoPJMortheEuropeanUnion,withmuchattentiongiventothedesignoftheirrespectivespotandcontractmarkets.Sofar,ChinatookthePJMmodelasareferenceinthedesignofmostprovincialpilotspotmarkets.Moreover,theongoingconstructionofthesouthernregionalmarketfollowsacentralisedapproachwithonesingleoperatoroftheregionalmarket.However,forthedesignofanationalmarket,severalcharacteristicsoftheEUtargetmodelmakeitmorecompatiblewiththeenvisagedintegrationprocessinChina:Itworksbetterwithdiversityoflocalpowermarkets’operationsanddesigns.AlthougheffortstocreateasingleEuropeanmarketledtoastandardisationofnationalmarketfeatures,therearenorulesintheEuropeanUnionprescribingacommonmarketdesign,andsignificantdifferencesremainacrosscountries.DecentraliseddispatchingoperatedbymultipleoperatorsseemsmorerealisticforChinaconsideringthecurrentmultilayerdispatchprotocol,mainlyorchestratedbyprovincialgridcompanies.AnNDAMmarketcouplingliketheoneintheEuropeanUnion,whichismainlybasedoncapacityconstraintsofinterconnections,iseasiertoexpandtoagrowingnumberofparticipatingregions,comparedwithacentraliseddispatchingmodel.BiddingzoneswithuniformpricingasintheEuropeanUnionseemmoresociallyacceptableinChinathanlocationalmarginalpricing,whichentailspricesvariationbetweenneighbouringnodesofthenetwork.However,biddingzonesshouldbedesignedinawaytoensurebotheconomicandcongestionmanagementefficiency.InspirationcanbedrawnfromtheongoingbiddingzonereviewinEurope.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE46IEA.CCBY4.0.ThenodalmodeladoptedinPJMisparticularlyrelevantforregionsshowingtransmissioncongestionlocally(e.g.Guangdongprovince).However,fromacountry-wideperspective,Chineseprovincesarerelativelywellinterconnectedwithoneanotherthrough(ultra-)high-voltagegrids(suchasthewest-to-eastcorridors)andhavethepotentialtobecomeevenmoresointhecomingyearswithmassiveplannedexpansionoftransmissioncapacities.Inthisregard,lessonscanbedrawnfromtheEuropeanUnion,whichhasachievedaveryhighlevelofinterconnectionamongcountries,atascaleproportionaltothatofChina,althoughtheEUsystemappearstobemoremeshedcomparedwiththeChinesesystemwhereHVDCconnectionsrepresentthebulkofthetransmissioncapacity.Inparticular,theEuropeanUnionhassetaninterconnectiontargetofatleast15%foreachcountryby2030,whichcouldbereplicatedinChineseprovinces.TheconstructionoftheEuropeaninternalelectricitymarketMarketorganisationinEuropeoffersagoodexampleofhowdecentralisationcansupportincreasedregionalintegration.Allowingdifferentcountries(or,moregenerally,jurisdictions)toretainfunctionalcontrolovertheirpowersystems,whileatthesametimeencouragingmarket,systemandregulatoryharmonisationattheinterregionallevel,hasenabledaflexibleyetscalableapproachtocross-borderpowersystemintegration.TheEUinternalelectricitymarketisnowthelargestwholesalepowermarketintheworldandanexampleofaprimarytradingmodel.Itshighlyintegrateddesignwasachievedprogressivelyafteryearsofgradualintegrationofnationalandsub-regionalmarkets.Fourenergypolicypackages(1996,2004,2009,2019)constitutedthemainmilestonesofthemarketconstruction,settingupatargetmodelforelectricitymarketsandasetofcommonrulesandgridcodestoachieveit.Efficientcross-bordertradeenablestakingadvantageoftheunevendistributionofrenewableenergyresourceswithintheEuropeanUnionandhasdeliveredsignificantsocialwelfare.TheEuropeanAgencyfortheCooperationofEnergyRegulators(ACER)estimatedsavingsofEUR34billionin2021,comparedwithasituationwithisolatedmarkets.OneofthemainsuccessesintheprocesstowardsmarketintegrationinEuropewastheimplementationofaday-aheadmarketcouplingthroughauniformpricealgorithm.Itwasmademandatoryin2015andnowcovers27countries.AsseveralpowermarketswerealreadywellestablishedwiththeirownpowerexchangewhentheEUtargetmodelwasadopted,couplingbetweenexistingmarketswasachievedthroughthealgorithmknownasEUPHEMIA(standingforPan-EuropeanHybridElectricityMarketIntegrationAlgorithm)whichlinksallpowerexchanges.NationaltransmissionsystemoperatorssharetheiravailabletransmissionBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE47IEA.CCBY4.0.capacitiesandpowerexchangessharetheirorderbooks,whichserveasinputparametersforthecommonday-aheadauction.PowerexchangesamongtheNominatedElectricityMarketOperators(NEMOs)taketurnstorunthealgorithm,afterwhichprices,volumesandcross-borderflowsarecalculatedensuringaleast-costdispatchandanoptimiseduseofinterconnectors.Laterin2017,theintradaymarketswerealsocoupled.TheEUinternalmarketdemonstrateditsabilitytosupportresilienceofpowersystemsduringtheglobalenergycrisis.AsFrancewasfacinghistoricallownuclearoutputsduringthewinterof2022/23,thecountryreliedonimportsfromitsneighbourstoavoidpoweroutages,becominganetimporterforthefirsttimeindecades.AssessingandselectingamodelforChina’snationalspotmarketToexaminehowdifferentmarketmodelscouldimpactthefutureChinesepowersystem,wehavecarriedouttechno-economicanalysisusingtheIEA’sRegionalPowerSystemmodelfortheAnnouncedPledgesScenario(APS)foraone-year“snapshot”in2035.ThenationalvaluesforsupplyanddemandcomefromtheIEA’sWorldEnergyOutlook(WEO)modelandaredisaggregatedintosixregions5withregionaltransmissioninterconnectionbetweenthem(seeAnnexfordetailedmodellingmethodology).Differentsettingsarestudiedtoexploretheimpactofvaryinglevelsofco-ordinationandtradeamongtheregions,includinga“lowco-ordination”optionbasedonhistoricalflowsbetweenregionsandthreedifferentmodelsfornationalmarkets:surplus,north-southsurplusandCETO.Notethatduetothesix-regionrepresentationoftheChinesegrid,co-ordinationwithinregionsiseffectivelyassumedandthustheresultsgiveonlyaconservativeestimateofthefullbenefitofprogressingfromprovince-levelmarketstoanationallyintegratedapproach.Anorth-southsurplusmayberelevantincaseoffullcouplingofprovincialmarketsintheSGCCareawhiletradebetweenSGCCandCSGremainslimited.5NotethatChinacanalsobeconsideredtohavesevengridregionswithasouthwesternregionconsistingofSichuan,ChongqingandTibet.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE48IEA.CCBY4.0.Settingssummaryfordifferentlevelsofco-ordinationamongprovinces/regionsCo-ordinationsettingDescriptionLowco-ordinationLimitedflowsamongregionsbasedonhistoricallevels.SurplusmarketUnitcommitmentdeterminedwithineachofthesixmodellingregionsseparately,dispatchthenallowedtoadjustwithinthestableoperatingrangeofallgeneratorstotakeadvantageoftradingamongregions.North-southsurplusUnitcommitmentsetwithinthe(SGCC)northernand(CSG)southerngrids,dispatchthenallowedtoadjustwithinthestableoperatingrangeofallgeneratorstotakeadvantageoftradingbetweenthenorthandsouth.CETONationallyintegrateddispatchwithflowsoptimisedacrosstheentiresystem.DispatchincorporatingdifferentlevelsofadministrativeallocationofFLHsandeconomicdispatchisalsoexploredtohighlighttheinterplaybetweenChina’smovetowardsmoreeconomicdispatchandtheroleofanationalmarket.HistoricalallocationsofFLHsareusedasareferencepointforpastpracticestounderstandthebenefitsofprogresstowardseconomicdispatchthatarealreadyexpectedbasedontherulesofexistingspotmarketpilots.Apartialeconomicdispatchcaserepresentsthelevelofeconomicdispatchconsistentwiththesetrials,andafulleconomicdispatchcaserepresentsaprogressiontowardsfullmeritorderdispatchinallprovinces.SettingssummaryfordifferentlevelsofpenetrationofeconomicdispatchDispatchsettingDescriptionHistoricalFLHallocationsFLHsconstrainedonthermalgenerationinkeepingwithhistoricaldispatchlevelsforallregions.PartialeconomicdispatchFLHconstraintsonthermalgenerationinthenorthwest,northern,north-easternandeasternregionsonly.Centralandsouthernregionshavefullyoptimisedeconomicdispatch.FulleconomicdispatchAlldispatchdeterminedonaleast-costbasiswithoutconstraintsontheoperatinghoursforanygeneration.Note:FLHs=fullloadhours,alsocommonlyreferredtoascapacityfactor,referstotheoperatinglevelsofaplantoversomeperiodoftime(typically,oneyear)relativetoitsmaximumoutput.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE49IEA.CCBY4.0.Thesesettingsarethenappliedindifferentcombinationstoexploretheimpactofdifferentmarketarrangementswithindifferentcontextsforregionaldispatch.InstitutionaleffortsmaybeadecisivefactorforpreferringamodeloveranotherThequantitativeanalysisperformedevaluatesandcomparesthedifferentmodelsintermsoftheireconomicefficiency,theirabilitytointegraterenewablesandtheircontributiontoreducingCO2emissions.Useoftransmissioncapacitiesandimpactsonimportsandexportsofelectricityforeachregionarealsoassessed.Althoughthesecriteriaalreadyprovidegoodindicatorsofthesocialwelfarepotentialassociatedwithimplementingthesemodels,theyshouldbecomplementedwithotherdecisionfactorstochooseamarketdesignoveranother.Chinesepolicymakersmaywishtoassessimpactsonpricestabilityandsecurityofsupply.Withgrowingconcernsassociatedwiththeeffectsofclimatechangeonpowersystems,criteriaofclimateresiliencearetobeconsideredwhenevaluatingtherobustnessofamodel.Theabilitytoprovidepricesignalsincentivisingflexibilityandnewinvestmentscouldalsobeconsidered,aswellasothersocialaspectssuchasimpactsonemployment.Beyondtechno-economiccriteria,institutionalfactorsandeaseofimplementationmaybemoredecisiveintheChinesecasetoselectamodeloveranother.Especiallywithsecondarymarketarrangements,manyofthebenefitsofanationalmarketwilldependonactionstakenlocally,soitisimportanttoanticipatebarrierstothetransitionatthislevel.Inthiscontext,policymakersmayfavouramovetowardsamarketdesigncompatiblewithexistingset-ups(notablylimitingtheneedfornewinstitutions)andallowingno-regretdecisions(seenextsection:TransitioningtowardsanationalspotmarketinChina).China’smarketreformstodatecanalreadydeliverbenefitsWhilepastpolicysettingsinChinastipulatingadministrativeallocationsofFLHsforgeneratorshadanimportantroleinprovidingtherevenuecertaintytoenablethermalgenerationcapacitybuild-out,thismechanismalsoresultedininefficienciesinpowersystemdispatch.ThemovetowardsMLTcontractshasthepotentialtosupportmoreefficientdispatch,butthisdependsstronglyonthecontractstructure:inparticularwhetherphysicalorfinancialcontractsareused.Inthisrespect,multiplespotmarketpilotsinChinatodayhaverulesthatdictateamovetofinancialCfDsforthermalgenerators,whicharethentofolloweconomicdispatch:Guangdong,Zhejiang,Shanxi,Shandong,Sichuan,GansuandInnerMongolia.WhiletheseprovincesstilltaketheoutputfromsomegeneratorsasaBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE50IEA.CCBY4.0.“firminput”tothedispatch,providedeconomicdispatchisappliedtotheentirecoalfleettheimpactshouldstillbequiteclosetomeritorderdispatch,sincethefirmgeneratorsareeithertechnologieswithlowvariablecoststhatfallearlyinthemeritorder(solar,wind,hydropower,nuclear)orarepresentinsmallshares(gas).InordertoassessthebenefitfortheChinesepowersystemofashifttoeconomicdispatchintheseprovinces,wecompareoperatingcosts,6CO2emissionsandsolarandwindcurtailmentwithour“partialeconomicdispatch”settingtothehistoricalbaselinewithFLHallocationsinallregions.Notethattheseprovincesaredistributedacrossthemodellingregions,sotocapturetheimpactofthepartialmovetoeconomicdispatchtworegionsareselectedwhicharerelativelyadvancedintheirmarkettrialsandcoverasimilarshareofcoalgenerationinthefutureAPSsystem(27%)tothesharecoveredbytheseprovincesin2021(31%).Theintroductionofpartialeconomicdispatchalreadyprovidesareductioninoperatingcostsaround4%intheAPSinChinain2035.Afurthercasewitheconomicdispatchacrosstheentiresystemillustratesthatthiscouldincreasetoan18%reductioninoperatingcostsevenwithoutanyincreaseinco-ordinationandtradeamongtheregions.Curtailmentisalsoreducedfromaround25%withFLHconstraintstoaround24%withpartialeconomicdispatchand12%withfulleconomicdispatch.OperatingcostsandCO2emissionsrelativetoabaselinewithfullloadhourconstraintsinChinaintheAnnouncedPledgesScenario,2035IEA.CCBY4.0.Note:Interregionalexchangesareallconstrainedbasedonhistoricalflowssothatonlyimprovementsinthedispatcharetakenintoaccount.6Inthefigures,theoperatingcostsdonotincludeemissioncosts.0102030405060708090100FLHconstraintsPartialeconomicdispatchFulleconomicdispatch%ofbaselineOperatingcostsCO2emissionsBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE51IEA.CCBY4.0.Increasedregionalco-ordinationcanimprovesystemoperationsundercurrentdispatchingrulesWhilecurrentspotmarketpilotsopenthedoortomoreefficientdispatch,limitedregionalco-ordinationtodayrestrictstheuseoftransmissioninfrastructurewhichalsoleadstoinefficiencies.Inordertounderstandthebenefitsthatincreasedregionalco-ordinationandtradecouldbringinthecontextofChina’scurrentdispatchingrules,wenowcomparethethreedifferentmarketmodels–surplus,north-south(N-S)surplusandCETO–againstabaselinewithhistoricallevelsofregionaltrade.Allcasesusethe“partialeconomicdispatch”settingtoreflectthelevelofeconomicdispatchconsistentwiththerulesofexistingspotmarketpilots.Atthelowestlevelofco-ordination,thesurplusmarketassumesthatunitcommitmentdecisions(whichgeneratorswillbeswitchedonandoff)aremadeattheregionallevel,andthenthemarketallowstradingwithinthestableoperatingrangeofallgenerators.NotethatthisassumptionisstillasignificantadvancefromthesurplusmarketoperatinginChinatoday,asithasfullparticipationfromalltechnologiesandallowsforbi-directionalflowsbetweenregions,withallcommittedplantsparticipatinginthemarketwithintheirstablerange.Increasedtradebetweenregionsunderthismodelallowsfora6%reductioninoveralloperatingcostsintheAPSin2035,aswellasamodestreductioninemissions(2%).Reductionsinoperatingcosts,CO2emissionsandcurtailmentunderdifferentmodelsforregionalco-ordinationundercurrentdispatchingrulesinChinaintheAnnouncedPledgesScenario,2035IEA.CCBY4.0.Note:ReductionsarecalculatedrelativetoabaselinescenariowithinterregionalexchangesbasedonhistoricallevelsanddispatchreflectingcurrentprogresstowardsmarketswitheconomicdispatchinsomeregionsandFLHallocationstakingplaceintheremainder(“partialeconomicdispatch”setting).-16-14-12-10-8-6-4-20SurplusN-SsurplusCETOReduction(%)Curtailment(percentagepoint)OperatingcostsCO2emissionsBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE52IEA.CCBY4.0.Boththenorth-southsurplusmodelandCETOmodelrepresentaveryhighlevelofco-ordinationbetweenregions,withthenorth-southsurplusoptimisingwithinthenorthernandsoutherngridsandonlyretainingsurplustradingbetweenthem.TheCETOmodel,bypursuingavolumecouplingapproach,allowstheflowstobeoptimisedbetweenallregions.Inboththesecases,weseeanoperatingcostsavingofmorethan12%duetoincreasedregionaltrade.Benefitsofthenorth-southsurplusmodelareverysimilartotheCETOmodelwithfullregionaloptimisation,sinceco-ordinationwithintheregionsalreadyprovidessubstantialbenefitandtransmissioncapacitybetweennorthandsouthislimited.Inthesecomparisonsitisimportanttobearinmindthatthemodelrepresentsthebenefitofregionalco-ordinationonlyandco-ordinationamongprovincesinsidetheregionsiseffectivelyassumed.Besidetheindicatorsconsideredhere,increasedco-ordinationacrossprovinceswillbringotherbenefits,notablyreducingreserverequirementswhichwillbecomeincreasinglyimportantforrenewableintegration.Extendingtheapplicationofeconomicdispatchwilldeliverenhancedbenefitsunderallco-ordinationmodelsEveninthecasethatregionalco-ordinationisincreasedunderoneofthemarketmodelsdiscussedinthisreport,realisingthefullbenefitoftheseapproacheswilldependonenablingmoreefficientdispatch,forexamplebytransitioningfromexistingphysicalMLTcontractstofinancialproducts.InordertoillustratethebenefitofenablingeconomicdispatchacrosstheentireChinesepowersystemincombinationwithincreasingregionalco-ordinationandtrade,wenowlookatcostandemissionsimpactsfromashifttobothfulleconomicdispatchandeachofthedifferentco-ordinationsettingsfromthebaselinewithpartialeconomicdispatchandlowco-ordination.Thisanalysisshowsthattheshifttofulleconomicdispatchalonewithoutimprovingtradecansavearound15%ofoperatingcostsinChinaintheAPSin2035.Addingthebenefitsofasurplusmarketbringsthissavingtonearly23%,whichisfurtherimprovedto24-25%underthenorth-southsurplusandCETOmodels.Allcasesalsobringverylargereductionsinsolarandwindcurtailment,whichfallstolessthan3%underallthreemarketmodelscomparedwitharound24%inthelowco-ordination,partialeconomicdispatchbaseline.BuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE53IEA.CCBY4.0.Reductionsinoperatingcosts,CO2emissionsandcurtailmentusingeconomicdispatchunderdifferentmodelsforregionalco-ordinationinChinaintheAnnouncedPledgesScenario,2035IEA.CCBY4.0.Note:ReductionsarecalculatedrelativetoabaselinescenariowithinterregionalexchangesbasedonhistoricallevelsanddispatchreflectingcurrentprogresstowardsmarketswitheconomicdispatchinsomeregionsandFLHallocationstakingplaceintheremainder(“partialeconomicdispatch”setting).Thishighlightsthatwhileregionalco-ordinationhasimportantbenefitsinitsownright,maintainingtheconditionsforeconomicdispatchandextendingthesetoallprovincesremainscriticaltoachieveamoreefficientpowersector.PreventingrenewablescurtailmentthroughprioritisationbringssignificantbenefitsonitsownUnderdispatchbasedonFLHallocationsorphysicalcontracts,renewablesoutputmaybecurtailedtomakeroomforcommittedgenerationwithhigheroperatingcostsandemissions.Toillustratetheimpactofprioritisingrenewablesevenwithoutafulltransitiontoeconomicdispatchorexplicitlyincreasingco-ordination,welookatacasewithpartofthesystembeinggovernedbyFLHallocationscombinedwithprioritydispatchofrenewables.Introductionofprioritydispatchforrenewablesresultsinaround12%savingsinoperatingcostsandarounda14%reductioninemissions.-40-35-30-25-20-15-10-50Lowco-ordinationSurplusN-SsurplusCETOReduction(%)Curtailment(percentagepoint)OperatingcostsCO2emissionsBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE54IEA.CCBY4.0.Reductionsinoperatingcosts,CO2emissionsandcurtailmentwithprioritydispatchforrenewablesinChinaintheAnnouncedPledgesScenario,2035IEA.CCBY4.0.Note:BothcasesincorporateinterregionalexchangesbasedonhistoricallevelsanddispatchreflectingcurrentprogresstowardsmarketswitheconomicdispatchinsomeregionsandFLHallocationstakingplaceintheremainder(“partialeconomicdispatch”setting).Theseresultsillustratethatearlystepstominimiserenewablescurtailmentevenaheadofbroaderreformstodispatchandregionalco-ordinationcanalreadyprovidesignificantbenefits.Regionalexportpatternswillshiftwithincreasedco-ordinationandimplementationofmarket-baseddispatchBothlimitedregionalco-ordinationandadministrativeFLHallocationsleadtoarestrictedusageoftransmissioninfrastructuresinceco-ordinationisrequiredtofacilitateadvantageoustradesbetweenregionsandFLHallocationslimittheopportunityforimports.Asaresult,bothincreasingeconomicdispatchandincreasedco-ordinationinthedevelopmentoftheChinesepowersectorareexpectedtoincreaseinterregionalflows.Thisincludesbothanoverallincreaseinnetimportsorexportsbutalsoabi-directionalincreaseinbothimportsandexportsformostregions.0102030405060708090100BaselineVREpriority%ofbaselineOperatingcostsCO2emissionsBuildingaUnifiedNationalPowerMarketSysteminChinaDesigninganationalspotpowermarketsupportingChina’spolicyobjectivesPAGE55IEA.CCBY4.0.AnnualimportsandexportsbyregionunderdifferentdispatchingpracticesandmarketarrangementsIEA.CCBY4.0.Notes:CR=Centralregion;ER=Easternregion;NCR=Northern-centralregion;NER=Northeastregion;NWR=Northwestregion;SR=Southernregion.Lowmarketco-ordinationisrepresentedbyinterregionalexchangelimitsbasedonhistoricallevels.Suchincreasesinbi-directionalflowsreflectanadditionalbenefitleveragedfromexistingtransmissioninfrastructureparticularlyunderincreasingrenewablespenetration,allowingregionstoexportduringperiodsofabundantrenewablessupplyandimportthelowest-costavailablegenerationduringperiodsoflowrenewablesoutputand/orhighdemand.Thecurrentarrangementswithunidirectionalcontractsbetweenprovinces/regionsrepresentasignificantopportunitycost.-1000-800-600-400-20002004006008001000CRERNCRNERNWRSRCRERNCRNERNWRSRCRERNCRNERNWRSRCRERNCRNERNWRSRCRERNCRNERNWRSRLowco-ordination(historicalFLHallocations)Surplus(historicalFLHallocations)CETO(historicalFLHallocations)Surplusmodel(fulleconomicdispatch)CETOmodel(fulleconomicdispatch)Annualflows(TWh)ImportExportBuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE56IEA.CCBY4.0.TransitioningtowardsanationalspotmarketinChinaChinacouldachievethegoalofthecurrentroundofreformsthroughtheimplementationofvariousspotmarketmodelsincomplementtofurtherdevelopmentswithothermarkets(MLT,ancillaryservicesandreal-timemarkets).Asinstitutionaleffortsmaybeakeyfactorinselectingamodel,itisproposedtoimplementasecondarymodelwithanationalmarketthatinterfaceswiththeexistinglocalmarkets.ItisacknowledgedthattheCSGismakingprogresstointegrateallprovincesinitsgridareaunderasinglemarket,basedonGuangdong’sprovincialmarketmodel.Therefore,theco-ordinationeffortsrequiredbythesecondarymarketwilltakeplacebetweenthissouthernregionalmarketandtheprovincialmarketsintheSGCCgridarea.Thissectionwillthusconsiderindistinctivelythesouthernregionalmarketandtheprovincialmarketsaslocalentities.Thissecondarymarketcouldbeasurplusmarket,throughanextensionoftheSGCCinterprovincialspotmarket,oramoreadvancedvolumecouplingmodel(theCETO),asbothleaveopenthepossibilitytofurtherintegratemarketsandestablishaprimarymarket.ThissectionpresentspathwaystofirstdeployanationalsurplusmarketbeforelaterimplementingaCETOmodel,andpossiblyaprimarymarket.Asthenationalspotmarketwillrequirestrongco-ordinationbetweenthelocalentitiesandthenationallevel,specialattentionisgiventotheroleofnationalinstitutions.ImplementingasecondarymarketmodelAsecondarymarketmodelenablesintegratingexistingandfuturemarketswhilegivingtimetoaddressbarrierstomarketsImplementinganintegratednationalmarketinChinamayfacemanyobstaclesandtakealongtime.Forexample,fullcompetitionamonggeneratorsmayrequirerestructuringofthemarket.Ontheotherhand,anationalmarketbasedonasecondarymodelcandeliverquickbenefits.AsecondarymarketmodelmeetstherequirementsofDocumentNo.118andallowsthegradualtransitionfromthecurrentstateofplayinsideprovincesandregions.Byfollowingamultilayermarketapproach,italsoembracesthefive-leveldispatchprotocolinplaceinChina.TheinterfacebetweenlocalandnationalBuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE57IEA.CCBY4.0.marketsunderasecondarymodelhastheflexibilitytoenableprovincestoachieveattheirownpacetherequiredchangestoefficientlyintegratewiththenationallevel,suchasphasingoutadministrativeallocationofhours,creatingorexpandingapplicationoflocalspotmarkets,andadoptingflexibleinterprovincialagreements.Inthemeantime,provincescangraduallybecomefamiliarwithshort-termtradingofelectricitywithoneanother.Astheybecomemorecomfortablewithtrading,localentitiescangraduallyincreasetheirparticipationinthemarketandtakeadvantageofthebenefitsitprovides.Asecondarymarket(surplusorCETO)requiressomeco-ordinationandharmonisationbetweentheconnectedentities.Theseneedtoharmonisetheirapproachtooperationalsecurityaswellastransmissioncapacityallocationandcongestionmanagement.Thecalculatedavailabletransmissioncapacities(ATC)atthebordersbetweenoneanothermustbeshared,andbi-directionalinterconnectorflowsmustbeallowed.Existingbilateralcontractsbetweenprovincesshouldbeharmonised.Acommon,transparentmethodologytocalculatewheelingchargestocompensatetransmissionownersoftransitareasisalsoneeded.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE58IEA.CCBY4.0.SGCC’sinterprovincialspotmarketTheinterprovincialspotmarketcoverstheSGCCgridarea.InNovember2021,SGCCissuedtheProvisionalRulesforInterprovincialSpotTrade.Beforethisregulation,spottradingbetweenindividualprovinceswasallowedonlyforsurplusofrenewablepoweraspartoftheSGCCpilotmarketlaunchedin2017(providedthatthetradingprovincesbelongedtodifferentregions).Thenewrulesexpandthegeographicalscopeofthemarket,andallowalltypesofpowersources(includingnuclearandthermal)tobetradedontheinterprovincialspotmarket.MarketfeatureDescriptionSimplifiedzonalgridmodelEachprovincecorrespondstoone“tradingnode”inprinciple,withtheoptionofinternalsplitsincaseoflocalcongestion.Sichuan,JiangsuandGansuhavetwonodeseach.MarketparticipationOpenedtogenerators,powergridscompanies,retailersandpowerusers.Thelattercanparticipatedirectlyintothemarketorthroughtheintermediaryofgridcompaniesinaninitialstage.Participationtothemarketisrestrictedinnodesshowingtightsupplyanddemandbalance(nopowercanbesold)andinnodeswithsurplusofVRE(nopowercanbebought).MarkettradingfrequencyDay-aheadtradingtakesplacewitha15-minuteresolutionfortheexecutionday.Intradaytradingtransactionsoccur12-timesadayforthenexttwohours.TransmissioncapacityDeterminedbasedonremainingcapacityafterMLTcontractsanddirectdispatch.TransactiondeclarationMarketentitiesdeclarecurveorderswitha15-minutesresolution.QuotationrangemustbebetweenCNY0perkilowatt-hour(kWh)andCNY10000/kWh.MarketclearingTheclearingprocedurefollowsacentralisedbiddingwithaconversionofpurchasebidsaccordingtotransmissioncostsanda“principleofdecreasingpricedifference”.Provinceswithapilotspotmarketperformapre-clearing(andthosewithoutperformpre-planning)beforetheNationalDispatchCentreclearstheinterprovincialmarket.Interprovincialmarketclearingresultsaretreatedasboundaryconditionsbyprovincialspotmarkets.TransmissionpricingCalculatedbyaddingtransmissionchargesofinterprovincialalternatingcurrent(AC)anddirectcurrent(DC)corridorsandprovincialones.Transactionsfeesarechargedaccordingtotheactualtradedvolume.Source:IEAsummaryfromSGCCrulesandinformationsharedbyNorwegianEmbassyinBeijing.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE59IEA.CCBY4.0.Extendingtheinterprovincialsurplusmarkettowardsanationalsurplusmarketisano-regretmoveforthefutureAsecondarymarketcanbuildonexistingstructuresandenablesresourcesharingbetweenlocalentitieswithoutcompromisingtheabilitytomovelatertomoreintegratedmarketmodelssuchasaprimarymarket.MeetingtherequirementstodeployasurplusmarketalsohelpscreatethefoundationneededforestablishingmoreadvancedtargetmodelssuchastheCETOoranintegratedmarket.Anotherbenefitofasecondarymarketisthatitcanbeimplementedquicklyatasmallscaleandexpandedovertime.Onceasecondarymarketisestablishedandstakeholdersarefamiliarwithitsfunctioning,thereisroomforaddingmoreparticipantsandimprovingperformancegradually.Moreco-ordinationinhowtomanageinterfaces(suchascalculationofATCandplansfortransmissioninfrastructureexpansion)willbenefitthesystembutarenotrequiredatfirst.TransitionpathwaystowardsanationalspotmarketIEA.CCBY4.0.Note:Therecommendedpathwayisindicatedbytheplainarrows.Moredirectupgradesasrepresentedbythedashedarrowsarepossible.Theminimumrequirementsarethefollowing.Thenational(secondary)marketwillhavetobeestablished,asanexpansionofthecurrentsurplusmarket,withtransparentrules,amethodologyforwheeling(transit)charges,andamechanismforsettlementanddisputeresolution.Ensuringtransparentandnon-discriminatoryuseofinterconnectionsneedsspecialattention.Pre-requisitesarepermittingbi-directionalinterconnectorflows,sharingofATC,andallocationofATCtoMLTcontracts,aswellasallowingthird-partyaccess.Thetradingplatformsandassociatedinformationtechnology(IT)infrastructurewillneedtobedeployedandbesupportedbyacommonandsecuremethodtosharedataandinformation.Attheprovinciallevel,harmonisationofpoliciesandregulationsisrequired,inparticularthosethatrelatetooperationalsecurityanduseofinterconnections.Harmonisationofbilateralinterprovincialcontractsalsofacilitatescooperationandfurthertechnicalco-ordination.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE60IEA.CCBY4.0.Amarketoperator(MO)–preferablyindependent–willneedtobedesignated.ThiscanbeanationalMOoracooperationamonglocalMOs,similartothesituationinEuropewheremandatedpowerexchanges(the“NEMOs”)taketurnsrunningtheday-aheadandintradaymarkets.TheMOreceivesordersfrommarketsparticipants,overseesthematchingandallocationofordersaccordingtotheNDAMresults,publishesprices,andactsasacentralclearingpartyforclearingandsettlement.Aregulatoryauthoritywillbeneededtomonitorthemarketandparticipantsbehaviours.BoththeMOandregulatorensurethatthemarketoperatesinatransparentandsecuremanner.StrengtheningofinterconnectionbetweentheSGCCandCSGdomainswillalsobeneeded.Onlytwotransmissionlinesexisttoday(Hubei-GuangdongandFujian-Guangdong),whichiskeepingthetwogridsrelativelyisolatedfromeachother.FurtherinvestmentsintotransmissioninfrastructurewillcontributetotheintegrationoftheSouthernRegionUnifiedMarketintothenationalsurplusmarket.Afterasurplusmarketisdeployed,transitiontowardstheCETOmodelrequiresmoderateadaptations.ToachievetheCETOmodel,implementingimplicitauctionandpre-clearingoftheNDAMisnecessary.Thetechnicalfunctioningofthenationalmarketisnotdrasticallydifferentfromthesurplusmarket,exceptforthesequencebetweenthenationalandlocalmarketsandtheneedforimplicitallocationoftransmissioncapacity.Ontheotherhand,thereisastrongerroleoftheregulatortoensurethatlocalmarketscomplywiththeoutcomeofthenationalmarkettomaximisetheuseofinterconnectors.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE61IEA.CCBY4.0.MinimumrequirementsforestablishinganationalsurplusmarketandmainchangesfortransitiontoCETOandprimarymarketmodelsSecondarymodelsPrimarymodelSurplusCETORoleofnationalinstitutionsEstablishordesignateanationalMO(whichtakesonthecentralclearingpartyfunction)andamarketregulatorReinforceroleofregulatortosupervisecomplianceofprovincestoNDAM’sclearingoutcomesReinforceroleofregulatortomonitormarketparticipantscompetitionDesignofanationalmarketandclearingalgorithmExtendordesignsurplusalgorithmUpgradeclearingalgorithmtosolvecombinedflowoptimisationproblemUpgradeclearingalgorithmtofullmarketcouplingNationalmarketrulesTransparentmarketrules,methodologyforwheeling(transit)charges,andmechanismforsettlementanddisputeresolutionEstablishregulationsofvolumecouplingEstablishnationaltransmissionpricingcongestionrentTradingplatformandITinfrastructureEstablishacommon,securemethodfordatasharingandcorrespondinginfrastructureEnablehighervolumesofdatatransfersEnablesignificantlyhighervolumesofdatatransfersLocalmarketsclearingHarmonisetimingoflocalmarketclearingtoprecedeNDAMSwitchsequencetoclearingafterNDAM.NDAMclearingresultasfirminputforlocalmarketclearingCanexistbutnotnecessaryParticipationandbiddinginnationalmarketLocalmarketparticipantssendestimatedexcessvolumestotheNDAMProvinceswithspotmarketsubmittheirnetpositionstoNDAM.MarketparticipantsfromprovinceswithoutspotmarketcanbiddirectlyinNDAMEstablishaprocesswhereallmarketparticipantscanbidtotheNDAMCalculationofATCanduseofinterconnectorsPermitbi-directionalinterconnectorflows,allowthird-partyaccess,increaseharmonisationandco-ordinationofATCcalculationsImplementimplicitauctionforoptimisationoftheallocationofATCHarmoniseATCcalculationmethodologyEconomicdispatchwithinprovincesVoluntaryVoluntarybutprovinceswithoutEDmayexperiencesub-optimalgainsEDassumedGridcodesandstandardswithinprovincesHarmonisegridcodes(operationalsecurityanduseofinterconnectors)andcross-provincialcontractsProduceanupdatednationalgridcodeFurtherharmoniserulestocreatealevel-playingfieldNotes:ED=economicdispatch.Forthenationalsurplusmarket,theminimumrequirementsarelisted.FortheCETOandprimarymarkets,themarginalupgradesarelisted.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE62IEA.CCBY4.0.ReinforcingnationalinstitutionsforanationalmarketAlthoughthedeploymentofanationalspotmarketwillbenefitChina,somestakeholdersmayhaveconcerns.Thus,strongcentraldirectiveswillneedtobecomplementedbyengagementofstakeholders.Attimes,top-downdecisionswillbenecessarytobalancetheinterestsandrolesofthevariousstakeholdersinvolved.BenefitsofanationalmarketdependonthecapacityofthenationalregulatorCentralinstitutionsplayakeyroleinpowersectorreformsinChina.TheNDRCandNEAareleadingthereformsthroughdeliveryofframeworkpolicies.ThedesignofmarketsislargelyundertheresponsibilityoftheNEA,althoughitcanbedevelopedincooperationwithordelegatedtogridcompaniesandresearchinstitutes.However,thedesignchoicesaretobeapproved(ordenied)byandeventuallyownedbytheNEA.Movingforwardwillrequiregivingalargeroleandcapacitytotheregulator.ThecurrenttradinglandscapeinChina,withweaklyornon-connectedmarketsandadministrativemechanisms,makesmarketoversightcomplicatedandputsgeneratorsinastrongpositiontokeepwholesalemarketpriceshigh.Toaddressthisissue,theimplementationofaregulationsimilartotheEuropeanUnion’sRegulationonWholesaleEnergyMarketIntegrityandTransparency(REMIT)maybeconsidered.REMITwasintroducedin2011toimprovethemonitoringandregulatoryoversightoftransactionswithwholesaleenergyproducts.Theregulationisbasedonfourprinciples:transparency,integrity,monitoringandco-operation,withtheaimofincreasingtransparency,marketintegrityandconsumerprotection.ACERisresponsibleformonitoringenergytradingoperationstodetectandpreventtradingbasedoninsideinformationandmarketmanipulation,andthecostofACER'smarketmonitoringandsurveillanceactivitiesarefinancedthroughafeeimposedonmarketparticipants.SimilartoEuropewheretheregulatorsoftheinterconnectedentities(thenationalregulatorsofthememberstates)keeparoleinmarketmonitoring,theprovincialregulatorscanalsoplayaroleinmonitoringthelocalmarkets.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE63IEA.CCBY4.0.OrganisationsleadingpowermarketreformsinChinaTheNationalDevelopmentandReformCommission(NDRC)servesasthemainreformbody,issuingguidingdocumentsandsettingthedirectionforthereforms.VariousdepartmentssuchastheDepartmentofPrice,theBureauofEconomicOperationsAdjustment,andtheDepartmentofEconomicSystemReformhavespecificresponsibilitiestokeeppowerpricesfairandstable,ensurereliableandaffordablepower,monitorindustryimpacts,andprovideactiveguidanceduringpilots.TheGeneralOfficeoftheNDRCprovidescross-departmentco-ordination,whileprovincialdevelopmentandreformcommissionshavelocalpricingregulationandenergydivisions.TheNationalEnergyAdministration(NEA)isresponsiblefordraftingandimplementingreformpoliciesandlegislations.NEAdepartments–RenewableEnergydepartment;Electricitydepartment;ReformandLegislationdepartment;andMarketsandRegulationdepartment–eachhavetheirrespectivemandatetocreaterenewableenergypolicies,monitortheeconomichealthofthermalfleetandgridcompanies,turnreformsintolawandenforcethem,designmarketsandregulation,releasemarketrules,andoverseemarketoperations.TheNEAalsohasregionalandprovincialbranchoffices.TheState-ownedAssetsSupervisionandAdministrationCommissionoftheStateCouncil(SASAC)doesnothaveadirectroleinpolicymakingbutcaninfluencereformsiftheyaffecttheeconomichealthofstate-ownedenterprises(SOEs).TheMinistryofIndustryandInformationTechnologyalsodoesnothaveadirectroleinpowerreformsbutcaninfluencethemiftheythreatenindustrialdevelopmentgoals.Attheprovincialandregionallevels,thedevelopmentandreformcommissions,responsibleforlocalGDPgrowthandplanningandpermittingfornewassets,oftenplayasignificantroleinimplementingprovincialpilotsduetotheirpossibleimpactsonGDPandjobs.Thetwogridcompanies,StateGridCorporationofChina(SGCC)andChinaSouthernPowerGrid(CSG),alsoplayasignificantrole.Theyhaveresearchinstitutesthatsupportmarketreformsanddesignsincooperationwiththinktanksanduniversities.Theirlocalsubsidiariesalsohavespecificroles.ExchangescentresweregivenresponsibilityforMLTtrade.Provincialandregionaldispatchcentresdirectlyinfluencespotmarketrules,giventheirresponsibilitytomatchgenerationdispatchwithcontractsandadministrativeallocation.Source:YiyanCao,RuosdiaLin,BingqiLiu,ZiheMeng,andDanielWetzel(2019).TrackingChina’sProvincialSpotMarketDesigns.BuildingaUnifiedNationalPowerMarketSysteminChinaTransitioningtowardsanationalspotmarketinChinaPAGE64IEA.CCBY4.0.AddressingstakeholderconcernsthroughtransparentconsultationsAlthoughwidelybeneficialtoChina,themovetowardsspotmarketsraisesconcernsamongmanystakeholders.Themoregranularandvolatilepricesignalofafullyfunctioningspotmarketwillaffectthesupply-demandbalanceanddecision-makingofgeneratingcompaniesandinvestors.Thecreationofanationalmarketwillalsochangetherolesofstakeholders.Inparticular,provinceswillneedtooperatewithinaframeworkofnationalguidelinesandgridcompanieswillneedtofollowthedirectionofmarketoperatorsandregulators.Anotherfactorthatwillaffecttheeffectivenessofmarketsisthelinkbetweenpowermarketsandsystemplanning.Inamarket-basedpowersystem,planningcanbeconsideredasanessentialinformationchannelbetweenpolicymakersandmarketparticipants,deliveringinformationonthesystemneedstomeetthepolicyobjectivesasaguideforcompetitivestakeholderstomaketherightdecisions.ThecurrentprocessfortransmissiongridplanninginChinaisstronglylinkedwiththeapprovalfornewplantsandtheexpectedutilisationrate.Inamarket-basedenvironmentwithahighshareofVRE,theflowswillvarymoreandtheplanningprocesscanbeadaptedtocapturefasterthebenefitsofmarketsoverlargeareas.Thefeatureofsuchanadaptedprocessmaybetobemadesystem-wideandbasedonaprobabilisticassessment.Goingaheadwiththereformswillrequireacentralentitytotaketheleadoftheprocesswhilemakingsureconflictsofinterestareminimised.Globalexperienceshowsthatintegrationisoftenhamperedbytheabsenceofstrong,enablinginstitutions.Givenitsmandateandindependence,theNEAisbestpositionedtoplaythisroleandprovideregulatorycertainty.Openconsultationswithallstakeholderswillallowgatheringthenecessaryexpertisewhilealsoconsideringallconcerns,andeventuallyincreasethebuy-inoftheoutcome.Thisprocesscanbeinitiatedtosupportthenewdesign(s)butcanbeconsideredwithtohaveapermanentexistenceasmarketrulesmayrequireupdatesperiodically.Thisway,stakeholderswillalsobeallowedtoprovidefeedbackcontinuously.BuildingaUnifiedNationalPowerMarketSysteminChinaRecommendationsPAGE65IEA.CCBY4.0.RecommendationsNationalco-ordinationofthepowersectorChina’smarketreformstodatehavemadesignificantachievements:successfullyraisinginvestmentsandrecentlyintroducingincreasedcompetitionbetweencoal-firedplantsandimprovingtheenvironmentalattributesofthepowersector.Muchoftheprogressinthe2015reformhasfocusedontheprovinciallevel.DocumentNo.118in2022recognisedthatbetterco-ordinationamongprovincesandregionsholdsthepotentialtodeliversignificantimprovementsinpowersectorefficiency.Awell-functioningnationalmarketcancontributetoefficientuseofresourcesacrossthecountryduringtherapidenergytransitionrequiredtomeetthedualcarbongoals.Thepreservationofprovincialautonomyanddiversityofprovincialpowerdispatchprocessespresentobstaclestotheestablishmentofafullyintegratedprimarynationalmarket.Inthisrespect,secondarymarketmodelsexploredinthisreport,namelythesurplusandCETOmodels,havetheadvantageofharvestingquicklythelargestpartofthereformbenefits.ThesesecondarymodelsprovideChinawithoptionstoaccessthebenefitsofimprovedco-ordinationofresourcesacrossthecountrywhileretainingprovincialautonomy.Thisalsoallowsthesouthernregionalpowermarkettocontinueitsdevelopment.AnumberofpolicyrecommendationscanhelpChinatoimproveco-ordinationatthenationallevelwithintheframeworkofsecondarymarketmodels:Anationalsurplusmarketbuiltonthefoundationoftheexistinginterprovincialspotmarketcanbeano-regretmoveenablinglaterfurtherintegration.Provincialmarketsmaypreservemostoftheircurrentfeaturesandparticipationoftheirresourcesinthenationalmarketcanbeachievedinanumberofwaysenablingagradualincreaseintransactions.Whilebuildingontheexistingsetup,thismodelalsoenablesmoreadvancedintegrationmodelsatlaterstages.Astrongnationalregulatorybodyisneededtosupervisetheimplementationofnationalmarkets.Strongnationalinstitutionscanacceleratetheimplementationofanationalmarket.Transparentandunbiasedchoicesareneededinthedesignofthemarket,andonceimplemented,asupervisionofthemarketwillberequired.Co-ordinationandguidanceofprovincialmarketsalsogrowsinimportanceastheprospectsofintegratingmarketsincrease.Furtherco-ordinatenation-wideplansandoperationalprotocols.Independentnationalinstitutionsmayneedtotakeastrongerstanceandfavourconvergenceofpractices.Thisgoesfromsystemplanningtodesignoflocalmarkets.MoreBuildingaUnifiedNationalPowerMarketSysteminChinaRecommendationsPAGE66IEA.CCBY4.0.interconnectionsbetweenadjacentprovinceswillbebeneficial.Furtherthoughtsonhowtobringallprovincial/regionaldesignsclosertogethermaybeneeded.Cross-provincialand-regionaltradescanbemademoreflexible.Moreflexibilityinthesearrangements–theiroriginaldefinitionandenablingchangesclosetoreal-time–willrequireco-ordinationbetweenthemechanismsandadaptingoperationalprotocols.Thiswillalsoincreasetheuseofexistinginterconnectionsthankstoadditionaltradesclosertorealtime.Transmissionpricingmechanismscanbeimprovedandharmonisedtoavoid“tariffpancaking”andpromoteinterprovincialtrading.Thecurrentenergy-basedinterprovincialtransmissionpricingmechanismhasshownlimitedefficiencyinincentivisinginterprovincialtransactions.Moreover,accumulationofchargesacrossmultipleregionsorprovincescandiscouragetransactionsthatwouldhavebeenotherwiseefficientforthesystem.AstheChinesenationalmarketbecomesmoreintegrated,transmissionchargesmaychangetocongestionrents.ThisisthecaseintheEuropeanUnionwheretransmissionsystemoperatorsreceivecongestionrentsthroughauctionsforcross-bordercapacityrights,whilenotransmissionfeesapplytointerconnectorssoastomaximisetheiruse.Inaddition,itisessentialthattransmissionchargesarede-correlatedfromcommercialtransactions.Planningofthepowersectorcanbefurtherarticulatedaroundmarkets.Planningshouldprovidetheframeworkunderwhichpowermarketsoperate,takingasessentialinputsnationalpolicyobjectivesandexistingmarketdesigns.However,lettingadministrativeplanningplayaleadingroleinguidinginvestmentsandpowersystemoperationscanresultinsub-optimalinvestmentdecisionsandovercapacity,whichinreturnmayrequiremarketdesign’sadjustments(e.g.throughcapacitypaymentstocoalplants).Thus,enhancingtheroleofpowermarketsoverplanningwillbecrucialtodetermineinacost-efficientmannerthesolutionsandtechnologiesneededtowardsdecarbonisationgoals.AdvancingregionalandprovincialmarketsUndersecondarystructuresforthenationalpowermarket,thestatusoflocalmarketarrangements(provincialandregional)willremaincriticaltotheefficiencyoftheChinesepowersector.SpotmarketpilotsinChinatodayalreadyprovideanumberofgoodexamplesofhowlocalarrangementscancontinuetoevolveinthecomingyears.Applyinganumberofkeyprincipleswillallowthesemarketstoworkinconcertwithincreasingnational-levelco-ordinationtodeliverthebestoutcomefortheChinesepowersectorasawhole:Maximiseparticipationinlocalspotmarketstoimprovepricesignalsandachievemoreefficientdispatch.Tothisend,itisessentialtoenableanequalparticipationinspotmarketsofallmarketplayers,onbothgenerationandsupplysides,includingdistributedrenewables,storageanddemandresponse.Thiscanhelplimitimbalancescausedby“dualtrack”structures.Moreover,largebenefitsBuildingaUnifiedNationalPowerMarketSysteminChinaRecommendationsPAGE67IEA.CCBY4.0.comefrommovingtowardsmarket-drivendispatchinprovinces,evenbeyondthoseofestablishinganationalspotmarket(improvedefficiency,reductionofoverallcosts,betterintegrationofrenewableenergy).Therefore,inparallelwiththestepstoimplementthenationalmarketsystem,economicdispatchshouldbepromoted.Inthelongerterm,increasingsharesofVREmaybeanaturaldriverforacceleratingdeploymentofshort-termmarketsandparticipationfromVRE,asthebenefitsassociatedwithshort-termmarketsignalsadaptedtomoreflexibleoperationsbecomeincreasinglyevident.Continuethemovetowardsaliquid,competitiveMLTmarketwithfinancialcontractsandminimisetheimpactofphysicalcontractsonspotmarketfunction.Thisisofparticularimportanceconsideringrecentpolicyrequiringlargeconsumerstosecure90%oftheirpreviousyear’sconsumptionthroughMLTcontracts,which,ifphysical,couldgreatlylimittheroleofprovincialspotmarkets.ExpandingtheuseoffinancialMLTcontracts,ashavebeenintroducedaccordingtothespotmarketrulesforChina’sprovincialgrosspoolspotmarkets,cansubstantiallyimprovetheefficiencyoftheChinesepowersectorandreduceemissions.Creatingasetofstandardproductswillhelpimproveliquidity.Wherephysicalcontractstructurespersist,increasingtheirtimescalegranularity(withweeklyandmulti-daycontracts)canhelpbridgethegapwithspotmarketsbybetterreflectingthefuelpricedynamicsofpowerplants.Inaddition,itisrecommendedtograduallyincreasetherangeofpricefluctuationofMLTcontracts(currentlysetat+/-20%aroundthebenchmarkpriceforcoalpower)andeventuallyremoveanyrestrictiontoenableMLTpricestograduallyconvergetowardslong-termtrendsofspotprices.ComplementMLTandspotmarketswithancillaryservicesandreal-timemarkets.AlthoughMLTandspotmarketswillconstitutethebulkofthetradeinenergy,keepingthesystemstableandinbalancewillrequireeffectivemarketsforregulationandbalancingsupplyanddemandatalltime.Thesemarketscanbeinitiallyestablishedatthelevelofthelocalmarkets.Providedthenecessarytransmissioncapacityallocationmechanismsareputinplace,furtherefficiencycanbeobtainedbyestablishingthesemarketsatthelevelofthegridarea(SGCCandCSG).Properlycompensateavailablecapacitywithoutdistortingmarketsandcontraveningclimategoals.Renewableswilltakeagrowingroleandpeakpricesonspotmarketsmaynotbesufficienttocompensatethermalpowerplantsforreducedoperatinghours.Thus,transitionmechanismsaretobeconsideredforlegacythermalplants.AfirststepinthisdirectionwastherequirementforgeneratorstomovetoMLTmarkets.Morerecently,DocumentNo.118letthedooropentoseveralsolutionsforfuturecostrecoverymechanisms,suchascapacitycompensationmechanism,capacitymarket,andscarcitypricing,whichshouldbeestablishedaccordingtolocalconditions.Someprovinceshavealreadyproposedorexperimentedwithcompensationschemes,withaper-kWhcapacitypaymentforcoalplantsparticipatinginthespotmarket(Shandong),orthrougha“two-part”tariff(basedonkilowatt-hoursandkilowatts)forgas-firedpowerplantsBuildingaUnifiedNationalPowerMarketSysteminChinaRecommendationsPAGE68IEA.CCBY4.0.(Shanghai,Zhejiang,Jiangsu).Whenintroduced,CRMsshouldbecarefullydesignedtotargetonlyspecificassetsactuallyusefulforthesystemandcompatiblewithdecarbonisation.Inthatpurpose,theyshouldalsobeopentoallprovidersofcapacity,includingstorageanddemandresponse.CRMsshouldnothinderparticipationoftheseassetsonspotmarketsnorleadtopricedistortion,withgeneratorsbiddingbelowtheirmarginalprice.Ifputinplace,itisrecommendedtopromotemarket-basedCRMswhichremunerateavailablecapacitybasedonactualperformance,toincentiviseflexibleoperationwhenthesystemneedsarethehighest.Competitionthroughauctionscanalsoallowidentifyingthecheapestresources.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE69IEA.CCBY4.0.AnnexModellingmethodologyToexaminehowdifferentmarketmodelscouldimpactthefutureChinesepowersystem,wehavecarriedouttechno-economicanalysisusingtheInternationalEnergyAgency(IEA)RegionalPowerSystemmodelfortheAnnouncedPledgesScenario(APS).Theanalysisfocusesonaone-year“snapshot”in2035toreflectthebenefitsofpowersystemreformsthatcanberealisedwhenChinaisrelativelyadvancedinitsdecarbonisationpathway.ThenationalresultsforsupplyanddemandcomefromtheIEAWorldEnergyOutlook(WEO)modelandaredisaggregatedintosixregionswithregionaltransmissioninterconnectionamongthem.Differentcasesarestudiedtoexploretheimpactofvaryinglevelsofco-ordinationandtradeamongtheregions.Dispatchincorporatingdifferentlevelsofadministrativeallocationoffullloadhours(FLHs)andeconomicdispatchisalsoexploredtohighlighttheinterplaybetweenChina’smovetowardsmoreeconomicdispatchandtheroleofanationalmarket.Representinglevelsofregionalco-ordinationFourdifferentoptionsforregionalco-ordinationandtradearerepresentedwithincreasinglevelsofco-ordinationamongtheregions.Notethatthemodelconfigurationisillustrativeonlyofthedynamicscomingfromdifferentlevelsofmarketintegration.Duetothesix-regionrepresentationoftheChinesegrid,co-ordinationwithinregionsiseffectivelyassumedandthustheresultsgiveonlyaconservativeestimateofthefullbenefitofprogressingfromprovince-levelmarketstoanationallyintegratedapproach.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE70IEA.CCBY4.0.Casessummaryfordifferentlevelsofregionalco-ordinationCo-ordinationcaseDescriptionLowco-ordinationLimitedflowsbetweenregionsbasedonhistoricallevels.SurplusmarketUnitcommitmentsetwithineachofthesixmodellingregions,dispatchthenallowedtoadjustwithinthestableoperatingrangeofallgeneratorstotakeadvantageoftradingbetweenregions.North-southsurplusUnitcommitmentsetwithinthenorthernandsoutherngrids,dispatchthenallowedtoadjustwithinthestableoperatingrangeofallgeneratorstotakeadvantageoftradingbetweennorthernandsouthern.CETONationallyintegrateddispatchwithflowsoptimisedacrosstheentiresystem.RepresentingdispatchingpracticesSinceincreasedeconomicdispatchisalargesourceofpotentialvaluefromChina’smarketreform,wealsorepresentseveraldifferentdispatchapproachesinthemodelling.ThefirstoptionrepresentsthehistoricalapproachofadministrativelyallocatedFLHsacrossalltheprovinces.ThisprovidesabaselineagainstwhichtoobservethefuturebenefittobeexpectedfromthereformsChinahasalreadycompleted,andisusedtofixtheelectricityflowsbetweenregionsforallcaseswithhistorically-basedtrade.Second,inlinewithcurrentprogressinmarketreformwherethemarketrulesforcertainprovincesprovideforashifttofinancialcontractsandeconomicdispatchforthermalgeneration(Guangdong,Zhejiang,Shanxi,Shandong,Sichuan,Gansu),weincludeacasewheresomeregionsonly(centralandsouthern)havetransitionedtoeconomicdispatch.Thisregionselectionisdesignedtocoverashareofthermalgenerationin2035(27%)similartotheshareofthermalgenerationthatshouldbecoveredbyfinancialcontractsin2021(30%)sincetheprovincesaredistributedacrossthemodellingregionsandcannotbedirectlyrepresentedintheregionalmodel.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE71IEA.CCBY4.0.CasessummaryfordifferentlevelsofeconomicdispatchDispatchcaseDescriptionHistoricalFLHallocationsFLHsconstrainedonthermalgenerationinkeepingwithhistoricaldispatchlevelsforallregions.PartialeconomicdispatchFLHconstraintsonthermalgenerationinnorth-western,northern,north-easternandeasterregionsonly.Centralandsouthernregionshavefullyoptimisedeconomicdispatch.FulleconomicdispatchAlldispatchdeterminedonaleast-costbasiswithoutconstraintsontheoperatinghoursforanygeneration.Note:FLH=fullloadhoursandreferstotheoperatinglevelsofaplantoversomeperiodoftimerelativetoitsmaximumoutput.ThepartialeconomicdispatchcaseisintendedtobroadlyreflectthedispatchpracticesexpectedinChinatodaybasedonrulesofthecurrentspotmarketpilotsintheprovinceswithfinancialcontracts.Notethatwhilethesetrialsstillallowforsomegenerationtypestobetakenasfirminputstothedispatch,sincethesearetypicallyfirstinthemeritorder(solar,wind,hydropower,nuclear)orpresentinverylowshares(gas),thedispatchcouldnonethelessbeexpectedtocomeveryclosetoafulleconomicoptimisation.Theco-ordinationcasesanddispatchcasesdescribedabovearethenusedtogethertoproducedifferentcombinedcasestoillustratethepotentialbenefitsofreforminbothaspects.ToensurethatchangesintheFLHdonotimpacttradeinthe“lowco-ordination”case,notethattheinterregionalflowsfromthecasecombininglowco-ordinationandhistoricalFLHallocationsareusedacrossbothpartialandfulleconomicdispatchcaseswithlowco-ordination.Ifnotsetinthismanner,thenthemovetopartialeconomicdispatchwouldresultalsoinincreasedtrade,whilethecurrentmarkettrialsareattheprovincelevelonlyanddonotimplyincreasedtradebetweenregions.Thisapproachalsoallowsthebenefitsoftradeandeconomicdispatchtobeseparatedanalytically.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE72IEA.CCBY4.0.CombinedcasesusedfortheanalysisCasedescriptionCo-ordinationlevelDispatchsettingFullloadhourconstraintswithlowco-ordinationHistoricalexchangesFLHconstraintsinallregionsPartialeconomicdispatchwithlowco-ordinationHistoricalexchangesFLHconstraintsinselectedregionsEconomicdispatchwithlowco-ordinationHistoricalexchangesEconomicdispatchinallregionsPartialeconomicdispatchwithsurplustradingSurplusmarketFLHconstraintsinselectedregionsPartialeconomicdispatchwithnorth-southsurplustradingNorth-southsurplusFLHconstraintsinselectedregionsPartialeconomicdispatchwithCETOtradingCETOapproach–flowsareoptimisedforthecurrentdispatchFLHconstraintsinselectedregionsEconomicdispatchwithsurplustradingSurplusmarketEconomicdispatchinallregionsEconomicdispatchwithnorth-southsurplustradingNorth-southsurplusEconomicdispatchinallregionsEconomicdispatchwithCETOtradingCETOapproachEconomicdispatchinallregionsNotes:FLH=hasfullloadhourconstraints.RegionalsetupandtransmissioncapacityThemodelincludessixnodescorrespondingwithChina’smajorgridregions,i.e.northeast,northcentral,northwest,east,centralandsouth.Eachregionincludesmultipleprovinces.NotethatChinacanbeconsideredtohavesevenregionalgridswithSichuan,ChongqingandTibetmakingupasouthwestgridregion,howeverbasedondataavailabilitythesix-regionclassificationhasbeenusedforthisstudy.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE73IEA.CCBY4.0.DivisionofsixmodellingregionsbyprovinceRegionAbbreviationProvincesNorthwestNWRGansu,Shaanxi,Tibet,Ningxia,Xinjiang,QinghaiNorthcentralNCRBeijing,Hebei,InnerMongolia,Shanxi,Tianjin,ShandongNortheastNERHeilongjiang,Jilin,LiaoningCentralCRHenan,Hubei,Jiangxi,Chongqing,Hunan,SichuanEasternERAnhui,Jiangsu,Shanghai,Fujian,ZhejiangSouthernSRGuangxi,Guizhou,Hainan,Yunnan,GuangdongTransmissioncapacityusedinthemodelincludesexistinginterconnectorsandadditionalinvestmentsto2035basedonapossiblebuild-outtrajectoryofaround200gigawatts(GW)oftotalcapacity,particularlyincorridorsfromregionswithhighVREcapacity.CapacitiesaregenerallyalignedwiththeIEAChinaPowerSystemTransformationstudywiththeconnectiontothesoutherngridreviseddownwardbasedonlackofcurrentplanstoexpandtheseconnections.Transmissioncapacity(GW)assumedfor2035RegionCRERNCRNERNWRSRCR411151155ER19.581122NCR24.543.5ElectricitydemandAnnualelectricitydemandprojectionsandhourlyloadprofilesforeachend-usesectorarebasedondetailedbottom-upanalysisfromtheWEO,whichestimateshourlydemandbyenduseforresidential,services,agricultural,industrialandtransportsectors.Theprojectionsrelyonnationalmacroindicators(e.g.populationdynamicsandeconomicgrowth),integratingthelatestpolicies.Thedisaggregationoftheloadintothesixmodellingregionsisbasedonregionalprojectionsconsideringkeydriversofeachenduseandfactoringinregionaltrends,policiesandotherconditions.Thehourlypotentialfordemand-sideresponsebyregionisbasedontheprojecteddemandbyenduseineachregion.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE74IEA.CCBY4.0.GenerationcapacityPowergenerationcapacityintheAPSisdeterminedbasedontheprojectedevolutionoftheexistingfleetinlinewithannouncedpledgesandtargetsforemissionsreduction.Themodelassumesthatprojectedcapacityforexistingandnewtechnologiesismadeavailablefordispatch.Fortheregionaldistributionbothexistingplansandtheexpectedevolutionofcapacityineachregionistakenintoaccount,includingconsiderationsofmaintainingregionalsecurityofsupply.Forthedeploymentofcoalplants,aparticularroleisplayedbyco-generationplantsfollowingthechangingheatdemandresultingfromtheshiftofheavyindustrytowardsthenorthernregions,andinparticulartowardsthenorthwest.Co-generationplantsarebroadlydividedintoindustrialsteamanddistrictheatingoperations,andaseasonalpatternwasappliedtothedistrictheatingplants.Gas-firedplantsaredevelopedineachregionconsideringtheevolutionofthegassupplyinfrastructure.Newnuclearreactorsaredeployedreflectingplannedandproposedsites.Thehourlymodellingincludesdetailedoperatingcharacteristics(e.g.operatingcosts,planttechnicalminimumoperatinglevels,minimumupanddowntimes,start-uptimes,andramprates).RenewablesgenerationprofilesWind(on-andoffshore)andsolarPV(utility-scaleandrooftopPV)capacityareallocatedonthebasisofover4000representativesitesconsideringresourcepotentials;populationdensity;distancefrompowergrids;exclusionsbasedonlanduse,altitudeorslope;andpoliciesinplace.HourlywindandsolargenerationhavebeensimulatedfromtheselectedwindandsolarsitesacrossChina.Hydrocapacityhasbeenbrokendownineachregionintofourmaintypes:run-of-river,run-ofriverwithsmallstorage,reservoirandpumpedhydrostorage.Differenttypesofseasonalinflowhavebeenconsideredforeachofthesetypes.Theexpansionoftheremainingrenewablestechnologies(bioenergy,concentratingsolarpower,geothermalandmarine)wasbasedonresourcesandcapacityrequirementsacrossthedifferentregions.FuelpriceswerederivedfromtheWEO,andforsteamcoalprices,thepricedifferencesbetweentheregionswereestimatedconsideringcurrentmarkettrendsandtransportcosts.BuildingaUnifiedNationalPowerMarketSysteminChinaAnnexPAGE75IEA.CCBY4.0.AbbreviationsandacronymsACERAgencyfortheCooperationofEnergyRegulatorsAPSAnnouncedPledgesScenarioATCavailabletransmissioncapacitiesC&IcommercialandindustrialCETOChinaEnergyTransitionOutlookCfDcontractfordifferenceCNYChineseYuanrenminbiCO2carbondioxideCRMcapacityremunerationmechanismCSGChinaSouthernPowerGridETSemissiontradingschemeFLHfullloadhoursHVDChigh-voltagedirectcurrentIEAInternationalEnergyAgencyITinformationtechnologyMCPmarket-clearingpriceMLTmid-to-long-termMOmarketoperatorNDAMnationalday-aheadmarketNDRCNationalDevelopmentandReformCommissionNEANationalEnergyAdministrationNEMOsNominatedElectricityMarketOperatorsPPApowerpurchaseagreementPVphotovoltaicREMITRegulationonWholesaleEnergyMarketIntegrityandTransparencySADCSouthernAfricanDevelopmentCommunitySAPPSouthernAfricanPowerPoolSASACState-ownedAssetsSupervisionandAdministrationCommissionSGCCStateGridCorporationofChinaSIEPACCentralAmericanElectricalInterconnectionSystemVPPVirtualPowerPlantVREVariableRenewableEnergyWEOWorldEnergyOutlookUnitsofmeasurementGWgigawattGWhgigawatt-hourkWhkilowatt-hourMWhmegawatt-hourTWhterawatt-hourInternationalEnergyAgency(IEA)ThisworkreflectstheviewsoftheIEASecretariatbutdoesnotnecessarilyreflectthoseoftheIEA’sindividualmembercountriesoroftheEnergyFoundationorofanyparticularcontributor.Theworkdoesnotconstituteprofessionaladviceonanyspecificissueorsituation.TheIEAmakesnorepresentationorwarranty,expressorimplied,inrespectofthework’scontents(includingitscompletenessoraccuracy)andshallnotberesponsibleforanyuseof,orrelianceon,thework.Forfurtherinformation,pleasecontact:camille.paillard@iea.org.SubjecttotheIEA’sNoticeforCC-licensedcontent,thisworkislicensedunderaCreativeCommonsAttribution4.0InternationalLicence.Thisdocumentandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.Unlessotherwiseindicated,allmaterialpresentedinfiguresandtablesisderivedfromIEAdataandanalysis.IEAPublicationsInternationalEnergyAgencyWebsite:www.iea.orgContactinformation:www.iea.org/about/contactTypesetinFrancebyIEA–April2023Coverdesign:IEAPhotocredits:©Shutterstock

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