A Milestone in Low-carbon Power Market Design and Carbon Neutrality
By Anders Hove, Project Director, Sino-German Energy Transition Project, GIZ and Li Xiang, Associate Professor, Institute of Energy, Peking University
Kicking off green electricity trading – the Chinese context
On 7 September 2021, China launched its green power trading pilot – a remarkable step towards energy sector low-carbon transition and moreover, a milestone towards its 2060 carbon-neutral pledge to the world.
It is reported more than 250 domestic and international companies participated in the trade on the first day with a trading volume of 7.9 TWh of green power, accounting for over 1% of the total amount of green power China generated in 2020.
The green electricity trades are organized as follows: trades mainly include wind and solar power and are mostly for monthly or annual contracts. In the current phase, the trading market covers output beyond that which already qualifies for guaranteed purchase under the Chinese feed-in tariff scheme, which has strict limits by province on the maximum operating hours per month that wind and solar plant output will be compensated and guaranteed grid purchase. If consumer demand for such electricity results in full uptake of all power beyond that already covered by the feed-in tariff and guaranteed purchase hours, consumers can then consider buying power from subsided projects and guaranteed purchasing scheme from the grid company. Depending on whether green power derives from the marketized or the guaranteed portion of green power production, funds from the green power purchase price will compensate different entities. According to the green electricity trading implementation proposal, green electricity is given priority in power market trading and dispatch.
Green power trading – an international perspective
Trading of green power is an important trend in both North America and Europe. Not only do the practices of these regions differ from the way green power trading has evolved in China, but different countries have adopted radically different practices in green power trading. In the U.S., the absence of a national target for renewable energy, and the regulatory patchwork that governs the country’s wholesale power markets, has led to a decentralized system for voluntary procurement of green energy through both long-term power purchase agreements, often for durations of 20 or 30 years, and short-term trading of renewable energy certificates (RECs). Companies that participate in green power trading in the U.S. and Canada have varying motivations, including hedging against power price increases, locking in lower prices for renewables, advertising 100% renewable procurement to consumers. Most renewable energy is sold without any premium to conventional electricity, reflecting the rapid cost declines in renewable energy over the past decade.
In Europe, the guarantee of origin (GO) market has developed quite differently: The EU introduced the GO in its first Renewable Energy Directive in 2009. GO can be issued for each MWh of generated electricity. All GOs must contain information on each installation where energy was produced, whether it received investment support or runs under national support scheme, date and country of certificate issuance, and the date the installation became operational. GOs can be issued for all kinds of energy sources, including nuclear and fossil. The GO system is voluntary. The EU originally did not introduce GOs with the purpose of supporting achievement of the energy targets of the EU and its member states but with the sole function of showing to final consumers that a specific amount of energy was produced from renewable sources. Unlike in the U.S. and Canada, where most green power trading involves wind and solar, in Europe hydro is the largest source of GOs. As in the U.S., the price of GOs is quite low: just Euro 0.5/MWh.
Perhaps the most significant difference between the European and U.S. green power markets versus the China green power trading is in the dispatch of green energy. In most wholesale power markets, wind and solar represent the lowest marginal cost production, and are virtually always dispatched ahead of fossil generation, except in rare cases where transmission is inadequate. In China, dispatch is managed over various time scales and geographical areas, and wind and solar producers are allowed priority up to a maximum amount of operating hours set administratively. Green power trading, as described in the introduction, presently exists as a way for wind and solar generators to market the power produced beyond these administrative guarantees.
Such practices will likely shift in the coming years as more province introduce spot markets, as spot market volumes grow, and as feed-in tariff subsidies scale off. This could enable green power trading at prices considerably below present prices, reflecting the favorable economics of wind and solar. In addition, as policy makers introduce more long-term targets, it may become feasible to introduce longer-term, multi-decade PPAs to match those presently available in other markets.
Although the Chinese green power trading platform is brand new, several international observers consider it a step forward in the development of power market reforms already underway in China.
“It is inspiring to see that China has launched green electricity trading, which is crucial for ongoing market reform,” said Alejandro Hernandez, head of the Renewable Integration and Security of Electricity Division at the International Energy Agency (IEA).
Simon Mueller, power market expert with Energy Transition Catalytics, highlighted the importance for China to start its green power trades. “Market trading of variable renewables could be challenging, but would also be valuable for the power system transformation in China. The crucial point is ensuring investment certainty and efficient operations.” said Mueller.
What’s next – challenges and opportunities
According to China’s National Development and Reform Committee (NDRC), the trading price was US$ 4.6-7.7/MWh (RMB 0.03-0.05/kWh) higher than most mid-to-long term bilateral contracts, which mainly represent coal power. Taking the Beijing coal on-grid tariff of US$ 57.3/MWh (RMB 0.37/kWh) as an example, this would represent a premium of 8-13% over the price of coal power. In the initial phase, designers have prioritized the smooth and stable operation of the market. As wind and solar have already reached grid parity in many parts of China, it is likely the green premium will fall or disappear in later years.
The coordination of green power trading with various other green-power related policies, including the renewable energy certificate and renewable energy consumption obligation, has posed challenges for China. For example, the incumbent green power trades allow renewable energy certificates to be bundled with the traded electricity, while the remaining green power is unbundled with its green certificate. The renewable energy consumption obligation mandates a renewable target for each province in China, and this could hamper the promotion of interprovincial green electricity trades.
Despite these challenges, green electricity trading represents a landmark for China’s ongoing power sector reform. As China’s power markets continue to evolve to meet the nation’s energy, economic, and environmental goals, international collaboration on market experience and best practice sharing are valuable for Chinese policy makers and stakeholders.
This article has been sourced from the Sino-German Energy Partnership and can be accessed here