(By Caixin journalists Zhao Xuan, Fan Ruohong and Denise Jia)
Each year more than 300 million kilowatts of electricity travels down ultra-high voltage power lines stretching tens of thousands of kilometres across China as energy-rich western and northern regions feed the more densely populated and developed eastern and southern provinces.
Now experts are saying new power plants should be built nearer to where the electricity is most needed.
In 2023, although large-scale power cuts were avoided, periodic power shortages spread from areas of heavy usage in the mid-eastern regions to the generating provinces in the west.
To maintain the stability of the power grid, western provinces need to generate an electricity supply over 24 hours, not only during daytime when solar power stations operate efficiently but also over peak demand periods at night.
In western regions such as Qinghai and Ningxia, where large industrial users need to operate around the clock, power generators have to buy in coal-fired electricity from outside the province to make up for the shortage. Qinghai, for example, spent about 7 billion RMB (US$980 million) last year buying in out-of-province electricity. The cost was eventually passed on to business users, who saw power bills surge by nearly 30% between 2019 and 2023.
... solar power plants are forced to let some of the power they generate dissipate as there is nowhere to store it.
The boom in new energy construction in recent years has not solved the western regions’ problem but made the situation worse.
Investment in power storage capacity in the western regions has failed to keep up with the rapid increase in green power generation. As a result, solar power plants are forced to let some of the power they generate dissipate as there is nowhere to store it.
Solar power plants in Qinghai give up three to four hours of sunlight-generated power during the daytime. At the Jiuquan Wind Power Base in Gansu, one of the world’s largest wind farms that cost hundreds of billion RMB to build, nearly 40% of wind turbines cannot operate at full capacity.
“Electricity is a homogenised commodity. No matter whether the power is from Xinjiang or Hebei, it is the same,” said Zhang Shuwei, chief economist at Draworld Environment Research Center, a Beijing-based energy and environment research institute. “Therefore, by building plants where high demand is, you can save on transmission.”
From a technical point of view, a balanced power system should follow the principle of meeting nearby demand, which should be the fundamental for coordination of the source, the grid and the storage of the future new power system, Zhang said.
The expansion of renewable energy in China has been driven by the government’s 2020 pledge to reach peak carbon dioxide emissions by 2030 and become carbon neutral by 2060. To achieve this goal, the key is to start from the consumption side, by promoting energy saving and reducing the cost of power supply, an executive from a state-owned power enterprise said.
The current model of having wind and solar power generation based in the west using ultra-high voltage power transmission lines is not the best solution for a new power system, said Liu Yiyang, deputy secretary-general of the China Photovoltaic Industry Association.
In the future, it is necessary to move to a development model that integrates the source, the grid and the storage, Liu said. In this process, power plant builders, the manufacturing sector, the power grid companies and other parties need to work together.
China has been talking about reforming its power system for more than two decades as it aims to build an integrated power trading market by 2025 that will let supply and demand play a bigger role in setting prices.
Let the market set the price
The key is to accelerate the reform of the power system and the marketisation of electricity, Liu said. A market-based power price can play a greater role in guiding the players in the power system to put their money in the right place and avoid blind investment by local governments.
Most households and businesses in China pay electricity rates tied to government-set benchmarks. China has been talking about reforming its power system for more than two decades as it aims to build an integrated power trading market by 2025 that will let supply and demand play a bigger role in setting prices.
Many solar-rich provinces set a low price for connecting their solar power to the grid. Gansu sets the 2024 mid-to-long term price for solar power at no more than half the benchmark coal-power price. The province’s coal-power price is 0.3078 RMB per kilowatt hour, which means solar power is sold at no more than 0.1539 RMB per kilowatt hour.
Qinghai has to buy coal power from the three northeastern provinces of Liaoning, Jilin and Heilongjiang at about 0.4 RMB per kilowatt hour, compared with the 0.23 RMB it charges for its own solar power. Qinghai also pays 0.1 RMB per kilowatt hour for the long-distance transmission fee.
Shandong, with abundant wind and solar generation sources, allowed negative electricity prices on its spot market last May because of excess generation. A power price policy researcher told Caixin that Shandong’s practice clearly told the market that the province has an over-supply of solar power.
With the trend for falling power prices, many power generation companies are increasingly concerned about their profitability.
The executive from the state-owned power enterprise said a solar power project in Inner Mongolia has an estimated return rate of 6% to 7% based on current power price. If the price continues to drop, the project could lose money.
Under a 2022 guideline on establishing a unified national power market issued by the National Development and Reform Commission, the country’s top planner, China aims to build the unified electricity market system by 2030, by which time renewable energy will fully participate in market trading.
As renewable energy relies so heavily on weather conditions, it poses challenges to the grid. Allowing generators and end users to flexibly participate in the electricity spot market may be a solution.
Currently, renewable energy is gradually entering the market, said Liu, from the China Photovoltaic Industry Association. In the run-up to 2030, renewable energy project builders should be given the option of participating in market trading. They can participate if they are capable, and if not they should postpone their project, he suggested.
Another problem is the lack of transparency in the grid’s capacity. In overseas power station projects, governments usually give clear information on how much renewable energy capacity will be generated and how much consumption is expected in the next few years, said Lu Chuan, chairman of electrical components manufacturer Chint Group Corp., at a solar industry conference in late 2023. In China, due to planning uncertainty and a lack of information, renewable energy projects often encounter consumption problems after they are being built, Lu said.
If the power grid information is clearer, enterprises will be able to make their own choices about whether to start a project to avoid consumption problems later, Lu suggested.
As renewable energy relies so heavily on weather conditions, it poses challenges to the grid. Allowing generators and end users to flexibly participate in the electricity spot market may be a solution. Western provinces and regions have speeded up the establishment of electricity spot markets. Xinjiang, Qinghai, Shanxi, and Ningxia completed trial operations of their electricity spot markets last year.
Amid the rapid development of renewable energy, reform of the power system and the reshaping of a new energy order still has a long way to go, a person close to policymakers said.
This article was first published by Caixin Global as "In Depth: China’s Ambitious Clean Energy Development Raises Questions on Efficiency". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.