Restructuring the Chinese Electricity Supply Sector: An assessment of the market pilot in Guangdong Province

Transcription

1 Restructuring the Chinese Electricity Supply Sector: An assessment of the market pilot in Guangdong Province Michael G. Pollitt Chung-Han Yang Hao Chen February 2018

2 Introduction Michael Pollitt Professor of Business Economics Judge Business School University of Cambridge Assistant Director, Energy Policy Research Group (EPRG) Leader of In Search of Good Energy Policy Grand Challenge Project Founding co-editor of Economics of Energy and Environmental Policy Former External Economic Advisor, Ofgem

3 This project Arises from Search of Good Energy Policy/EPRG ongoing collaboration with National Grid, British Embassy in Beijing and British Consulate in Guangzhou and partners in China, including a research visit in August. Working on this project since May Started with case study of 14 EU/US reform model elements within the Chinese case study, with fieldwork in August Prof.David Newbery (EPRG) and Lewis Dale (National Grid) visited Beijing in November With thanks to my wonderful assistants, Chung-Han Yang (CEENRG/Cambridge University) and Hao Chen (EPRG/BIT). Delivered the results in January 2017 in Beijing to universities, the regulator, government research agencies, leading companies. Now this second paper looks specifically at Guangdong, with fieldwork in August 2017.

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5 China Reform Context Higher marginal fuel prices in 2014 (coal in China minus gas in the US) only explains 63% of the differential. How can power market reform reduce the remaining (37%, or 12% of the Chinese price)? Some of gap is taxation, but prices in China should be lower than US given lower internal costs in China. Total Revenue from households: $62bn (718 TWh in 2014) Total Revenue from Industry: $402bn (3770 TWh in 2014) [Assumed price elasticities: 0.18 for industry, 0.3 for households (He et al., 2011)]

6 Conclusions of first paper: Reducing industrial electricity prices The driver of the reform is the high price of electricity for industrial customers relative to the US. We started by wanting to reduce prices by up to 12%. We suggest: reform of dispatch (which would allow industrial prices to fall by 1-2%) increasing the efficiency of the grid companies (which might reduce industrial prices by 2-3%) rebalancing charges away from industrial to residential customers to better reflect underlying system costs (which might reduce industrial prices by up to 5%) reducing the high rate of investment in generation/networks (could reduce prices for industrial customers by of the order of 3%).

7 Outline Background to the reforms in Guangdong International context and Guangdong: Power market design New players in the power market Effect of the reform on the operational and investment decisions of firms Suggestions for improvement

8 Guangdong Source: safe=strict&hl=zh- CN&tbm=isch&source=hp&biw=1280&bih=580&ei=J hm_wr2id4ki0qsf97egag&q=guangdong+map&oq= Guangdong+map&gs_l=img ac.1j4.64.img j 0i30k1.0.lFwlxyuThfs#imgrc=EgKu I1w56MVM: Guangdong in 2016: 25% of Chinese exports 10.6% of Chinese GDP 7.8% of the Chinese population (c.108m) 9.5% of electricity consumption in China

9 Timelines for Reform in the Guangdong Electricity Sector Source:Adapted from An Bo et al. (2015, p.6).

10 Timelines for Reform in the Guangdong Electricity Sector 2 Source: revised from Guangdong Power Exchange (2017b)

11 Size of electricity sector in Guangdong Capacity type in 2014 (GW) Generation type in 2014 (TWh) 0.51, 1% 2.04, 2% 0.02, 0% 0.09, 0% 3.39, 1% 0.00, 0% 7.21, 8% 13.23, 14% 68.63, 75% Thermal Hydro Nuclear Wind Solar 28.90, 8% 54.90, 14% , 77% Therma l Hydro Nuclear Wind Solar Others Source: China electricity statistics (2015)

12 Sources of electricity demand Source of electricity demand in 2015 (TWh) 9.01, 2% 6.03, 1% 8.24, 2% 29.28, 5% 50.17, 9% 84.60, 16% , 65% Industry Residential Consumption Others Wholesale, Retail Trade and Hotel, Restaurants Transport, Storage and Post Agriculture, Forestry, Animal Husbandry and Fishery Construction Source: Guangdong Governmental Statistics (2016)

13 Growth of electricity demand in Guangdong 600 Electricity consumption (TWh) % p.a , 1.5% in 2015 Source: Guangdong Government Statistics (2016)

14 Total hours lost per consumer (h) Quality of service in Guangdong City consumers Rural consumers Source: China Southern Grid (2016)

15 Motivation for reform: Electricity price and fuel input price differential with US Industrial Electricity Price (US $/kwh) In 2015 Coal price for generation (US $/kwh)in 2015 Gas price for generation (US $/kwh) In 2015 Residential Electricity Price (US $/kwh)in 2015 Texas Guangdong Guangdong minus Texas (152% higher) (7% lower) Sources: Fridley, David, Hongyou Lu, and Liu Xu. Key China Energy Statistics Berkeley, CA: Lawrence Berkeley National Laboratory, 2017 (p.28); Guangdong NDRC website: Zhang et al. (2013); EIA (2017); OECD energy price & taxes (pp ) 1 USD = RMB

16 International experience of power markets Stoft (2002) on full set of power markets In Great Britain: Bilateral energy contract market (monthly, annual and other periods) Power exchange for day ahead trading in half hourly blocks Balancing market (half hourly) down to one hour ahead of real time Markets for other ancillary services, including annual capacity market auction. Organised markets tend to be uniform price because supply and demand equally valuable and this encourages market efficiency.

17 The power market in Guangdong The wholesale power market is currently divided into 2 parts. The first is an annual bilateral negotiation once per year and this covers 80% of the traded electricity. In 2017, the annual traded quantity is 110 TWh, of which around 20 TWh is in the monthly market. This means that only 4% of total electricity demand (20% of 20%) is in the monthly market. There is a 20% limit on the market share of retailers in the monthly market, though no limits on retailer market shares in the annual market.

18 Market prices in the power market Market prices 0 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct Annual discount Monthly discount Source:

19 The power market in Guangdong The current market price in the power market in Guangdong is actually a market determined discount on the regulated retail price. The maximum discount is -500 basis points (1 point = RMB per kwh). The market currently covers 4000 large users. A typical large user, say large teleco or a metals factory. The annual market discount is around 64.5 basis points ( RMB / kwh = $ / kwh). Benchmark coal generation tariff is RMB / kwh in 2014 in Guangdong. In 2018 the market will cover 180 TWh and all gas, nuclear, wind and hydro. Generators are paid a regulated price for their power by China Southern Grid (CSG) for all supply to the grid.

20 Observations on Guangdong power market Only largest users incorporated, room for cross subsidy. Mix between monthly and annual markets fixed. No direct linking of dispatch and market prices. CSG still has monopoly. Essentially this is a discount market offered by existing generators in conditions of excess supply, not clear how market could function in conditions of excess demand.

21 International experience of market players Proliferation of generators and retailers in liberalised power markets. In the UK in 2017: 149 licensed generators and 68 licensed industrial and commercial retailers. Low market concentrations in each. Most electricity traded bilaterally (90%), retailers fix prices for a year, generators incentivised to offer 1-2 year contracts to hedge wholesale risk and match retailer demand. High degree of vertical integration between generators and retailers as longer term hedge. Stand alone retailers poor history in most markets. Retailers need to manage billing and payment risk and often meet social obligations. Competition also in outsourced services and in energy services around supply of kwhs.

22 Market players in Guangdong Generator capacity shares 2017 Retailer market shares 2017 Sources:

23 Retailers in Guangdong 13 largest retailers, 3 private. Lots of retail entry: 300 registered, 100 participating. Retailers focus on demand and supply matching significant penalties (+/-5% of market price, for imbalance greater than +/-2%) for monthly imbalance, strong incentives for metering and feedback. Retailers sell a discount, either a share of the discount price or guaranteed minimum discount, or a combination. CSG deducts market discounts from generators and distributes discounts to retailers, who then pass on to their customers. All payment risk handled via CSG.

24 Retailers in Guangdong Retailers do energy retailing, energy and power contract management, software, renewable energy projects, building incremental grid and power management research. They can focus on big data and IT management, with a management teams that can be drawn from both the electricity and IT sectors. They can offer a number of value added services to its retail customers including: power system emergency response, technical consultancy, preventative testing, engineering management, price monitoring, load control, accurate measurement in real time etc.

25 Observations on market players in Guangdong Impressive entry and sense that important part of reform is to release innovation in retailing and demand side management and internet of energy. Lots of potential for contracting out of services, project management and equipment production across electricity sector, made possible by competition between generators and retailers. However retailers still don t know what their final customers pay and are not managing payment risks.

26 International experience of dispatch Wholesale power markets exist to match supply and demand and reduce market power of players, by facilitating entry. The Guangdong pilot does some of this. They should also increase the efficiency of production by allocating power production to the least cost plants first. This will sharpen the incentives to reduce plant specific costs and system costs. Dispatch should reward low cost and flexibility. Both central and self-dispatch, and interconnection of separately dispatched markets do this.

27 Dispatch in Guangdong Dispatch in China occurs on an equal hours basis, not on the basis of least cost. Generators receive fixed kwh prices from CSG by type of generator. Demand and supply are equilibrated by changes in number of hours dispatched. Returns in 2016 to generation were 9%, now predicted to drop to 5% in 2018 in Guangdong (Ng, 2016; CPL making losses).

28 Dispatch in Guangdong Dispatch occurs at national, provincial, city and county levels. Provincial the most important. Market position and dispatch order not integrated, as in most markets under central or self-dispatch. Trade with Yunnan limited and toll of RMB / kwh, even though trade would be very beneficial and Yunnan also has a market pilot.

29 Overall impressions Lack of price transparency to the players. Multiple regulators reponsible for monitoring of how competitive the market is. The Electric Power section of the Economics and Information Commission (EIC) of the Guangdong Development and Reform Commission (DRC) is responsible for the market and licensing of market participants. The Pricing Section of the DRC is responsible for the calculation of T+D charges. The South China Energy Supervision Bureau (part of the NEA) is responsible for some of the monitoring. May need an independent regulator and clear responsibility for enforcement of Ant-monopoly Act.

30 Overall impressions The introduction of new retailers into the power system has had three positive effects. First, it has improved market participants understanding of the nature of the electricity product Second, the government has gained an understanding of what it means to move from an administered price to a market price. Third, retailers have improved service quality to customers relative to CSG. The ownership of generation in Guangdong is concentrated with the largest company (Yudean), with 35% of capacity is a potential problem. Current excess supply, may encourage over-competitive bidding.

31 Overall impressions Importance of transmission and distribution charge reform, in overall price reduction. Significant margins on transportation charge for CSG. Coal generator receives RMB / kwh, retail price c RMB / kwh for industrial user. There are some development taxes in here. Government now announced regulated T+D charges for These have been reduced by RMB / kwh for all users from January This is large reduction in the relevant charge for industrial users (which in the five largest cities is to RMB / kwh). This is $ / kwh. Generator + T+D charge reduction due to reform for those in market (need to net off cost of retail): $ / kwh or 10% of 2015 industrial price.

32 Initial market clearing result of monthly future market in Guangzhou Power Exchange Center Source: E-Power (2016) and Zhang (2017)

33 Illustrative market clearing and price determination A. Retailer (green) bids and Generator (blue) offers, with maximum trading volume (red) Source: Jing, Z., Chen, Z., and Zhu, J. (2018).

34 Illustrative market clearing and price determination B. Calculation of System Discount Charge Source: Jing, Z., Chen, Z., and Zhu, J. (2018).

35 Illustrative market clearing and price determination C. Allocation of System Discount Charge to winning bidders Source: Jing, Z., Chen, Z., and Zhu, J. (2018).

36 Illustrative market clearing and price determination D. Calculation of final prices paid to winning retailers and generators Source: Jing, Z., Chen, Z., and Zhu, J. (2018).

37 The market is gameable (see appendices) Imagine one of the intra-marginal retailers shaves their bids down. For example, if R2 (the second and third units of retail demand) had bid -100, instead of -50. Panels A1 to D1 change and the R2 receives a bigger discount (-268.8, rather than ). All other prices are changed. Imagine one of the intra-marginal generators shaves their offers up. For example, if G1 (the two cheapest units of generation) had bid -350, rather than -400 then they would end up receiving higher payments (-206.8, rather than ). Note all other final prices are changed.

38 How the market should be organised In the example, the market should clear at -200, where supply offers cross the fixed quantity to be supplied. However all generation and retail for a particular segment should be in the market. Regional power markets should be integrated to facilitate trading. For example, bidders from Yunnan (with lots of hydro) should be able to bid in the market. This may necessitate compensation for customers in Yunnan (c.f. a hydro-benefit charge).

39 Recommendations for market pilots If necessary there should be a reallocation of assets between state owned generators to increase competition and spread the value loss in generation (and perhaps a competitive transition charge). In Guangdong, there is a need to move to a day-ahead market for all generation and to integrate this with dispatch. A complete day ahead market implies that is difficult to avoid a big-bang day for trading. A genuine market pilot needs a full set of wholesale electricity markets applied to all generation and demand. Guangdong is a good candidate for a comprehensive pilot because of its initially high electricity prices (c.f. UK, New York etc).

40 Recommendations for deepening reform The probability of reversal of power market reform in China seems higher than in many other jurisdictions due to the lack of progress over a 5-year time period and the lack of legislative underpinning of the reform itself. The 10-year political cycle in China argues in favour of experimentation to create a workable plan at the provincial level first AND THEN setting an ambitious time table for reform more generally.

41 Select Bibliography Chaplin et al. (2016), Search of Good Energy Policy: Multi-disciplinary approaches to the UK s 1956 Clean Air Act, mimeo. Joskow, P.L. (2008), Lessons Learned From Electricity Market Liberalization, The Energy Journal, Special Issue in Honor of David Newbery, pp Pollitt, M.G. (2015), In Search of Good Energy Policy: The Social Limits to Technological Solutions to Energy and Climate Problems, EPRG Working Paper No Pollitt, M. and Anaya, K., (2016) Can current electricity markets cope with high shares of renewables? A comparison of approaches in Germany, the UK and the State of New York, The Energy Journal, Volume 37, Bollino-Madlener Special Issue, doi:// / si2. Pollitt, M., Yang, C-H. and Chen, H. (2017), Reforming the Chinese Electricity Supply Sector: Lessons from International Experience, EPRG Working Paper, No Available in Chinese at: Pollitt, M., Yang, C-H and Chen, H. (2018), Restructuring the Chinese Electricity Supply Sector: An assessment of the market pilot in Guangdong Province, EPRG Working Paper, forthcoming. Stoft, S. (2002), Power System Economics: Designing Markets for Electricity, Wiley-IEEE Press.

42 Appendix 1: Retailer bid shaving A1. Retailer (green) bids and Generator (blue) offers, with maximum trading volume (red)

43 Retailer bid shaving B1. Calculation of System Discount Charge

44 Retailer bid shaving C1. Allocation of System Discount Charge to winning bidders

45 Retailer bid shaving D1. Calculation of final prices paid to winning retailers and generators R2 s discount was originally , it is now

46 Appendix 2: Generator offer shaving A2. Retailer (green) bids and Generator (blue) offers, with maximum trading volume (red)

47 Generator offer shaving B2. Calculation of System Discount Charge

48 Generator offer shaving C2. Allocation of System Discount Charge to winning bidders

49 Generator offer shaving D2. Calculation of final prices paid to winning retailers and generators G1 s original payment was a discount of , it now becomes