Text/Zhang Shuwei
The author is the director of Zall Environmental Research Center (Beijing).
He is also a senior advisor to the German Think Tank on Energy Transition
Starting from April 2024, a new version of the Regulatory Measures for the Full Guaranteed Purchase of Renewable Electricity [1] will come into effect, replacing the 2007 Regulatory Measures for the Full Purchase of Renewable Energy by Power Grid Enterprises from the perspective of legal documents.
The 2007 version of the "Measures for the Supervision of the Full Purchase of Renewable Energy by Power Grid Enterprises" stipulates the principles for the purchase of renewable electricity by power grid enterprises, which can be summarized as "grid underwriting". Compared to the principles established in 2007, this new paradigm of regulatory approaches is further complex and fragmented. At the same time, it must be emphasized that in practice, the grid connection of wind power and photovoltaic trading after 2007 does not strictly follow the principles of regulatory measures. In practice, the early stage is a period when the regulatory measures are completely impossible to implement (the curtailment rate remains high), the medium term (implemented after 2016) is a hybrid model that combines "minimum guaranteed hours" and "electricity/electricity price matching transactions", and later through the "Clean Energy Consumption Action Plan (2018-2020)" to set an administrative curtailment rate of 5% to provide discipline for the operation of wind and solar grid. The principles of the new regulatory approach are also expected to be different from those that will actually work before 2024, although it remains to be seen how the principles will be applied in practice.
It can be said that the mainland's wind power and photovoltaic industry has entered the "post-grid underwriting era" in both substantive and legal senses. In this column, we explore the possible changes in generation revenue (price multiplied by volume) and the uncertain but possible scenarios of the interaction between volatile power sources and other participants in the generation market, grid infrastructure, and other players in the system.
Business Logic: Profit Maximization
The pursuit of profit maximization will not be shackled by its own costs. Cost shouldn't be a constraint – it's not that the cost isn't high, so the price shouldn't be high. It is the equilibrium between supply and demand that determines the price. Diamonds are very cheap to mine, but in the era of "one forever", no one tried to convince the diamond seller to set a price for the stone. Because people know that if the price of a stone is set, he/she/it will not be able to grab it.
Power generators are undoubtedly also independent decision-making entities. They seek to maximize profits, justifiably and ethically. The new regulatory measures stipulate that the on-grid electricity of non-hydro renewable energy power generation projects such as wind power includes guaranteed purchase electricity and market-traded electricity. Guaranteed Purchased Electricity is the amount of electricity purchased by the relevant members of the electricity market。 Market-traded electricity refers to the amount of electricity that has been priced in a market-based manner, and the relevant members of the electricity market, such as electricity sales enterprises and power users, shall jointly bear the responsibility for the purchase。
Then, for the previous part, the volume estimate is set by the government, and the price will also be set by the government (similar to the previous "benchmark price", or refer to coal power). There isn't much that companies can do in the face of this "market segment", but that's not necessarily a bad thing. It is fully insulated from the risks of various markets.
The second "market-traded electricity" is the other extreme. Especially given the continent's highly distorted medium- and long-term markets, as well as short-term markets that are almost non-existent – such as the so-called "spot". Medium and long-term market accounts for more than 80% of the annual transactions, excessive contracting, and also need to "bring curves", which objectively constitutes discrimination against the inability to make long-term prediction of power sources; electricity production and consumption behavior is changing rapidly, and it is often difficult to match the characteristics of specific producers and consumers, and bilateral transactions often mean more contracts and higher transaction costs; the spot market is full of various price and performance constraints, out of the "fear" of a sharp rise in prices, almost one-sided low prices.
Participating in this session is undoubtedly highly fraught with risk. This is a problem of insufficient supply of public goods in the industry. Therefore, from the perspective of enterprises, what is the proportion of electricity in these two parts, according to what criteria, and which participant in the system becomes the power, has become a key public policy issue.
Market logic: competition determines price, and the cost of flow, not the cost of a sunken investment, determines the price
Competition is not always good, and highly homoistic competition destroys every participant. Based on the current market design, wind power and photovoltaic power sources with zero marginal cost constitute a separate market to compete, and the price will always be zero, and no participant will have the opportunity to recover fixed capital [2].
Electricity participation in the market often has limited reaction time. William Hogan, a master of electricity market design, once said, "Half an hour is a long time on an electrical scale, but a short time on a human scale" [3]. This highlights the rapid nature of changes in supply and demand in the power system, as well as the limited time available to participate in the market.
The electricity market is usually a multi-level market in time, which facilitates the participation and gradual balance of power generation companies' positions. The electricity market should also allow companies to trade arbitrage in different spatial markets to promote market coupling and overall economic efficiency improvements.
Unfortunately, at present, it is not so pleasant to conclude that the construction of the mainland's electricity market has precisely such and such problems in infrastructure, which makes the participation of power generation companies in the electricity market have a tendency to "gamble", which is prominently manifested in the distortion and extreme lack of short-term markets. It's similar to the joke that says, "Sheep, do you choose to be steamed or boiled?", but there is no choice. The market is dominated by medium- to long-term, especially one-year contracts, and is severely illiquid. In this case, pushing wind power and PV to a "market" that I don't know where undoubtedly means abdicating responsibility. Companies need to take a clear stand against the highly fragmented so-called marketization, such as "special deals" and "fixed prices" for the grid (see below).
Monopoly logic: only this one
There is no other branch, love to sell or not!
The author's contemporaries and industry practitioners are probably familiar with the text of "Overcharged Three or Five Buckets". One of the episodes is that when the rice seller said that he would go to other markets to sell it, the receptionist said, "Don't talk about Fan's tomb, even if you shake it to the city." Our peers agreed that the price for these two days was five pieces of brown rice and three pieces of grain. ”
There is no doubt that there is such a basis for price monopoly in the mainland's power industry. Even more disadvantageous: power products change faster and are less likely to be stored. Grain needs to be sold by counting months, otherwise it will become stale or moldy. And electricity often takes hours or even minutes to sell, otherwise it won't be available on the grid. The ability to react quickly is more demanding.
The last disadvantage: the asymmetry between the supply and demand of electricity is higher, and it is more difficult to find a match with each other, because it is difficult for different people to agree on the electricity/production characteristics of different people, and more participants or third parties (such as the unified "big pool" of exchanges) need to cooperate.
Regulatory logic: Infrastructure must be open
The market must conform to the characteristics of the commodity
Based on the above logic, the regulatory role of the electricity market becomes very indispensable. As emphasized in the Regulatory Measures, power grid enterprises, power dispatching agencies and power trading institutions[4] should not only ensure the implementation of the policy of fully guaranteed purchase of renewable energy, but also provide necessary support and services for the grid connection, dispatch and market trading of renewable energy.
The electricity market needs to provide a multi-layered time frame for power producers to participate in and gradually balance their "positions", and should allow power generators to trade arbitrage in different spatial markets to promote market coupling and economic efficiency. This is at odds with the true meaning of "serious dispatch discipline", which has been repeatedly emphasized.
The regulatory measures emphasize that "if the market transaction is not reached, temporary dispatching measures should be adopted to make full use of the surplus capacity of the power grid for consumption under the premise of ensuring the safety of the power grid". This sentence still reflects the lack of necessary understanding of the characteristics of electricity commodities. It is still mixed with the unnecessary restriction that "the transaction path determines the physical flow", rather than the economic dispatch principle determining the physical output of the unit. We will leave this to a specific theme for discussion in the future.
Power Politics: If it can cut you once
will be able to cut you many times
On the mainland, the development and change of many things are often not gradual, but like a "spring door" that will automatically slide to the bottom as soon as it is opened; and the key to a matter is not the thing itself, but the "meaning" it brings to similar things -- whether it is okay to do so, and whether it breaks the rules. This is also the underlying institutional environment factor for the public discussion of the reduction of the issue of continuity to the question of binary values. For example, false propositions such as "whether coal power will be turned off", "carbon neutrality can be achieved in one hand", and "renewable embarrassment" are widely available.
In such an environment, it is often difficult to discuss specific matters. If things become unbounded, unclear about where to start, and devoid of clear coherence and standards for judging, then the discussion can easily degenerate into a power-centered political game.
In order to avoid this situation, we must start with the biggest truth of "I am zero cost, and not using it first is the overall system loss", and discuss 110% of the power generation into the grid (sometimes exceeding the quota capacity), both now and in the long run. Any curtailment of electricity requires additional justifications and explanations.
Summary: The real world is a mixture of the above logic
In the post-grid underwriting era, renewable energy companies must study the ever-changing policies and the current electricity market, which is full of distortions, must contribute to the social and public goods of the industry, promote the transparency of the power system and establish clear, consistent, technology-neutral rules, and must have a fighting spirit to unite against all coercion, monopoly and bullying, and resist the similar "power politics" before 2016 – on a case-by-case basis.
This is the way to survive, develop and prosper. We will continue to pay attention to the ecological impact of this change in government regulatory policies.
Source: International Energy Network WeChat public account