Power sector reforms are necessary to make the energy system sustainable. This is the message from top leaders in Chinas energy administration. Here is a suggestion for prudent next-step actions in this long-term reforming process.

Reforming the Chinese power sector is often mentioned as a prerequisite for developing a sustainable energy system with a large share of well-integrated renewable energy. See e.g. the article in CNRECs Energy Magazine written by Shi Lishan, Deputy Director of New Energy and Renewable Energy Department of the National Energy Administration NEA. But it is clear that China should not just copy other countries market reforms and market set-ups. After all, globally the market reforms still have to prove that they actually are promoting sustainable energy systems, and Chinas special context has to be taken into account when designing the reform process. So what to do?

Many ideas has been brought to the table, and one of the more convincing papers with ideas is actually more than one year old, but still highly relevant. The Regulatory Assistance Project published in september 2011 a draft paper: Power Sector Policy in China: Next Steps (Chinese version here) with the following suggestion for next-step actions:

1. Develop improved planning methods to identify the least-cost mix of supply and demand-side options.
2. Create an industry structure and competitive bidding processes to acquire the identified supply and demand-side resources in the least-cost manner.
3. Adopt generation pricing and other practices to allow improved implementation of China’s new power plant dispatch rules.
4. Redefine the role of transmission providers (i.e., the grid companies) to specifically address long-term system planning (including demand-side management), investment, dispatch, and renewables integration issues.
5. Redefine the role of distribution companies to explicitly include investment in energy efficiency.

I am quite excited about this suggestions. The first precondition for changing the system is to change the planning system to focus on least-cost options. And combining supply planning with planning for cost-efficient demand side measures is basically very interesting in a country like China who now has adopted the “dual control” principle of setting targets for both the energy intensity and for the total consumption. Such a planning process is also well suited to an electricity system where the market reforms are not fully implemented. US and Europe introduced Least Cost Planning and Integrated Resources Planning in the 80’ties and early 90’ties for the big power producers, but this planning mechanisms disappeared again as a consequence of the market reforms. But for China a full market reform is risky in the sense of the small number of players leading to inefficient market pricing and market power situations and introducing such integrated planning methodologies in China makes sense to me.

Adressing the system dispatch principles is definitely one of the core actions to ensure a flexible and sustainable energy system. This also includes reforming the pricing mechanisms for the thermal power plants in order to ensure the survival of these plants even if the number of full load hours are reduced due to integration of renewables.

The paper is quite easy to read and in only 13 pages you get a quite good insight in the current situation (which has not changed since last year) as well as a good argumentation for the above mentioned next-step actions. Take a look at the paper and let me know what you think!