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Six Core Supporting Documents about Electricity Reform Issued: Highest Benefit from Electricity for Nearby Consumption
        On November 30, 2015, NDRC and NEA jointly issued the Notice on Issue of Supportive Documents for Electric Power System Reform, and released six supporting documents about electric power system reform, kicking off the electric power system reform on sales side.

        After reading through the six issued supportive documents (Implementation Opinions on the Advancement of Reform on Transmission-distribution Price, Implementation Opinions on the Advancement of Electricity Market Construction, Implementation Opinions on the Establishment of Electricity Transaction Institutions and Standardized Operation, Implementation Opinions on Orderly Decontrolling Electricity Generation and Utilization Scheduling, Implementation Opinions on Advancement of Reform on Sales Side and Guiding Opinions on Enhancement and Regulation of Supervision and Administration of Coal-Fired Captive Power Plant), the report from SOLARZOOM finds that except the sixth documents, all the other five involve PV industry to certain extent, and affect network transaction of PV power generation. In addition, according to the analysis of SOLARZOOM, the most important influence of electric power system reform of sales side is the distributed project with smallest proportion in PV power generation, especially the distributed project oriented by nearly consumption highest benefit, which may benefit most.

        Background of Electric Power System Reform: Economic Downturn and Electricity Demand Reduction

        Chinese overall economic downturn tendency in 2015 was beyond a doubt. According to the electricity consumption of whole society consecutively issued in August, September and October by NEA, it is found that the electricity demand of whole China market is in gradual reduction with economic downturn. However, individual power supply is not decreased with demand reduction. As regards PV, stimulated by general objective for 150GW installed capacity of PV power in 13th Five-Year Plan issued by NEA in October, the installed capacity of PV power has been continuously extending. In addition, thermal power is not actually shrunk obviously. All this causes a situation of more and more total power generation while less and less electricity demand in overall electricity market. Electric power supply exceeds its demand.

        The electric power supply may differ in each specific area. In northwest areas, power surplus is relatively serious, aggravating “power supply limitation” and “abandon of PV power generation”, while in eastern coastal, part of areas even suffer power shortage because of concentration of big consumers of electric energy and poor natural endowment therewith. Currently, this problem cannot be adjusted effectively by electric power system reform if there is no further expansion of transmission channel.

        Subject of Electric Power System Reform: Fully Decontrolling of Quantity and Price of Electric Power

        The ultimate goal of the electric power system reform is to decontrol quantity and price of electric power to truly commercialize electric power whose price and supply are supposed to be adjusted by market. The goal will exert immeasurable effect on all power generation enterprises as well as power consumption enterprises and individuals

        Influence on Quantity. According to the electric power system reform, modes of intensification and diversification are applied to set up the main body of power supply. The mode of diversification is mainly based on mid-and-long term of material object contract. In day-ahead stage, the parties of generation and consumption determine the curve of daily generation and consumption of power. As for the deviation of electric quantity, the market model is applied that adjustment is made through day-ahead and real-time balance of trade. The mode of intensification is to control market risks by mid-and-long term of contract for price difference, as an electricity market model of whole power quantity bidding in combination with spot trading. Both above modes apply unified calculation, i.e. fixed hours * installed capacity, and transactions can be facilitated in mode of bidding as required in each place. It is crucial since bidding can effectively enhance interests of power generation enterprises with cost advantage and initiative of power generation side to improve efficiency to reduce costs.

        Influence on Price. To decontrol electric power supply and implement bidding principle ensures the possibility of new regional calculation of electricity price. That is to say, according to different costs of PTD, the electricity price is allowed to have different levels. The traditional pricing model of benefit from “spread between prices” is changed into the model of “transmission cost + fair return”. 

        By taking the self-balance distributed electricity price structure in Shanghai as an example, suppose the self-balance proportion is 80% of industrial and commercial users, before reform, the grid purchase price = (0.44*20%+0.93*80%)+0.42+0.25; after reform, electricity price of sales side = electricity price of generation side + power grid cost + grid profits. According to new rules in reform, the reasonable profit can be added on average cost of electricity sale companies. Disclosed by insiders, the average cost of grid company is about RMB 0.2, indicating that the possible reduction is only in profit items. Therefore, the reliable estimation is that the electricity price profit of sales side will not change greatly. However, if the user sell its electricity to nearby enterprises, the power grid cost will be greatly reduced, possibly resulting in the situation of (0.93*80%+electricity market price 20%) +0.42+0.25, which is likely much higher than RMB 0.44 even reducing cost and profit of the grid. In accordance with calculation of SOLARZOOM market center, suppose poor state of operation of an enterprise, its electricity price before reform is just (0.44*100%+0.93*0%)+0.42+0.25, as very poor benefit, but its electricity price after reform is likely to be electricity market price*100%+0.42+0.25, which means the lower limit is enhanced. This will exert great promotion and protection on the initiative of investment on PV power generation.

        Currently, the nationwide electric power oversupply may hinder price of electricity from rising in a short period, and the profit is not so obvious, but in the long run, the enterprises with more distributed power plant assets will benefit more.

        Pilot Areas of Reform: 7 Provinces and Regions Approved 

        Shenzhen and western Inner Mongolia lead the PTD reform, followed by other early pilot areas of Anhui, Hubei, Ningxia, Yunnan and Guizhou. 

        Reform Trading: two Regional Trading Institutions 

        Currently, there are two trans-provincial (trans-regional) trading institutions, Beijing Power Exchange affiliated with SGCC and Guangzhou Power Exchange affiliated with China South Power Grid International Co., Ltd. 

        There are three modes to set up power exchanges. They are subsidiaries of a grid company, companies of a relative holding grid company and companies in membership system.

        The issue of six core supporting documents exerts a profound influence on PV industry. In view of a reporter, the greatest significance does not lie in electricity price, but to clarify that distributed PV is a qualified subject to sell electricity market transactions, which is good news for future distributed development. Lv Jinbiao, Vice President of GCL-Poly, stated that the issue of six documents will promote the reform of power supply side to benefit on-grid of PV as generation of renewable energy sources and the development of energy micro network featuring self-balance and in-place consumption of distributed PV.

        Expert Comments

        The key of the 6 supportive documents is the two documents therein about electricity market construction and electricity trading institutions establishment. The two documents break through and detail the Document No. 9 about electric power system reform by CCCPC to much greater extent, and concept of “electric power spot trading market” formed clearly. The trade category of electric power spot trading includes day-ahead, within-day and real time electrical energy trading, as well as trade of auxiliary service such as standby application and FM. The participants of electric power spot trading include power generation enterprise, power supply enterprise and power consumer, as well as electricity selling enterprises - sales side. Unlike previous market expectation, the supportive documents make a low requirement on the qualifications of selling company, which means no special licenses or qualifications are needed and the company can just be established with approval of provincial government when it meets basic requirements on registered capital and business personnel. In addition, the power grid enterprises are also shown in the list of the subjects of sales side. As regards the system of electric power spot trading institutions, the supportive documents make rules on different levels of trading centers in regions, provinces (districts and cities). The regional centers are respectively established in Beijing and Guangzhou by State Grid and Southern Power Grid (two Grids), and provincial trading centers are established by the subsidiaries of Grid, companies of a relative holding grid company or companies in membership system. With different level, cooperation can be made among different markets of trading centers. 

        In terms of schedule for electricity market construction and capacity of future electric power spot trading, professor C from THU holds the opinion that it will just be experimental in future 1-3 years until 2018 when the market would be truly established and the capacity of the market is expected to be about 20-30% of electrical energy trading in consideration of international comparison and China’s actual situation. The early pilot provinces are more likely to be eastern coastal provinces with developed economy, good technical condition, high market awareness and few contradictions between interest bodies. 

        As for the overall trend of future electricity price, professor C believes that uncertainties exist nationwide. On the one hand, 2015 brings the nation into the era of comprehensive power surplus owing to weak demand, and the market-oriented reform on electricity system is bound to reduce the supernormal profit from intermediate link and addition; on the other hand, the electric power cost may rise as a whole if the external environmental cost (reflected as price of carbon emission rights) is gradually taken into consideration. Doctor Z, expert on electric power system reform, reminds that comprehensive price fall of electricity is not likely to happen because more currently considered portions participating electricity transaction are incremental portion while the stock is not considered in the short run. Due to the transmission mechanism of the cross subsidization, price fall of electricity is unlikely in resident side with more subsidy. However price fall of electricity used in industry and commerce is more likely to happen in areas suffering serious power surplus such as northeast, northwest and southwest regions.

        Regarding new energy industry, Doctor Z mentions that policy is impartial as for traditional wind electricity and PV. New energy is of full consumption, so it will not be changed by the reform. In electricity transactions, the thermal power and hydro-power are allowed to directly participate while nuclear power, wind electricity, PV are just encouraged to try to participate. However, as regards distributed PV, the supporting documents are active and positive: “the user with distributed power supply and the energy service companies can be engaged in the market sale of electricity business”, and the word “distributed” has appeared multiple times in the supporting documents. 

        Q&A for Six Detailed Rules of the New Electric Change Plan

1. Which provinces hold higher possibility?
Characteristics: (1) Good basic technical conditions and high requirements of market awareness, (2) Sales side liberalization, (3) Economically developed areas (4) Less contradiction. Three pilot aspects: sales side liberalization, transmission and distribution price approval, market construction.

2. How long will the electricity transaction market be in shape?
Electricity trading marketization reaches 20-30%, and the normal operation can be achieved within 1 to 3 years. All such projects are for pilot in 2017 and will not be truly established until 2018.

3. Touch of energy Internet
The energy Internet is on the user side. If there is no price liberalization in the sales side, the energy Internet is less likely to succeed.
The State Council has Internet plus declaration with energy source.

4. On the development of the new energy
It originally mainly depends on policy subsidies, which, to some extent, is partial neutral or negative. Hydropower and thermal power are the main electricity bodies for sale, which is only with encouragement at present. It is not favorable for the new energy. However, the main electricity consumption body occurs in the electricity consuming side after liberalization. The distributed development is promoted. New energy micro-grid is the natural main body for electricity sales.
The original new energy is fully consumed, which is the same after the electricity reform. It is a good thing from the long-term point of view if the construction of the spot market is good. What the new energy sells now is electric quantity. Thermal power also provides valuable services which cannot be provided by the new energy. Thermal power benefits from peak load cycling of wind power.

5. Electricity price trend
It is unclear all over China, which is in excess on the whole. Electricity price is in a reducing trend. Whether the reducing of the price can be transported to the terminal is not clear. The local government hopes to reduce the electricity price to improve the corporate profits.
The electricity price is expected to rise in the long run. Low thermal power price: (1) The external cost is not considered. Carbon transaction promotes the rise of electricity price. (2) New energy costs will not decline for a long time.
The new energy cost reducing of large industrial users is expected to be relatively large, with feed-in tariff reduced by 1/3 (RMB 0.1). The increment is used for transaction instead of stock. The government provides cross-subsidization to the users who have no price reducing expectation. It is possible for residents to reduce the price. Interests may be spread to electricity sales companies. The competition in the sales side will not be perfect competition.
The price reducing in the areas in the northeast, northwest and southwest is the most serious.

6. Will there be competitive bidding?
There are three kinds of electricity prices in the market: (1) agreed electricity price for larger users and direct supply; (2) spot market bidding; (3) benchmarking electricity price for basic supply. Foreign spot only accounts for about 20%.

7. How to guarantee the full acquisition when new energy is purchased and sold in a unified way?
There is no influence on the electricity price instead of the electric quantity. The priority right of PV and wind power in purchasing electricity remains the same. Nuclear power has some problems, so it is considered to be fully consumed after taking the peaking regulation needs into consideration.

8. How to ensure the acceptance of cross-regional transport of new energy?
Full acquisition of new energy itself is a false proposition. The new energy consumption in the northwest areas is not optimistic. Cross-regional power transmission is agreed by the parties, which is not matched by the state government.


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