“China’s Power Sector Reforms: Where to Next?” — Setting near-term priorities to build a market-based sector

(Paris) — 10 July 2006

Every two years, China adds as much power generation capacity as the total in France or Canada. The country is now the biggest electricity consumer in the world after the United States and its needs are still growing.

“With its rapid rate of expansion, China’s power sector is unique. At the same time, it shares many challenges that other countries have long grappled with: How to reflect the full costs of generating electricity in prices to consumers while increasing access to this essential commodity? How to provide stable and secure power economically? How to reduce the environmental burdens of generating power?”, said Claude Mandil, Executive Director of the International Energy Agency (IEA) today in Paris at the launch of a new publication: China’s Power Sector Reforms: Where to Next? “Taking on these challenges, Chinese policy will have implications for energy markets and for pollution that touch all of us”, Mr. Mandil added.

Two years ago, IEA and Chinese officials agreed that applying the lessons of liberalisation from other countries to China’s specific circumstances could help to refocus and re-energise its power sector reforms. This new IEA study is the result of that effort, and it comes at a time when the country is deliberating on a new comprehensive energy law, as well as revisions to its electricity law. Since China first embarked on an effort to gradually liberalise its power sector, great progress has been made: separating generation from transmission and improving distribution systems, experiments with wholesale markets are getting off the ground, and an increasingly independent regulator has taken its place in the Chinese administration. “China should be congratulated for this”, Mr. Mandil said, stressing, however, that “important challenges remain. Too much electricity is wasted by consumers and by networks, so too many power plants are being built to meet this demand. Too much fuel is wasted in generating power, and too much pollution is released as a result.”

China’s Power Sector Reforms: Where to Next? assesses ways to mitigate the tensions between rapid economic expansion and protection of the environment, and the promotion of greater equity. While keeping an eye on the long-term goals for the power sector, the report contributes mainly to the debate on actions to take in the next few years. “While no country has yet found a perfect solution, there is already clear evidence of the benefits that can be derived from competitive power markets, and this should remain the long-term goal”, Mr. Mandil said. Several near-term actions stand out as priorities. China needs first to strengthen its institutional and governance framework. In addition to clarifying legal structures, it should further define the roles of government agencies, for instance, clearly defining the State Electricity Regulatory Commission’s (SERC) mandate and enforcement powers regarding pricing and oversight of generators, the grid companies, and system dispatch and security. Pending establishment of a competition authority, SERC should also develop capacities for identifying and monitoring anti-competitive behaviour. An urgent task is to unbundle generation accounts from those of other state interests to enhance transparency and enable effective monitoring. To carry out these functions, SERC’s staffing levels and capacities must be strengthened quickly.

These activities should all be taken with a view to tackling the environmental consequences of coal, which fuels 70% of China’s electricity. China has the opportunity to leapfrog reformed systems elsewhere by integrating energy efficiency and environmental goals into its regulatory framework for competitive power markets. At least in the near term, direct support for efficiency is important, including demand side management programs that reduce barriers to adoption of better technologies. Steps can also be taken quickly to make power prices more reflective of actual costs - sending strong signals to investors to choose more efficient equipment and fuels, and to consumers to use electricity more wisely. Cleaner power plants also need to be used. Generation performance standards and higher pollution fees would increase the likelihood of cleaner plants being built.

China recently announced power tariff changes that are a step in the right direction, but it must take further urgent action to improve electricity pricing, no matter how difficult. One step towards a transparent pricing approach is for China to implement its proposed two-part pricing principle, under which the total price will consist of a regulated capacity price and a competition-based energy price. This will provide the basis for dispatching more efficient plants first. The country should also quickly implement its proposal to establish separate pricing for transmission. If China were to create alternative ways to help vulnerable customers, such as through lifeline support mechanism for poorer households, then it would be much easier to move towards transparent, cost-reflective pricing. Transparency is the key that will help unblock progress across all fronts. Better data collection and analysis on the power sector would improve understanding of supply and demand developments, and underpin the operation of effective markets.

“Across the world, power sector reform is a continuing process; no country can claim to have worked it all out. The IEA therefore looks forward to learning from China’s experience, as we share lessons learned from power sector reforms in our member countries”, Mr. Mandil concluded.

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