China is experiencing an unprecedented boom in distributed energy resources (DERs), including rooftop solar photovoltaics, battery storage, electric vehicles (EVs) and flexible electric loads. Typically located behind-the-meter, these small assets can deliver significant benefits to China’s power system if efficiently integrated, including enhanced flexibility, strengthened electricity security and lower system costs. Driven by declining technology costs and supportive national programmes, DER deployment has accelerated across rural communities and commercial and industrial buildings. By 2024, distributed photovoltaics (DPV) accounted for 40% of the country’s total solar capacity, up from 30% four years earlier, while the stock of electric cars grew by more than 650% over the same period. This rapid deployment is reshaping China’s power system and placing increasing pressure on distribution networks to adapt.

The speed of DER uptake has outpaced the readiness of the grid in several provinces. While China has succeeded in reducing and maintaining low curtailment rates over the past decade, localised grid constraints have emerged. In 2024, congestion and connection restrictions were reported in 11 provinces, where low demand or limited investment in distribution networks resulted in DPV injection exceeding local hosting capacity. Limited system flexibility, mismatches between supply and demand across time and location and a lack of operational visibility into behind-the-meter assets have further exacerbated these constraints. Other DERs, such as battery storage and demand response, could help alleviate them, but China’s market and regulatory conditions have so far constrained their full participation as system assets.

Policy responses have begun to emerge, signalling a turning point in integrating DER into power grids and markets. National regulations introduced in 2025 cancelled the profitable and widely implemented guaranteed purchase option for the largest DPV installations, requiring instead self-consumption models. At the same time, high-level policy documents are promoting market access for distributed generation and aggregators. Grid companies have announced record levels of investment and are assessing how much additional capacity the grid can safely accommodate to better guide DER deployment. But the challenges ahead require more systemic reforms.

The IEA’s three-pillar strategy, centred on modernising system operations, enabling progressive market integration and advancing regulatory reform, provides a pathway for China to integrate DERs securely and at scale by 2030, while also laying the foundations for longer-term system transformation. Informed by international experience from countries at the forefront of DER deployment, this approach can help China harness the full benefits of DERs and support its broader goal of a secure, affordable and low-carbon power system.

Challenges

As DER capacity grows, secure system operations increasingly depend on improved forecasting, visibility and control of decentralised assets. While simplified connection procedures and minimal technical requirements have supported China’s rapid DER deployment, they have also created operational blind spots in some regions. Grid operators lack real-time visibility and control of DERs, limiting their ability to forecast demand, ensure reliability or proactively address congestion. Additionally, the lack of flexibility of distribution networks reduces their capacity to absorb excess generation, especially during midday hours when solar output peaks and demand is relatively low.

Policy priorities

To address these challenges before they become more widespread across networks, China can benefit from building on its smart grid advancements and centralised planning strengths through targeted improvements in distribution operations, by adopting more data-driven practices and improving local flexibility. Key recommendations for grid operators and regulatory authorities include:

• Enhance DER visibility and controllability by implementing monitoring, control and real-time forecasting requirements for new DER installations, leveraging China’s digital infrastructure investments and proven IoT capabilities at low-voltage levels.
• Strengthen technical standards and grid connection rules to ensure new DERs contribute to system reliability and demand responsiveness, including requirements for smart inverters and standardised communication protocols.
• Implement mechanisms for grid congestion relief and for guiding the siting of new projects, such as transparent grid hosting capacity assessments – building on NEA’s pilot programme – and locational signals in network tariffs. For the most congested areas, experiment with flexible connection agreements, while pilots for local flexibility procurement can be considered in provinces with more advanced power markets.
• Invest in workforce training, institutional capacity and promote interprovincial and international experience sharing to equip grid operators, planners and regulators with the skills and tools needed to manage a more decentralised and dynamic power system.

Challenges

Unlocking the full value of DERs requires integrating them into both the grid and power markets – either directly, through aggregators, or by exposure to market prices – so their flexibility can be harnessed in response to system needs. In China, policymakers are increasingly turning to market mechanisms to mobilise flexibility and support renewable integration, but progress on power market reform has been uneven across provinces. Even where power markets are in place, most DERs still operate outside these frameworks, shielded from real-time price signals that reflect system conditions, and often without proper remuneration for the services they can provide.

Policy priorities

Expanding viable DER business models is needed to support China’s shift toward self-consumption and market-based participation, while harnessing flexibility from virtual power plants (VPPs), EVs and demand response. To accelerate this transition, key recommendations for national and provincial regulatory authorities include:

• Facilitate DER and aggregator access to wholesale and ancillary service markets where they operate, by removing practical entry barriers and adapting bidding rules and market products. As provincial markets develop and trial rules, ensure they enable DERs to provide multiple services and stack revenues without compromising system reliability.
• Encourage demand-side flexibility from smaller consumers by expanding the use of time-of-use and dynamic pricing schemes. This can be facilitated by leveraging China’s extensive rollout of smart meters and by introducing those schemes on an opt-out basis, focusing on consumers with flexible loads such as EVs and heat pumps.
• Promote self-consumption through targeted operational and remuneration models, particularly in areas with limited grid capacity. This includes pairing distributed generation with flexible loads, storage, as well as setting minimum self-consumption thresholds for new installations. In rural areas, accelerating electrification and using smart demand management can help absorb DPV production.
• Pilot and scale up innovative DER business models, such as VPPs, co-location, peer-to-peer trading and local energy communities, supported by adequate regulatory frameworks and informed by experiences from provinces and countries that have advanced further in this field.
  

Challenges

China’s current regulatory framework is not yet fully aligned with the needs of a power system with high shares of DERs. Structural inefficiencies such as limited grid access for incremental distribution networks, uneven allocation of grid costs, weak incentives for grid companies to adopt cost-effective alternatives and fragmented planning between transmission and distribution can hinder efficient and equitable DER integration.

Policy priorities

Adjusting regulatory frameworks is essential to ensure that DERs contribute to a system that is economically efficient, socially equitable and supported by clear institutional responsibilities. Key recommendations for national and provincial regulatory authorities include:

• Ensure fair grid access and cost allocation by mandating non-discriminatory access rights for DERs, microgrids and privately invested incremental distribution networks, in line with the newly enforced Energy Law, and by establishing transparent and equitable mechanisms for sharing transmission and distribution costs.
• Optimise transmission and distribution pricing mechanisms to reflect system costs and encourage efficient use. This includes refining the current voltage-based pricing to further encourage local consumption and introducing dynamic elements to network tariffs, drawing on provinces’ experience with incorporating grid costs into time-varying tariff components.
• Strengthen incentives for grid companies to support DERs by linking their performance to system outcomes under NEA guidance and supervision, encouraging the adoption of DERs and smart grids as alternatives to traditional grid expansion. Network tariff methodologies can gradually integrate performance-based elements to reward efficiency and reliability.
• Improve co-ordination between transmission and distribution networks in system planning, ensuring that local DER deployment and integration is reflected in provincial and national grid planning. This includes using shared forecasting tools, joint cost-benefit analysis and clear performance metrics.
• Clarify operational responsibilities for DER management at the distribution level, particularly for managing hosting capacity, procuring local flexibility services and collecting data.