November 2023 moves in China’s power FCNew Heading Heading market reform chess game FC Subheading Subheading This paper provides an update on China’s progress towards achieving carbon peaking and neutrality given developments in the past year, particularly in terms of major growth in both coal and renewable capacity, as well as the newly published power market reform documents. • High-level emphasis on energy security over climate and air quality priorities is contributing to a burst of coal power construction across China. Coal additions are taking place in regions with ample coal capacity to meet peak and balance variable renewables. This appears to be driven primarily by the desire of provincial officials to lock in more infrastructure investments now, while coal plants are encouraged. • China’s present coal boom is likely to lead to overcapacity in many provinces. Currently, China relies on administrative policies to encourage grid companies and provincial planners to absorb variable renewable energy. • As the coal overcapacity problem worsens, financial losses at coal plants are driving the push to adopt a specific capacity payment for coal plants. The capacity payment policy announced in November 2023 could provide further incentive to build more coal capacity, which might eventually lead officials to weaken requirements for fully utilizing wind and solar energy, and even to discourage construction of new wind and solar capacity. • China’s other recent market reform documents, such as the recently released principles for a national power market design, leave most aspects of market design up to provincial officials, and may provide insufficient impetus to increase volumes of inter-provincial trading or spot market trading that could reduce the motivation to build more coal plants. • The coal overbuild, while aimed at improving reliability, will also lead to higher costs, especially compared to alternatives such as increasing power trading among provinces and regions, or increasing demand response by allowing greater price volatility in short-term power markets. Higher costs ultimately lead to higher electricity prices, whether these are borne by the state (such as through financial losses at state-owned coal plants) or by electricity customers through higher prices. • Similarly, coal overcapacity could restrict the interest in investment in new gas capacity and, in the absence of high-volume spot electricity markets, could reduce the dispatch of existing gasfired power assets. • China remains committed to carbon neutrality and its renewable capacity is also expanding at an accelerating rate, including distributed solar photovoltaics (PV) and energy storage to balance the intermittency of renewables. Wind and solar not only will exceed China’s 2030 targets years ahead of schedule, but also could surpass what various forecasts suggested EnergyPAPER: Insight: SHORT 139 Anders Hove, Senior Research Fellow, OIES Author China would need to achieve carbon neutrality by mid-century.1 However, this assumes that renewables continue to be added and fully utilized. • While renewables are growing at an unprecedented pace and curtailment is presently under control, tying up financial resources in excess coal capacity could pressure planners and other market players to slow the energy transition. This could include allowing greater wind and solar curtailment (which allows coal plants to operate at higher levels to recover costs), discouraging new renewable additions, or imposing new costs on renewable generators (such as capacity payments, storage requirements, or requirements to subsidize local industry) that would slow investment in the field. • Lastly, an energy transition with a higher peak of coal electricity production implies increased tension at global climate talks, given the visibility of China’s coal build-out and the government’s sensitivity to criticism on this point. Now that China has largely ended financing for coal projects abroad, ironically this tends to focus even more global attention on China as the last country still building coal power at scale.2 Introduction: Are power reforms slow, or merely less ambitious than many assumed? Electric power market reform is a long process. In April, China’s National Energy Administration (NEA) compared the country’s changing power system and related reforms to a ‘game of chess covering the whole country’. Power market reforms have now been under