The Chinese government has just finalized Deepening Reform of the Power Sector, a policy document co-signed by the Central Committee of the Communist Party and the State Council. The Chinese media have anticipated this document for months, and billed it as a follow-up to the last major power sector reform document—State Council Decree #5—released in 2002. Although it is short on detail and leaves many important issues open to debate, this new policy statement holds promise as a broad road map for reforming the industry that accounts for around a quarter of the world’s annual coal consumption—and half of China’s.

Below, we offer some preliminary analysis and reactions to the new announcement. For additional background on power sector reform, see RAP’s Recommendations for Power Sector Policy in China and our analysis of relevant experience with power sector regulation in other countries.

Much of the recent public discourse in China has failed to adequately address the huge role that the power sector will have to play in the struggle to meet the country’s ambitious new goals for air quality and the environment. Deepening Reform of the Power Sector signifies an important shift. Crucially, it recognizes the need to orient power sector reform around China’s major goals of reducing emissions, promoting renewables, and boosting energy efficiency—all while reliably meeting rapidly-growing demand for electricity services.

Deepening Reform of the Power Sector outlines five basic principles to frame the overarching issues affecting the sector. In brief, these principles state that power-sector policy should be guided by:

1. The need for reliability;
2. Increased use of market mechanisms;
3. Protection of residential and agricultural consumers;
4. Energy savings, emissions reductions, and increased use of renewable and distributed generation; and
5. Better governance and regulation, including better planning and strengthened capacity in terms of regulatory agencies and approaches.

These principles strike a different tone than State Council Decree #5, which put much less emphasis on environmental and emissions concerns.

Deepening Reform of the Power Sector also addresses a number of important specific policy issues. The following selective list highlights several of the key issues that we noted in our preliminary reading of the new document:

• Grid company reform: The new policy extends the regulatory approach used in the recent Shenzhen grid company pilot to cover the entire country. This should switch China’s huge grid companies to a revenue-cap regulatory regime, which may open up greater opportunity for these companies to support energy efficiency and distributed renewables, depending on implementation details.
• Direct access and retail competition: As expected, the document emphasizes expansion of current provincial-level pilot programs that allow large users to bypass the grid companies and negotiate prices directly with generators. On a positive note, the document requires that both demand-side and supply-side parties be screened, with participation limited to those demonstrating good performance in terms of energy efficiency and compliance with environmental regulations.
• Demand-side management: The document includes very useful, positive language on demand-side management and end-use energy efficiency, although financing of energy efficiency is not directly addressed.
• Improved generator dispatch: The document recognizes the need to improve dispatch, a significant source of inefficiency and curtailment of renewables, but it is short on specifics.
• Renewables integration: In addition to dispatch reform, other challenges with renewables integration are discussed, including the need for new mechanisms for ancillary service provision and improved inter-provincial, cross-regional power trading mechanisms. However, the document stops short of detailing a comprehensive package of measures to improve integration of rapidly-expanding renewables capacity.
• Distributed generation: The document emphasizes the development of new mechanisms for distributed generation. It aims to remove market access barriers and allow distributed generation to participate in power trading.
• Power sector planning: The document stresses the need to revamp power sector planning and includes the welcome declaration that, “power planning should take full account of environmental carrying capacity.”

Because the new document is couched in very general terms, we expect it to be the starting point for a new round of discussion on these topics. The government is expected to develop and issue more detailed supporting regulations in the near future. There will be much work to do in fleshing out the details and moving ahead with implementation. We look forward to continuing to offer input to this process, based on our knowledge of international experience with power sector policy and RAP’s 15 years of history working on these issues in China.