Despite an ongoing and complex debate over market design, and differences in models across the U.S., European Union, and other places, there is a significant degree of consensus on the basic principles regarding what markets are supposed to do. Based on a review of practices, the authors find that policymakers generally agree that markets should be designed to ensure efficient system operations; guide rational investment and retirement of generators and other resources; and provide rational compensation for resource owners. In addition, there is broad agreement that markets are tools and should be designed to meet government policy objectives, including goals on efficiency, emissions, and reliability.  

The authors identify three opportunities to more closely align China’s electricity sector marketization efforts with these generally held market principles. 

• Operating (dispatching) resources efficiently and flexibly on an hour-by-hour and minute-by-minute basis.   
• Rationalizing the way generators are paid in order to support efficient and flexible operation. 
• Sending the right price signals to guide investment and for retirement of excess capacity. 

This paper is one in a series of papers by RAP and the Natural Resources Defense Council that looks at international experience for potential solutions and perspectives to inform China’s policymakers as they work toward meeting the country’s air quality and greenhouse gas reduction goals. Other papers address renewable energy integration, regulation and governance, and power sector planning. 

This paper is also available here in Chinese.