中国电力系统转型

The rise of low-cost wind and solar power, deployment of distributed energy resources (DER) and increasing digitalisation are accelerating change in power systems around the world, including the People’s Republic of China (“China”). With the right framework conditions in place, these trends can combine, leading to a much stronger integration between the demand and supply sides while allowing a more rapid uptake of variable generation resources, notably wind and solar power. “Power system transformation” describes the processes that facilitate and manage changes in the power sector in response to these novel trends.

Power system flexibility – a concept that goes beyond power plant flexibility – is the crucial element for a successful transformation of the power system at growing proportions of wind and solar power in China. Traditionally, flexibility has been associated with the more flexible operation of coal power plants in China. However, the concept of power system flexibility is much broader. Apart from power plants, it can be provided by grid infrastructure, demand-side response, and electricity storage. Changes to market, policy, and regulatory frameworks are crucial for unlocking flexibility.

Establishment of spot markets and trade between provinces are two of the main elements to promote power system transformation in China. Building on the World Energy Outlook (WEO) New Policies Scenario, modelling results indicate that if current efforts to implement economic dispatch, boost short-term inter-regional trading and expand transmission interconnectivity succeed, annual power system operational costs in 2035 can be reduced by 15% or USD 63 billion (United States dollars) annually, and power sector CO₂ emissions reduced by up to 750 million tonnes per year.

Power system flexibility is the most important cornerstone of a fundamentally transformed Chinese power system which achieves the goals of the Paris Agreement. Building on the WEO Sustainable Development Scenario, modelling results indicate that utilising advanced flexibility measures such as smart electric vehicle charging, demand-side response, and electricity storage can support the reliable integration of extremely high shares of variable generation without any substantial variable renewable energy curtailment in 2035, while simultaneously reducing power system operational costs between 2-11% and reducing the need for fossil generation capacity by up to 30%. Other clean energy technologies such as nuclear power and carbon capture and storage benefit from flexibility in the form of increased utilisation.

Accelerated progress on power sector transformation could bring substantial benefits in China and the world. An accelerated transformation of the Chinese power system could bring significant benefits in the drive to limit climate change in line with the Paris Agreement. China can use the path of power system transformation to make accelerated progress in restructuring its economy towards a pattern of growth in advanced high-quality industrial sectors, while making clean energy technologies affordable for countries around the world – including today’s developing countries, which will see a rapid increase in energy demand over the coming years.

China Power System Transformation has a two-fold objective. First, it provides a summary of the state of play of power system transformation (PST) in the People’s Republic of (“China”) and a comprehensive discussion of PST internationally. Second, it presents findings from a detailed power sector modelling exercise for China in 2035, which explores the impact and value proposition of various public policy and technology deployment options currently under consideration by Chinese policy makers. The report provides a number of insights on possible Chinese PST pathways based on the results of this modelling exercise.

Power system transformation requires action to boost power system flexibility and support clean energy investment. Global experience suggests that PST requires the co ordinated orchestration of actions across the entire value chain of electricity production and consumption to facilitate cleaner, more reliable, more resilient and more affordable power systems. A number of interventions can be made to support PST and promote the increasingly important characteristic of power system flexibility.

Traditionally, flexibility has been associated with the more flexible operation of coal power plants in China. However, it encompasses all resources of the power system that allow for its efficient and reliable operation at growing shares of variability and uncertainty. Apart from power plants, it can be provided by grid infrastructure, demand-side response and electricity storage. In a transformed power system with higher shares of variable renewable energy (VRE), the importance of flexibility options beyond power plants increases sharply. This can open synergies with other developments in the energy sector, such as the deployment of electric vehicles (EVs).

Advanced energy modelling exercises explore the value of reform goals and innovative system flexibility measures. The energy modelling analysis presented in this report builds on two International Energy Agency (IEA) World Energy Outlook 2018 (WEO 2018) energy system scenarios for China for 2035. These scenarios provide the overall energy system setting, including installed power generation capacity. For this report, the power sector is modelled at a much higher level of detail, based on eight regions. In addition, different cases are analysed that represent changes in the way the power system is operated and how much power system flexibility is available.

The New Policies Scenario (NPS) aligns with the achievement of China’s Document No. 9 reforms and aims to provide a sense of where today’s policy ambitions seem likely to take the energy sector in China. The NPS cases are used to explore the value of currently considered polices, notably the ongoing power market reform that aim to introduce spot markets and increase levels of cross-provincial trade.

The SDS achieves the main energy-related outcomes of the Sustainable Development Goals, including delivering Paris Agreement commitments, achieving universal access to modern energy by 2030 and dramatically reducing negative health outcomes due to energy-related air pollution. Its vision is aligned with the “Beautiful China” initiative proposed at the 19th National Congress in 2017 as the general blueprint for China’s future development. The SDS is used to explore the importance of advanced flexibility options – in particular on the demand side – to support a deeper transformation of the system.

Establishing spot markets and trade between provinces are two of the main elements to improve system operation efficiency in China. China’s goal of a transition from fair to economic dispatch would result in significantly lower power system operational costs and improved ability to integrate wind and solar power. Detailed power sector modelling results for the NPS indicate that China’s ongoing market reforms to introduce economic dispatch make good financial sense and should strongly benefit the environment. Transferring to economic dispatch could yield an annual operational cost saving of approximately 11% or USD 45 billion (United States dollars) per year in 2035, sharply reducing VRE curtailment and power sector CO₂ emissions by 15%. The implementation of spot markets in China is a crucial element of realising these benefits.

Increasing power trading and further expanding regional transmission interconnectivity will yield substantial economic and environmental benefits, and promote clean energy investment. Boosting power trading has long been considered a national priority in China. While some cross-regional, mid- and long-term trading already occurs, modelling results indicate that if current efforts to implement economic dispatch, boost short-term, inter-regional trading, and expand transmission interconnectivity succeed, annual power system operational costs will reduce even more, and savings will reach 15% or USD 63 billion annually. Power sector CO₂ emissions will reduce by up to 750 million tonnes per year. Notably, VRE curtailment is effectively eliminated when these reform goals are achieved, as greater interconnectivity and competition allow VRE resources to serve a significantly broader market. Thus, the achievement of these reforms would help promote a stable investment environment for clean energy technologies, which is a crucial factor for reaching PST goals. Significant efforts by policy makers will be required to orchestrate and harmonise various markets so that they co ordinate with one another, while also encouraging broad participation by both state-owned and private generator

Activating the demand side and targeted use of electricity storage are crucial for an accelerated transformation of the Chinese power system. Power system flexibility is the most important cornerstone of a fundamentally transformed Chinese power system that achieves the commitments in the Paris Agreement. In the SDS, which represents an accelerated transformation of the Chinese power system, VRE resources account for 35% of annual electricity generation. Modelling results indicate that utilising advanced flexibility measures enabled by digitalisation – such as smart EV charging, demand-side response, and electricity storage – can support the reliable integration of extremely high shares of variable generation without any substantial VRE curtailment in 2035, while simultaneously reducing power system operational costs by between 2% and 11%. Other clean energy technologies, such as nuclear power and carbon capture and storage, also benefit from the presence of these measures in the form of increased utilisation. Furthermore, the deployment of these measures significantly reduces the need for investment in new fossil capacity by as much as 300 gigawatts, or 30% of the total installed fossil generation capacity in the SDS in 2035. In sum, boosting power system flexibility beyond readily available options (e.g. existing coal-fired power plants) is one of the most important priorities for enabling a rapid transformation of the Chinese power system.

Accelerated progress on power sector transformation could bring substantial benefits to China and the world. The accelerated transformation of the Chinese power system could bring significant benefits in the drive to limit climate change in line with the Paris Agreement. China is already a global leader in clean technologies. Chinese solar PV manufacturers have played and continue to play a vital role in the rapid decline of solar PV costs. Moreover, the dynamic expansion of electric mobility in China and the associated expansion of the EV value chain have put downward pressure on electric batteries and, ultimately, EV prices. China also has a very well-developed digital communications and software industry, which is an ideal setting to make accelerated progress in the implementation of digitally enabled, demand-side response. China can use the path of PST to accelerate progress in restructuring its economy towards a pattern of growth in advanced high-quality industrial sectors, while making clean energy technologies affordable for countries around the world – including today’s developing countries, which will see a rapid increase in energy demand over the coming years.

This document summarises the main messages of the China Power System Transformation report. The full report has two objectives. First, it provides a summary of the state of play of power system transformation (PST) in the People’s Republic of China (“China”) and a comprehensive discussion of PST internationally. Second, it presents findings from a detailed power sector modelling exercise for China in 2035, which explores the impact and value proposition of various public policy and technology deployment options currently under consideration by Chinese policy makers. The report provides a number of insights on possible Chinese PST pathways based on the results of this modelling exercise.

The rise of low-cost wind and solar power, deployment of DER and increasing digitalisation are accelerating change in power systems around the world. Throughout the world, power systems are undergoing a period of profound change. The fundamental drivers behind this transformation are threefold. First, renewable energy – in particular wind and solar power – is on track to becoming the cheapest source of new electricity generation in many regions of the world. Wind and solar photovoltaics (PV) can already out compete new natural gas, and even coal-fired power plants, in areas with high-quality resources and low financing costs. This is leading to transformation on the supply side of electricity.

Second, distributed energy resources (DER) such as electric vehicles (EVs) and rooftop solar PV systems are changing the value chain of electricity. The demand side is poised to play a much more active role in the system, and distributed generation is emerging as a more relevant complement to large-scale generation.

Third, digitalisation of the power sector is expanding from the transmission level – where digital sensors and controls have been used for decades – into medium- and low-voltage networks, all the way to individual devices. This increased connectivity opens up advanced options to more dynamically match demand and supply.

With the right framework conditions in place, these trends can combine to bring more fundamental change to power systems, leading to a much stronger integration between the demand and supply sides while allowing a more rapid uptake of variable generation resources (Figure 1).

Figure 1. Illustration of an interconnected energy system enabled by digitalisation

“Power system transformation” describes the processes that facilitate and manage changes in the power sector in response to these novel trends. It is an active process of creating policy, market and regulatory environments, as well as establishing operational and planning practices, that accelerate investment, innovation and the use of smart, efficient, resilient and environmentally sound technology options. It is a complex task for policy makers.

Wind and solar power are experiencing rapid growth in China and further cost reductions could accelerate their deployment. China added 44.26 gigawatts (GW) of solar PV in 2018 – this increased total installed capacity by 34% compared to 2017 and accounted for 53% of the global market for the technology. Wind power increased by 20.59 GW and total installed capacity reached 184 GW at the end of 2018. This means that wind and solar accounted for 52.9% of capacity additions in China, demonstrating their position as a mainstream source of electricity. Importantly, generation from wind and solar PV continue to rise, while curtailment levels are falling. Wind generation increased by 20% year on year in 2018, while curtailment fell by 5 percentage points and stood at 7% in 2018. Generation from solar PV grew by 50% over the same period and curtailment fell by 2.8 percentage points and stood at 3% in 2018.

Continued cost reductions could further accelerate wind and solar PV uptake – in China and globally. Wind and solar PV currently receive higher remuneration than coal-fired generation in China. The associated additional costs have been a concern for Chinese policy makers and recent policy changes in China have reduced deployment expectations for solar PV in 2019. However, if wind and solar PV achieve cost parity with coal-fired generation, they could experience accelerated update. Current trends are encouraging in this regard and the Chinese government has announced several pilots for subsidy-free wind and solar PV plants for 2019. This makes it relevant to investigate the ability of the Chinese power system to absorb much higher proportions of variable renewable energy (VRE) in the future.

Very high shares of variable renewables are technically possible. International experience clearly demonstrates that there is no hard technical limit to the uptake of VRE in power systems. In countries where such limits were announced, further investigation showed that limits could be overcome. Technical solutions exist to deal with all issues that may arise from the increased variability and uncertainty inherent in wind and solar PV generation, or from their specific technical design that makes them behave differently on the power system compared to conventional power plants.

Reaching high shares of variable renewables in a cost-effective way calls for a system-wide approach. As experience in a large number of countries demonstrates, traditional approaches to integrating VRE do not take a system-wide perspective. VRE is often treated in isolation from the rest of the system and measures aim to make VRE more similar to conventional generators. However, such an approach becomes increasingly inefficient at growing shares and can lead to unnecessary high costs and/or curtailment. Advanced methods take a systemic approach that aims for a more comprehensive transformation of the power system. The main paradigm of such a transformation is an increase in power system flexibility.

Power system flexibility – a concept that goes beyond power plant flexibility – is the crucial element for a successful transformation of the power system at growing proportions of wind and solar power. Driven in many contexts by a higher share of VRE in daily operations, power system flexibility is an increasingly important topic for policy makers and system planners to consider. It is a core aspect of power system transformation, and is crucial for ensuring electricity security in modern power systems.

Power system flexibility is defined as the ability of a power system to reliably and cost-effectively manage the variability and uncertainty of demand and supply across all relevant timescales, from ensuring instantaneous stability of the power system to supporting long-term security of supply. A lack of system flexibility can reduce the resilience of power systems, or lead to the loss of substantial amounts of clean electricity through curtailment of VRE.

Importantly, power systems are already designed with the flexibility to manage variability and uncertainty, but requirements may grow and change over time. A number of operational, policy and investment-based interventions are available to make modern systems more flexible, facilitating cleaner, more reliable, more resilient and more affordable power systems.

Power system flexibility is a concept that is much broader than power plant flexibility. Traditionally, flexibility has been associated with the more flexible operation of coal power plants in China. However, the concept of power system flexibility is much broader. Indeed, it encompasses all resources of the power system that allow for its efficient and reliable operation at growing shares of variability and uncertainty. Apart from power plants, it can be provided by grid infrastructure, demand-side response and electricity storage (Figure 2). In a transformed power system with higher shares of VRE, the importance of flexibility options beyond power plants increases sharply. This can open synergies with other developments in the power sector, such as the deployment of EVs.

Figure 2. Overview of different power system flexibility resources

Different levels of VRE penetration require an evolving approach to providing power system flexibility. As VRE penetration increases, ensuring cost-effective and reliable integration may change flexibility requirements. The International Energy Agency (IEA) has developed a phase categorisation to capture changing impacts on the power system and resulting integration issues. This framework can be used to prioritise different measures for power system transformation. The phases are:

• Phase 1: The first set of VRE plants are deployed, but they are essentially insignificant at the system level; integration effects are highly localised, for example at the grid connection point of plants. Korea, the Russian Federation (“Russia”) or South Africa are examples of Phase 1 countries.
• Phase 2: As more VRE plants are added, changes between load and net load become noticeable. Upgrades to operating practices and making better use of existing power system flexibility resources are usually sufficient to achieve system integration. On a national level China is currently in Phase 2. Other countries in Phase 2 include India, Japan and the United States. 
• Phase 3: Greater swings in the supply–demand balance prompt the need for a systematic increase in power system flexibility that goes beyond what can be fairly easily supplied by existing assets and operational practice. Examples of countries in this Phase include Germany, Italy and the United Kingdom. The Chinese provinces of Xinjiang, Ningxia, Gansu and Qinghai are also considered to be currently in Phase 3.
• Phase 4: VRE output is sufficient to provide a large majority of electricity demand during certain periods (e.g. high VRE generation during periods of low demand); this requires changes to both operational and regulatory approaches to preserve power system stability. From the operational perspective, changes may be needed to the way the power system responds immediately following system disturbances. From the regulatory perspective, rule changes may be required to ensure that VRE has to provide frequency response services such as primary and secondary frequency regulation. Only very few countries are in this Phase including Ireland and Denmark.
• Phase 5: Without additional power system flexibility measures, adding more VRE plants in this phase may mean that aggregate VRE output frequently exceeds power demand and structural surpluses of VRE appear, leading to an increased risk of curtailment of VRE output. Shifting demand to periods of high VRE output via storage or responsive demand-side resources, and/or creating new demand via electrification, may mitigate this issue. Another possibility is to enhance power trading with neighbouring systems. In this phase it is possible that, in some periods, demand is entirely covered by VRE without any thermal plants on the high-voltage grid. No countries are currently in this phase.
• Phase 6: Once this phase is reached, the remaining obstacle to achieving even higher shares of VRE now becomes meeting demand during periods of low wind and sun availability over extended periods (e.g. weeks), as well as supplying uses that cannot be easily electrified. This phase can thus be characterised by the potential need for seasonal storage and use of synthetic fuels such as hydrogen. No countries are currently in this phase.

The comprehensive transformation of the power system to achieve high proportions of VRE requires action in three main areas:

1. system operation and market rules
2. flexible resource planning
3. investment, system-friendly VRE deployment.

A comprehensive set of policy, market and regulatory frameworks is needed to link actions in the three areas effectively (Figure 3). Importantly, the deployment of these measures has significantly broader benefits than simply promoting VRE integration – rather, they help to boost power system operational efficiencies, reduce environmental impacts, promote investment and competition, and increase reliability and resiliency.

Figure 3. Three main pillars of system transformation

• First pillar – System operation and market rules: Improved operating strategies are a powerful tool to maximise the contribution of existing assets to power system transformation. Relevant operating strategies include advanced renewable energy forecasting and enhanced scheduling and dispatch of power plants. In addition, new services for the power system (ancillary services) can become relevant, especially at growing shares of VRE. While markets for ancillary services are a key component, the most important market mechanism for system transformation is a well-functioning short-term (spot) electricity market. This provides a crucial basis for operating the entire power system much more dynamically, reflecting rapidly changing supply/demand patterns. Another important element for improved operations is expanding the geographic area over which demand and supply are balanced. These two fundamental aspects have been investigated in detail in this study.
• Second pillar – Flexible resource planning and investment: Deploying a balanced mix of flexible resources is critical for the long-term evolution towards a transformed power system. As explained above, different technical options are available to provide power system flexibility. The most widely used option today is the more flexible use of conventional power plants, combined with increases in grid infrastructure. However, digitalisation and the rise of distributed energy resources and systems open up radically new options to balance supply and demand. Consequently, the detailed modelling for this report investigates DSR and storage as well as EVs as advanced options to provide system flexibility.
• Third pillar – System-friendly VRE deployment: Wind and solar PV power plants themselves can also facilitate power system transformation, where policy allows and encourages them to do so. The classical paradigm for wind and solar PV deployment emphasises generating the maximum volume of energy with little consideration for where and when it occurs. However, as wind and solar PV play an increasing role on the system, planning and procurement strategies must take into account effects on the system. This publication provides a conceptual framework for assessing VRE power plants from a system perspective, referred to as “system value”, and highlights a number of international examples of policies that focus on system value.

Further details on all these actions are provided in the main analysis.

Power system transformation requires co ordinated changes across the entire value chain of electricity production and consumption. Indeed, it may even necessitate the creation of entirely new roles in the power system, such as aggregators of small-scale power system assets (e.g. smart charging of a fleet of EVs in order to provide grid services).

In practice, this means that it is not sufficient to look only at the technical or economic aspects of system transformation. The institutional setup and the roles and responsibilities of different stakeholders in the system require review and possibly revision. This is particularly relevant for establishing medium- and long-term system plans. Here it is critical for all stakeholders to ensure that planning entities operate in a transparent environment and work to promote fair market access and competition as plans are translated into reality.

Advanced energy modelling exercises highlight the possibility of achieving a transformed power system in China by 2035. Two different IEA scenarios describe possible configurations for the Chinese energy system in 2035. This report elaborates on the main scenarios for China from the IEA World Energy Outlook (WEO). The two key WEO scenarios explored for China are the New Policies Scenario (NPS) and the Sustainable Development Scenario (SDS) (Figure 4).

• The NPS aligns with the achievement of China’s Document No. 9 reforms and aims to provide a sense of where today’s policy ambitions seem likely to take the energy sector in China. In the NPS, non-fossil technologies account for 60% of installed capacity and approximately 50% of generation. Wind and solar PV provide 21% of total generation. The NPS assumes a carbon dioxide (CO₂) price of USD 30/tonne. The WEO NPS assumes the implementation of economic dispatch, optimised trading and increased interconnection between provinces.
• The SDS achieves the main energy-related outcomes of the Sustainable Development Goals, including delivering on the Paris Agreement, achieving universal access to modern energy by 2030, and reducing dramatically negative health outcomes due to energy-related air pollution. Its vision is aligned with the “Beautiful China” initiative proposed in the 19th National Congress of 2017 as the general blueprint of China’s future development. Under the SDS, nuclear and renewable technologies have higher levels of installed capacity, particularly wind, solar and hydropower, with less fossil fuel generation. Of the installed fossil fuel capacity, 15% has carbon capture and storage (CCS). Non-fossil technologies account for 74% of installed capacity and 72% of total electricity generation. Wind and solar PV account for 35% of total electricity generation. The SDS assumes a CO₂ price of USD 100/tonne. The WEO SDS assumes sufficient flexible resources to fully integrate VRE into the system.

Figure 4. Capacity and generation mix for China in 2035, IEA WEO NPS and SDS

The modelling analysis presented in this report takes these WEO scenarios a step further. Building on a regional model developed for the WEO 2017, it features detailed power sector modelling analysis at an unprecedented level of detail to help understand the value of various policy and technology choices in the year 2035. The modelling highlights what aspects of the power system are most crucial in 2035 – this then allows the identification of priority areas for policy options. To achieve this, a regional model has been developed that includes a detailed bottom-up analysis of future demand structures, taking into account anticipated structural shifts in the Chinese economy.

• The NPS is used to explore the value of current and proposed polices, notably the ongoing power market reform that foresees the introduction of spot markets and increased levels of cross-provincial trade. The analysis uses a two-step approach: first, an inflexible version of the NPS is modelled; then different options to make the system more flexible are analysed. The NPS analysis looks specifically at measures to improve system operation and market functioning.
• The SDS is used to explore the importance of advanced flexibility options – in particular on the demand side – to support a deeper transformation of the system. A two-step approach is also used for the SDS: first, an inflexible version is modelled; then different flexibility options are deployed in the system and their impact is analysed. The SDS provides a framework to assess the application of advanced technologies to provide flexibility.

In both scenarios, the modelling finds that steps to increase the flexibility of the power system are crucial for unlocking the full potential of renewable energy for power system transformation.

Establishment of spot markets and trade between provinces are two of the main elements to improve market rules and hence system operation in China.

The introduction of market forces in the Chinese power sector is a current policy priority. Dispatching in China currently follows an administratively predetermined “fair dispatch” rule, where generators produce an allocated energy volume, rather than an economically optimised merit order dispatch, which is common in most market-based systems (i.e. “economic dispatch”). Document No. 9 foresees the orderly withdrawal of the administrative allocation system as a crucial next step.

International experience clearly demonstrates that a well-functioning short-term market (spot market) for electricity is a very powerful measure to drive power system transformation. In such an arrangement, the power plant with the lowest generation costs has priority for meeting electricity demand (economic dispatch). In most designs, the cost of the last (most costly) plant that is needed to meet demand sets the price paid to all generators.
Spot markets are particularly useful in fostering power system transformation for the following reasons:

• They solve the issue of needing to allocate the right to generate to different power plants. No explicit regulations are required to determine how much each plant is allowed to generate. Plants can try to increase their generating hours by cutting their operational cost and can optimise their profitability by enhancing their flexibility (in order to generate when prices are high and turn down when prices are low).
• They reveal the actual value of electricity at different times and locations. Spot markets usually have a different electricity price for each hour of the day (in some cases even for every five minutes). They can also be designed to have different prices for each location or zone of the grid. This means that spot prices highlight when and where electricity is most precious or available in abundance. This information is crucial for integrating VRE.
• Their price signals can inform commercial negotiations for longer-term contracts. Spot markets are very useful because they discover an accurate price for electricity. This information can be used to inform long-term pricing of electricity, guide investment in new generation capacity, and help with the establishment of financial markets for electricity.
• They allow for the market entry of new players. A liquid spot market with well-designed market rules can facilitate the participation of new actors, such as demand aggregators and electricity storage.

Combining effective spot markets with better utilisation of interconnections and increased grid investment brings a more efficient power system that can absorb shares of VRE that are much higher than today’s. The modelling analysis under the NPS in 2035 indicates that the power system can integrate VRE at over 20% of total generation without any curtailment by improved operations and increased levels of physical interconnections. Hence, accelerating market reform – especially establishment of spot markets and increased provincial trade – is a priority for optimising a system in which VRE accounts for a growing share of generation.

China’s goal of transitioning from fair to economic dispatch will result in significantly lower power system operational costs and improved ability to integrate wind and solar power. Ongoing market reforms to introduce economic dispatch make good financial sense and will strongly benefit the environment. Detailed power sector modelling under the NPS compared two different ways to dispatch the system: a fair dispatch approach that allocates guaranteed full-load hours to conventional generation, fixed at 2017 levels; and economic dispatch, i.e. dispatching plants according to lowest operating cost – while still preserving a modest generation allocation for natural gas generators.

Maintaining the current fair dispatch system would lead to major inefficiencies in the capacity mix under the NPS in 2035, including very high levels of curtailment (33% combined for wind and solar PV at a national level). Improving system dispatch brings operational cost savings of approximately 11% or USD 45 billion per year in 2035. Also, curtailment falls to 5% at a national level. Moreover, power sector CO₂ emissions fall by 15% (650 million tonnes per year). These results clearly demonstrate the importance of introducing economic dispatch in the system.

The swift implementation of spot markets in China is crucial to achieving this. Conversely, failure to introduce economic dispatch or other measures to reduce allocated full-load hours to fossil generators would result in unacceptably high levels of VRE curtailment.

The introduction of economic dispatch is bound to trigger the exit of inefficient coal generators from the market, and this process is likely to need active management by government. Modelling results demonstrate that transitioning the Chinese power system to economic dispatch has significant consequences for fossil fuel generators, which will experience a drop in operating hours, particularly in VRE-rich regions. This issue will require close monitoring and possibly dedicated policy intervention to ensure an orderly transition.

Increasing power trading can substantially boost system efficiency and reliability, but efforts to co ordinate and harmonise markets are required. Boosting power trading has long been considered a national priority in China. As of today, China already has cross-regional (interprovincial/interregional) mid- and long-term trading, intended to improve the overall efficiency of the power system and make provincial grids more resilient by sharing their energy and backup services. While China has made progress in this area over the past years, this practice is not fully adopted and many barriers still exist. Significant effort by policy makers will be required to orchestrate and harmonise various markets so that they co ordinate with one another, while also encouraging broad participation by both state-owned and private generators.

Broader regional co ordination and greater transmission interconnectivity will yield substantial economic benefits. Modelling results show the significant economic benefits of regional co ordination and power trading in the Chinese power system. Again, two cases were compared: one where utilisation of interregional transmission lines is fixed at 2017 levels, and another where the flows are fully optimised. Assuming a fully optimised use of transmission lines, including those planned to be built by 2022, total operational costs are reduced by an additional 3% (USD 9 billion annually) compared to the case that uses economic dispatch but 2017 utilisation levels. Curtailment levels fall further, from 5% to 3% at a national level. This highlights the importance of increased trade in the system and the large benefit it can bring. Assuming additional interconnections further lowers operating costs by USD 8 billion and brings curtailment levels to 0%. (The analysis assumes an increase from 230 GW to approximately 410 GW of interconnections; see Annex A in the full report for details.)

This greater interconnectivity results in a heterogeneous set of regional impacts on power plant generation levels. Regions with more economically favourable power plants experience an increase in generation levels, whereas less competitive regions experience reduced generation levels and purchase cheaper electricity from neighbouring regions. Policy makers should be aware of this expected change in order to carefully and proactively manage the transition.

In summary, the combined impact of improved operations (economic dispatch, regional trade) and additional interconnections is a reduction in operating costs of 15% or USD 63 billion annually. In addition, annual CO₂ emissions are reduced by 750 million tonnes (Figure 5).

Figure 5. Operational costs, inflexible and flexible cases, NPS, 2035

Activating the demand side, including EVs, and targeted use of electricity storage are crucial to delivering an accelerated transformation of the power system.

Power system flexibility is the most important cornerstone of a transformed power system with a high share of VRE. In the SDS, VRE resources account for 35% of electricity generation on average. However, in some regions these numbers are much higher. For example, in the Northwest region VRE covers 73% of electricity demand. This requires unprecedented levels of system flexibility, including advanced technologies to ensure system stability. Relying on advanced technologies enabled by digitalisation allows for the reliable integration of very high proportions of variable generation without any excessive curtailment in 2035 under the SDS.

Advanced technologies – enabled by digitalisation – reduce the need to rely on power plants to provide flexibility. The modelling under the SDS combines a broad range of advanced flexibility options. Their impacts have been estimated on the basis of detailed bottom-up modelling of future electricity demand in China, assuming that advanced technologies can unlock the flexibility potential. The assumed flexibility options for this report are:

• Approximately 300 GW of residential, commercial, agricultural and industrial-sector load contributing to DSR programmes are in place in 2035, with enrolled resources spanning space heating and cooling, water heating, refrigeration and cleaning appliances.
• 220 million EVs are made available under smart charging schemes in China in 2035, which corresponds to approximately 250 GW of peak EV charging load and 800 terawatt hours of total annual EV charging load.
• Over 100 GW of pumped storage hydro and over 50 GW of battery energy storage are deployed.

The benefits and costs of the different flexibility options are quantified for this study – in all cases they bring net benefits under the SDS in 2035 (Figure 6).

Figure 6. Benefits and costs of different advanced power system flexibility options, SDS, 2035

Working in concert, these options can greatly improve the match between wind and solar PV supply and electricity demand. Indeed, the modelling analysis finds that these options can substantially reduce the need for flexible power generation – by 300 GW, or 30% of the total installed fossil fuel generation capacity under the SDS in 2035.

The use of advanced flexibility options is found to be highly cost-effective compared to the SDS without their presence. Using these options to their maximum potential could lead to total net savings of USD 64 billion annually. This considers both reduced operating costs (including CO₂ emission costs at a price of USD 100/tonne) and avoided capital costs for power plants. This number accounts for the investment required to install advanced flexibility capabilities.

Increasing power system flexibility beyond readily available options, such as coal power plants, is thus one of the most important priorities for facilitating the rapid transformation of the power system towards higher proportions of variable generation.

A stable investment environment for clean energy technologies remains crucial. The benefits of introducing short-term markets are clearly demonstrated by the modelling carried out for this study. However, the introduction of economic dispatch and spot pricing of electricity could bring new challenges for the system. The investment framework in China after the Document 5 reform provided a high level of certainty for all players. Prices are guaranteed via the regulated on-grid tariff, while operating hours are secured via the fair dispatch system. This arrangement cannot be maintained in the future, due to its contradiction with the efficient operation of the system. This therefore raises the question of how sufficient investment certainty can be ensured for clean energy technologies. This issue is particularly relevant because clean energy technologies tend to have high up-front costs and low operating costs. This makes the cost of financing a key driver for the cost of delivered electricity. In turn, risk and risk perceptions determine financing costs. As a consequence, this means that mitigating investment risk will become even more important in the future than it has been in the past.

The two most important risks for power generators are price risk and volume risk. Market premium systems and contracts for difference have proven to be effective tools to mitigate price risk while integrating clean energy into spot markets, as examples across Europe demonstrate. As regards volume risk (curtailment risk), a variety of mechanisms are available, including compensation for curtailed energy. In the specific context of China, the quota system currently under consideration could serve this purpose, ensuring sufficient market demand to prioritise clean energy use.

Advanced renewable energy policies that focus on system value can minimise integration challenges. As the share of renewable energy grows in the Chinese power system, the interactions between renewables and the broader electricity system need to be considered in the design of renewable energy policies. This usually becomes evident through the emergence of “hotspots” of VRE deployment, where penetration levels are much higher than the national average and integration challenges become significant. An initial approach to this issue is the geographic and technological diversification of VRE deployment. A variety of measures can achieve this, such as limiting permits for new installations in certain regions, differentiating remuneration levels regionally or by time of production, or giving specific incentives for smaller-scale installations – China has implemented a number of these options in the past years with some success. However, there are additional possibilities to enhance the system integration of renewables by use of deployment policies. The concept of system value (SV) is critical in this regard.

Considering the value of electricity to the overall system opens a new perspective on the challenge of VRE integration and power system transformation. The value of electricity depends on when and where it is generated, particularly in a power system with a high proportion of VRE. During certain times, an abundance of generation can coincide with relatively low demand – in such cases, the value of electricity will be low. Conversely, when little generation is available and demand is high, the value of electricity will be high.

The SV of a power generation technology is defined as the net benefit arising from its addition to the power system. While the conceptual framework applies to all power generation technologies, the focus here is on wind and solar power plants. The SV is determined by the interplay of positive and negative effects arising from the addition. On the positive side are all those factors included in the assessment that lead to cost reductions; these include reduced fuel costs, reduced CO₂ and other pollutant emission costs, reduced need for other generation capacity, reduced water requirements and possibly reduced need for grid usage and associated losses. On the negative side are increases in certain costs, such as higher costs of cycling conventional power plant and for additional grid infrastructure.

Spot markets can be a very useful tool for providing appropriate signals to VRE developers and operators. By exposing VRE plants to the varying prices on the spot market, they can be encouraged to build power plants that generate as much as possible at times and in places where electricity is valuable – and where prices are higher than average. However, such approaches need to strike a balance between creating an incentive for system-friendly deployment while also providing sufficient investment certainty. Advanced market premium systems such as the current system used in Germany or auction mechanisms that factor in SV such as the Mexican clean energy auctions are examples of how this balance can be achieved.

A comprehensive change in market design and system planning is needed to accelerate power system transformation.

While the presence of competitive wholesale power markets is not a prerequisite for power system transformation, it is an extremely common and highly effective tool for its achievement. Wholesale markets help to open markets to investment, unleash the forces of competition, integrate VRE and reduce system operational costs. While there is no standard design for wholesale electricity markets, several important characteristics are worth noting:

• Short-term power trading: Short-term markets are the foundation of all market-based electricity systems, and have been proven to be a valid approach to cost-effective integration of high shares of VRE in Europe and parts of the United States. Short-term markets play a critical role in mobilising the flexibility of the power system, and can support the integration of VRE.
• Economic dispatch and rapid trading: Arguably, the shift towards economic dispatch – which enables resources to compete based on their short-run marginal cost – is the single most important market design aspect for supporting the integration of VRE. Because VRE shows large variability across time and has very low short-run cost, rapid trading of electricity, close to real time, is also critical. For example, in Europe trading on intraday markets on the day of delivery is gaining importance for improved integration wind and solar power.
• Cross-regional trade in electricity: The benefits of regional power system integration and trading cut across all aspects of the power sector, including: improved security of supply; improved system efficiency; and improved integration of variable renewable resources. These benefits generally derive from the increased optimisation of generator dispatch. For example, the close interconnection and trade with neighbours is the most relevant tool for wind integration in Denmark.
• Markets for flexibility services: Reliable operation of the power system critically depends on a number of system services to provide flexibility, which contribute to maintaining system frequency and voltage levels, as well as balancing a power system with increased variability and uncertainty in the supply–demand balance. As the penetration of VRE increases, the need for such services – and hence their economic value – is bound to increase. Establishing market structures to incentivise the provision of flexibility resources and services is an important task for policy makers in the transformation process. For example, Ireland is introducing a comprehensive reform of system services to deal with very high proportions of VRE.
• Clean energy investment framework: A crucial aspect of market design is ensuring that clean generation resources have an appropriate investment framework to facilitate their continued growth in line with policy targets. As mentioned, market premium systems in Germany and the Mexican auction design include measures to balance investment certainty with maximising SV.
• Pricing of externalities: Price-based instruments aim to internalise the societal costs of environmental degradation, climate change or air pollution – caused by energy production – in the planning and operation of electricity generators according to the polluter pays principle. Price-based instruments can achieve environmental targets in a cost-effective way. However, they should be part of a coherent policy package. For example, the European emissions trading system has been updated several times to deliver an effective price signal that is well-linked to other policy instruments.

The opportunity of digitalisation and the rise of DER have broad implications for power system transformation in the retail electricity market segment. Relevant dimensions, and examples of them, in the retail market include:

• Tariff reform to encourage system-friendly investment in and utilisation of DER: Making time-of-use tariffs accessible to a wider array of consumers may be a useful way of encouraging improved use of DER, including demand response and rooftop solar.
• Promoting digitalisation and connectivity in various retail customer segments: One prerequisite for visibility and control across the power system is the availability of appropriate real-time monitoring systems with bidirectional communication across grids, loads and generation. Sweden has implemented a comprehensive roll-out of smart meters in support of power system transformation.
• Enabling technology neutrality for the provision of power system flexibility: For a successful transition, a level playing field is crucial to allow advanced DSR and storage to contribute to system services and power system flexibility. System services markets in Europe have been reformed to allow participation of storage and demand response.
• Establishing procedures for open and secure access to power system data: Greater monitoring and computing capabilities present a great opportunity for constant improvement of power system operation and the development of new business models for DER in the retail segment. Allowing access both to power sector participants and researchers may assist policy makers in identifying new areas of opportunity to pursue. Denmark has recently established a data hub for better access and availability of smart meter data.

Power sector planning is an inherently complex process due to the long planning horizon and is subject to a range of drivers that are highly uncertain. Traditionally, the primary focus of power sector planning was on expanding supply infrastructure (generation, transmission and distribution networks) to meet projected electricity demand, based on assumptions of economic growth over the next 20 to 30 years. However, with the changing landscape of the power sector, due to increasing deployment of VRE and other new technologies such as DER, as well as increasing consumer participation, planning for a future power system needs to become more sophisticated – it needs to take into account the role and impact of these developments. Several important characteristics of upgraded power system planning frameworks are worth sharing:

• Integrated generation and network planning exercises: Historically, generation, transmission and distribution planning processes have been conducted independently in separate processes. However, as the level of VRE deployment increases, there is an increasing need to co ordinate and integrate generation and network planning exercises in order to avoid transmission congestion in areas with the highest-quality VRE resource, and to plan a system that utilises VRE resources with the highest SV.
• Incorporation of demand-side resources into planning exercises: The potential role of the demand-side resources, such as DSR and energy efficiency, is often overlooked in power sector planning processes. The Integrated System Plan introduced in 2018 in Australia aims to better incorporate these aspects in overall system planning.
• Integration of planning between the power sector and other economic sectors: Integrated planning that spans the power sector and other sectors is a growing field, one which promotes broader energy system integration. Historically, planning across different sectors was thought to be relevant only for the electricity and gas sectors, since gas is one of the main fuels for electricity generation in many countries. More recently, continuing innovation in and uptake of demand-side technologies are having an impact on the power system. This is particularly the case for EVs. They can be used with smart charging strategies to support power system flexibility and facilitate VRE integration by recharging during periods of high VRE output and – ultimately – supplying to the grid when output declines. In the European Union, for example, network development plans for electricity and gas infrastructure were better integrated in 2018.
• Broader interregional planning: Power system planning was traditionally confined to established single-utility balancing areas. However, with an increasing level of VRE deployment, expanding the size of balancing areas can potentially provide greater flexibility through resource diversification across different geographical regions. In addition, greater geographic diversification of generation sources leads to less variability in supply.
• Including system flexibility assessments in long-term planning: While traditional approaches to power system planning have ensured that sufficient flexibility is available on the system to balance supply and demand, the emergence of VRE in 21st century power systems requires more careful consideration of power system flexibility in planning exercises. As the proportion of VRE increases in many markets and government deployment targets continue to evolve, recent experience has shown that it is good practice to accompany longer-term power system transformation goals with a long-term system flexibility strategy.
• Incorporation of DER considerations in distribution network planning: When local grids are expected to integrate considerable amounts of DER, such as VRE, within the planning horizon of a distribution utility, additional and potentially more complicated distribution planning studies typically need to be completed. This is to ensure the continued safe, reliable and cost-effective operation of the interconnected distribution system.

Accelerated progress on power sector transformation could bring substantial benefits to China and the world. China’s power system is the largest national power system in the world; it accounted for one quarter of global electricity consumption in 2017 and its share is expected to rise to around 30% by 2035 in the NPS. Consequently, optimisation of the Chinese power system has immediate global effects, simply because by itself it accounts for such a substantial share.

An accelerated transformation of the Chinese power system could bring significant benefits in the drive to limit climate change in line with the Paris Agreement. As the modelling conducted for this study demonstrates, improved operations and advanced power system flexibility options can deliver substantial emissions savings while reducing overall system costs.

However, there could be further positive effects of an accelerated transformation of the Chinese power system. China is already a global leader in clean technologies. Chinese solar PV manufacturers have played and continue to play a vital role in the rapid decline of solar PV costs. Moreover, the dynamic expansion of electric mobility in China, and the associated expansion of the EV value chain, has put downward pressure on electric batteries and ultimately EV prices. 

China also has a very well-developed digital communications and software industry. So far, these industries have not been combined to their full potential. However, as the scenarios set out in this report demonstrate, an optimised system relying on enhanced digitalisation to unlock load shaping could integrate much larger amounts of clean energy. In turn, this stands to bring substantial economic and environmental benefits.

The accelerated adoption of these solutions in China could make them affordable for countries around the world – including today’s developing countries, which will see a rapid increase in energy demand over the coming years. In turn, China can use the path of power system transformation to make accelerated progress in restructuring its economy towards a pattern of growth in advanced high-quality industrial sectors.