Fan Bi: The Road to Reform Rescue Power Dilemma

In the spring of 2002, the State Council issued the Notice on Printing and Distributing the Power System Reform Program (Document No. 5), which reorganized state-owned power assets. Today, ten years of vicissitudes, the No. 5 paper proposes four major goals: separation of plant and network, separation of main and auxiliary facilities, separation and transmission of electricity, and competitive bidding for electricity. The first two steps have been initially achieved. What will be the next step for the reform?

Lagging in electricity reform: Accumulated new contradictions in the China Energy News: How to sum up and comment on electricity reform for the past decade?

Fan Bi: In 2002, the State Council promulgated the "Document No. 5". Before the reform, the newly added 20 million kilowatts of power generation capacity is a good result. Ten years of reforms, many years can add 100 million kilowatts of installed capacity, which greatly eases the power shortage that has long plagued China's development.

However, in recent years, the contradiction between coal and electricity has intensified, power generation companies have suffered huge losses, industrial and commercial enterprises are heavily burdened with electricity, and the development of new energy and renewable energy is constrained, and the universal service of electricity is not in place. The prominent contradictions in a series of energy fields reflect that the emergence of the line power system has become a major obstacle to transforming the mode of economic development, promoting energy conservation and emission reduction, and developing a multi-ownership economy. At present, it is necessary to further deepen the reform of the power system and fundamentally solve the outstanding problem that has long plagued the power industry and the economic operation.

China Energy News: What are the most prominent issues at present?

Fan Bing: Some important reform tasks identified in Document No. 5 have not yet been implemented. If the separation of power transmission and distribution has not been implemented, the construction of the regional power market has been hindered, the reform of electricity prices has lags behind, and a series of new contradictions and problems have been accumulated. Mainly in the following areas:

First, the contradiction between coal and electricity periodically. Since the beginning of the new century, the price of coal and electricity has been rising and power generation companies have encountered difficulties in operating. From 2008 to 2010, the entire thermal power industry suffered a loss of several hundred billion yuan, and the debt ratio of some power generation companies even exceeded 100%.

Second, it is difficult to generate new energy. There is a big gap between the actual power generation of new energy and the design level. The “abrogated wind” and “abandoned light” and the phenomenon of power curtailment are serious and the development is difficult to sustain. Distributed rooftop photovoltaic power generation, small-scale wind power generation, and distributed natural gas polygeneration plants, which are very common in developed countries, are struggling in China.

Third, the energy saving and emission reduction situation of the power industry is severe. For a long time, in most of the power dispatches, the generation time of even high energy-consuming fossil-fired power generation units, high-efficiency energy-saving units, and renewable energy-generating generating units has been evenly distributed. There are even plans to complete the thermal power generation project. Renewable energy power generation has to give way to thermal power generation. The situation is equivalent to encouraging the development of high-energy-consuming units and forming an adverse adjustment to energy-saving and emission-reduction.

Fourth, industrial and commercial enterprises are overburdened with electricity. At present, the on-grid tariff of power generation companies is 0.3-0.4 yuan/kWh, while the actual electricity cost of industrial enterprises is generally one to two times higher than the on-grid tariff, and most of the commercial enterprises in the eastern region are above 1.2 yuan. Enterprises generally reflect that there are many power grid charging links, the actual electricity consumption is much higher than the national list price, and even reaches the level of some developed countries, which has affected the international competitiveness of enterprises to a large extent.

Program Continuation: Insufficient Development of the Electricity Market China Energy News: What are the causes of the above contradictions?

Fan Bi: The above-mentioned outstanding contradictions and problems in the power industry in recent years stem from the fact that the reforms since 2002 have not fundamentally resolved the contradiction between the plans and the market.

On the one hand, the traditional way of planning management continues. In general, the sales revenue of a power company is equal to the price of electricity multiplied by the amount of electricity (income = electricity price × electricity). At present, the on-grid tariff is determined by the government's examination and approval, and the amount of power generation is determined by the production plan issued by the local government. As a company, there is no autonomy in product output and pricing. This is a rare phenomenon today after more than thirty years of market-oriented reforms. Artificially set electricity prices and power generation plans hardly reflect supply and demand, and there is no scientific basis. When the price of thermal coal rises or falls, power generation companies cannot independently adjust and cope with the cost change factors.

On the other hand, when the local government is formulating a power generation plan, it is basically based on the average distribution time of generator units. A thermal power unit can generate more than 6,000 hours of electricity a year, often only giving 4000-5000 hours. For this part of the planned electricity, the grid companies purchase electricity at the on-grid tariffs stipulated by the state, while the unplanned electricity prices are purchased at a reduced price. When the price of thermal coal rose sharply, the thermal power plant over-planned power generation even caused losses. The more contradictions between coal and electricity, the lower the company's enthusiasm for generating electricity. In the case of ample power generation capacity in the country, unreasonable institutional arrangements have created a "electricity shortage."

China Energy News: In the way of planning and management, how is the performance of the electricity market?

Fan Bi: The electricity market is underdeveloped.

The reform since 2002 has only initially established a competitive pattern in the field of power generation. The transmission, distribution, and sales of electricity still maintain the upstream and downstream integrated organizational structure. The grid companies integrate grid assets operations, engineering construction, power system dispatching, and electricity billing and financial settlement.

At present, the difference between the purchase of electricity and the sale of electricity in the power grid is among the highest in the world, but the return on assets is still very low. Due to lack of transparency in grid dispatch, trading, and finance, the inherent causes of high spreads and low returns have always been a mystery. Deepening the reform of the power system has reached a point of no time.

Deepening Electric Power Reform: Redefining the Transmission and Distribution Separation of China's Energy News: What is the use of overseas practices in the development of electricity markets?

Fan Bi: The traditional view is that the power industry must implement upstream and downstream integrated operations and be managed by the state. With technological advances and management innovations, this situation has changed a lot.

The general practice of foreign power market reform is to establish a power market based on the principle of fair competition in power generation and electricity use, redefine the market attributes of the transmission and distribution links, define the transmission link as a non-competitive sector, and the power grid company is responsible for the backbone. The construction and operation of the transmission grid; the distribution of power distribution links into a competitive area, the introduction of market mechanisms, the formation of a large number of power distribution, power sales companies, as an independent market entity engaged in the purchase and sale of electricity business.

At present, most of the transmission networks in developed countries are composed of numerous grid companies that form a national interconnected or transnationally interconnected transmission grid. For example, the United States has ten networks and Western Europe (including some Eastern European countries) is composed of more than a dozen national power grids. The advantage of multiple asynchronous transmission grids is that it facilitates the allocation of resources within the region and the adjustment of surplus power resources outside the region, and is more secure than a national synchronization network. The No. 5 document stipulates that the country should set up six regional transmission grid enterprises that operate asynchronously.

China Energy News: Redefining the market attributes of the transmission and distribution sectors, what are the benefits for the electricity market?

Fan Bi: It can improve the efficiency of the electricity market. Although various countries have different ways and order of reform, they have basically chosen the path of splitting the industrial chain and established an electricity market that buys more and sells more. Even Japan and France, which still retain the vertical integration model, have opened up markets on the power generation side and the power sale side.

The practice of power reforms in various countries has proved that re-defining the market attributes of transmission and distribution links and restructuring the transmission and distribution business does not change the original physical connection mode of the power grid. There are no technical obstacles and it will not affect the power system security.

China Energy News: According to international experience, how to further deepen the reform of the power system in light of China's actual situation?

Fan Bi: According to international experience, deepening the reform of China's power system requires further emancipating the mind, redefining the market attributes of each production chain, and reconstructing its business organization model according to its characteristics. At present, we should adhere to the correct direction of the market-oriented reform identified in the No. 5 document, define the competitive business and non-competitive business as breakthroughs, build the electricity market that buys more and sell more, and further deepen the reform of the electric power system.

First, to further complete the task of separation of plant and network and separation of main and auxiliary facilities. For equipment manufacturing companies newly acquired by power grid companies at all levels in recent years, auxiliary business units still retained, such as power transmission and transformation construction companies, as well as related "triple production" and diversified business enterprises, have been subject to property rights divestiture. Strictly regulate the business scope of power grid companies, power grid companies are no longer engaged in business other than the main power transmission and transformation business.

Second, implement scheduling and transaction independence. Power dispatch plays a decisive role in organizing and coordinating power system operation and power market transactions, and it is the main means for power grid companies to maintain their monopoly status. In order to build a pattern of buying and selling power markets, China should, in accordance with international practices, separate the power dispatching agencies from power grid companies and form an independent dispatch and settlement center to take charge of power market platform construction and power trading, measurement, and settlement. Organize and coordinate the operation of the power system to ensure that the power dispatch transaction is open, fair and equitable and that the power grid is open and non-discriminatory. The operation of an independent dispatching agency is supervised by the SERC or directly assigned to the power supervision department.

Third, cancel unreasonable power generation plans. At present, there are no legal basis and policy basis for the power generation plans issued by various localities, and the national power authority has not issued such a plan. The plan should be completely abolished in the new power system reform program.

Electricity price reform: Let go of the middle to control the middle China Energy News: Electricity prices are the key to the reform of the electricity market. How to establish a market-based electricity pricing mechanism?

Fan Bian: The basic direction of reform is to “open the two ends and control the middle” and establish an electricity market that buys more and sells more. That is, the transmission and distribution prices are set by the government, and the on-grid tariffs and electricity prices are released. The specific steps are as follows: In addition to the government’s direct pricing, electricity is used for 15% of residents’ life and agricultural production, and industrial and commercial users of various voltage levels are directly involved with the power generation companies from high to low, step by step, and within a limited time. Trading, contractual power supply, self-determination of electricity, electricity and electricity prices. The contract was submitted to the power dispatching organization for verification and implementation. After the contract is fulfilled, the electricity supplier pays the relevant grid companies the prescribed transmission and distribution prices.

In the electricity price reform, we should also clean up all kinds of electricity price additions and reform the collection methods. The insistence on the ban on electricity price surcharges introduced by local authorities in violation of regulations. For the government funds and additions originally in line with the state regulations, the relevant taxes can be collected through tax-to-tax reform.

The government singly regulated and independently regulated the grid companies. In the near future, the modern enterprise system of the regional grid company can be perfected, and the internal accounting of the distribution company can be independently performed. On this basis, in accordance with the principle of “reasonable cost plus prescribed profit level”, the state will individually price each grid company, and the electricity regulatory authority will supervise the operation of the grid and the electricity market.

Reform of grid enterprise assessment methods. With reference to the international prevailing approach, under the premise that the grid company's profit level is stipulated by the government and capped, the transmission, distribution, and power supply quality of the unit assets should be taken as the main assessment indicators of power grid companies. Through the reform of assessment methods, grid companies are urged to focus on the quality and efficiency of transmission and distribution, and strive to reduce costs, restricting its blind pursuit of the expansion of the scale of assets, to improve the professional level and safety of power grid operations.

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