China advances renewables marketisation by 5 years, targeting 30% electrification

1. Why is renewables full marketisation five years ahead of schedule?

• Capacity milestone: China hit its 2030 wind and solar power installed capacity target six years early, with renewables surpassing 40 per cent of total installations, exceeding coal power.
• Cost competitiveness: Wind and solar power generation costs have dropped below 0.30 yuan/kWh, undercutting coal power.
• Structural shift: The traditional centralised purchasing model incentivised grid operators to act as traders rather than invest in grid upgrades.
• Rising demand: AI-driven computing power is pushing electricity demand up 5 per cent annually, straining grid infrastructure.
• Market deadiness: By end-2024, over 50 per cent of renewable generation was already traded in the market.

2. How does renewables market integration differ from the 2021 coal power market reform?

• Renewable energy market integration is more aggressive than the coal power reform, adopting a dual-track system of "market-based pricing + price difference settlement" instead of coal power's "benchmark pricing + floating adjustments." The price-difference settlement mechanism applies only to a portion of renewable electricity output and will be phased out over time, making pricing fully market-driven.

3. How will this impact renewable project revenues?

Previous model: Power price = coal power benchmark price (stable returns)

New model: Power price = market bidding ± price difference settlement (higher volatility)

Break-even analysis: A 10MW solar PV power plant needs a price above 0.26 yuan/kWh to sustain an internal rate of return (IRR) above 8 per cent, but spot and long-term electricity prices in many regions have already fallen below 0.15 yuan/kWh.

Mechanism tariffs: The new price settlement mechanism is crucial for stabilising project revenues. If mechanism tariffs closely match coal power benchmarks, which are normally between 0.25 and 0.49 yuan/kWh, the investment risks will be significantly reduced. However, it remains unclear how the tariffs would be adjusted in different regions.

4. Who stands to gain?

For power generators:

• Digital leaders: Top state-owned and private firms using AI to enhance generation forecasts and bidding strategies.
• Low-cost producers: Companies with lower generation costs than coal power will gain more market share.
• Flexible operators: Projects with long-term contracts or onsite energy storage capacity will see more stable earnings.

For industrial power users:

• The full market integration of renewable electricity will drive faster innovation and cost optimisation in renewable generation. While short-term price swings may occur, long-term power prices are expected to decline, making electricity more competitive against fossil fuels. This shift will accelerate electrification. By the end of 2024, electricity accounted for about 28 per cent of China's end-use energy consumption, with projections to reach 30 per cent in 2025.