China’s Market-Oriented Reform: A New Chapter for Renewable Energy Pricing

China has taken a major step forward in its renewable energy policy by transitioning from fixed pricing to market-based mechanisms. This new approach, announced by the National Development and Reform Commission (NDRC) on February 9, represents a landmark shift aimed at boosting market efficiency while maintaining stability for renewable energy developers.

The reform, detailed in the policy Deepening the Market-Oriented Reform of New Energy On-Grid Electricity Prices, introduces a Price Settlement Mechanism that mirrors elements of contracts for difference (CfDs) used in the UK and Germany. This mechanism replaces the long-standing coal-benchmark tariff system, offering a more dynamic pricing model. While this shift marks a maturing of China’s renewable energy sector, it also brings new challenges and opportunities for market participants.

Key Features of the Reform

• Contracts for Difference (CfD): The new balancing payment is essentially CfD scheme which has been widely deployed in European countries to support renewables buildout. If market prices fall below an agreed level, generators will be reimbursed. Conversely, they will pay back the difference when prices exceed the threshold. This CfD mechanism ensures revenue stability while promoting market-oriented practices.
• Differentiation of Old and New Projects: Renewable energy projects will be divided into two categories based on a June 1, 2025, cut off. Existing projects will continue under the current compensation rules, while new projects will operate under the new pricing system. This differentiation is designed to ensure a smooth transition while incentivizing new development.
• Provincial Implementation: Local governments will be responsible for implementing the new policy by the end of 2025. Each province will have the flexibility to determine how the Price Settlement Mechanism will be applied, potentially creating variations in how the policy unfolds across regions.

A Push Toward Market Efficiency

The reform reflects a continued effort by Chinese authorities to wean the renewable energy sector off subsidies and move toward a more self-sustaining market model. As Yan Qin, principal analyst at ClearBlue Markets, explained in a Bloomberg article on February 10:

“The new policies represent a breakthrough that reflects a continued push by Chinese authorities to shift the maturing renewable energy sector away from subsidies.”

China’s renewable energy capacity is immense, with installed wind and solar capacity reaching 1,410 gigawatts last year—achieving the country’s 2030 target six years early. However, despite this impressive growth, integrating clean energy into the broader power market remains a challenge. Market-based pricing could help address this by incentivizing more flexible and efficient grid management.

Balancing Market Growth and Affordability

While the reform introduces market-oriented pricing, the NDRC emphasized that the policy will not affect residential and agricultural electricity prices. Industrial and commercial users can also expect minimal changes in the first year, helping to ensure that the transition does not disrupt broader economic stability.

The shift is a significant milestone in China’s power market reform, but how it will be implemented at the provincial level remains to be seen. Market observers will be closely watching how this policy unfolds and its impact on renewable energy integration and grid stability.

Learn more in a LinkedIn post from Yan Qin on February 10, 2025