China is set to introduce unified national-level guidelines for green power trading. In April and May 2024, the National Energy Administration (NEA) solicited public opinions on these draft guidelines. In the short term, wind and solar PV power will continue to dominate green power trading, where environmental attributes are bundled traded with energy attributes. Power generation projects from renewable energy sources other than wind and solar must use the green electricity certificate (GEC) trading market to gain environmental benefits on top of their electricity revenues.
Separately settling the prices of electrical energy and green certificate components in green power trading helps improve the valuation of renewable energy's environmental benefits and the pricing mechanism for the green premium. As of 2023, green power trading in China accounted for less than 1% of the total electricity market transaction volume, with renewable energy projects primarily dependent on electricity revenues.
Since 2024, China's green power trading market has grown rapidly. From January to May, the nationwide green power trading volume reached 148.1 billion kWh, more than double the 61.1 billion kWh traded in 2023. It is expected that the supply and demand for green power will continue to increase throughout the year. On the supply side, it is anticipated that by the end of 2024, the cumulative installed capacity of wind and solar power will surpass that of coal power for the first time, raising its share to approximately 40% of the total installed capacity. On the demand side, China aims for non-fossil energy consumption to account for around 20% of the national total by 2025, up from 17.7% in 2023, necessitating an accelerated expansion of non-fossil energy use. Additionally, China's recognition that green power usage can lower CO2 emission calculations for carbon quota compliance can enhance enterprises' enthusiasm for adopting green power.
The domestic green power trading market currently faces challenges like inadequate inter-provincial trading mechanisms and underdeveloped transmission channels, hindering rapid trade between provinces. Additionally, an immature market-driven pricing mechanism leads to frequent price imbalances. However, policies introduced since 2024 indicate that the government is progressively refining these mechanisms to expand the national green power trading market.
Wind and solar PV power to dominate trading in short term
Domestic green power encompasses all electricity generated by renewable energy projects registered and filed on the national platform. This includes wind, solar, biomass power, conventional hydropower, geothermal energy, and ocean energy, etc.
China started piloting green power trading in September 2021, with market participants primarily consisting of wind and solar PV power projects. The newly released document reconfirms that these projects will remain the primary participants at the initial stage. This means that power generation projects from other renewable energy sources must participate the GEC trading market to get environmental benefits on top of their electricity revenues.
Meanwhile, obstacles remain in certifying wind and solar PV power as green power. Some distributed solar PV projects are struggling to connect to grids due to insufficient grid capacity in certain regions. This issue is delaying project filings and affecting their participation in green power trading.
Electrical energy and GEC prices settled separately
Due to the small scale of China's green power market, incomplete GEC issuance and verification mechanisms, and immature market systems, most renewable energy companies focus solely on electricity trading. Consequently, the environmental value of green power (i.e., revenues from GECs) remains undervalued and unrealized.
As of 2023, green power trading in China represented less than 1% of the total electricity market transaction volume, with renewable energy projects primarily dependent on electricity revenues. In practice, green power trading prices are typically higher than the average medium- to long-term market prices. In 2023, the average environmental premium for green power was 6.5 cents/kWh in State Grid's operating areas and 1.85 cents/kWh in China Southern Power Grid's areas.
As domestic consumption of renewable energy increases, the demand for green power and GECs is expected to rise, boosting both the environmental value and green premium of renewable energy. A clear and refined green power pricing mechanism is urgently needed. GEC prices are influenced by renewable energy consumption obligations, energy consumption dual control policies and carbon emission caps, rather than electricity price fluctuations. Since early 2024, the immature market mechanism has caused a surge in domestic GEC supply while demand has remained low. This has caused the lowest settlement price for a single GEC fell below 1 yuan, translating to an environmental benefit of less than 0.1 cent per kWh.
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Edited by Aggie Hu, huchenying@mysteel.com
