Electricity Market Reform in China

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RESTRUCTURING CHINA’S POWER SECTOR: THE TECHNICAL, ECONOMIC AND POLITICAL FOUNDATIONS OF UNBUNDLING TRANSMISSION AND DISTRIBUTION SEGMENTS IN CHINA’S ELECTRICITY INDUSTRY

Zichao Yu Undergraduate Student The Hong Kong Polytechnic University, China Email: 09819622d@connect.polyu.hk

H. W. Ngan IEEE Senior Member The Hong Kong Polytechnic University, Hong Kong Email: eehwngan@polyu.edu.hk

Yang Wu IEEE Student Member The Hong Kong Polytechnic University, China Email: yang.wu@connect.polyu.hk

ABSTRACT Starting from 2002 China has been engaging vast amount of resources in restructuring its power industry and has so far achieved the separation of generation and auxiliary from the former vertically integrated entity. What remained unsettled and even grew into a tougher bottleneck is that without obvious efforts in unbundling the transmission and distribution (T&D) segments there was actually a trend of reintegration and recentralization of power grid assets. The State Grid Corporation of China (SGCC), China’s giant national grid operator, currently runs over 70 percent of the country’s business in electricity transmission, distribution and sales, and its monopolistic market power continues to expand through pursuing national goals like rural electric network renovation and strong smart grid construction. Despite SGCC’s great contribution to the overall development of China’s power sector, its operational efficiency has long been questioned and little public openness been challenged. The chaos in recent years in which interest controversies between local electric companies and SGCC evolved into armed conflicts exposed the structural deficiencies in a unified T&D configuration. It is consequently appealed that an approach to dismantle China’s electricity distribution from transmission should be urgently dedicated to. This paper aims at designing an approach to unbundle China’s electricity transmission and distribution segments. Such an approach should be effective in solving present problems and paving ways for further reforms. At the same time, it should avoid affecting the achievement of the nation’s long-term goals. It is therefore suggested that a gradual approach with modest, step-by-step adjustments should be taken. Through deep investigation into China’s electricity transmission and distribution section, its technical and economic characteristics are identified. Findings indicate that hasty separation of the transmission and distribution segments is technically applicable but not economically feasible, for a competitive distribution market would be premature when the country’s distribution networks, especially those in rural areas are still underdeveloped. Basing on this conclusion the political issues concerning China’s power industry are studied. A roadmap is presented which intends to balance the interests of different stakeholders and the administrative power of different authorities. The guarantee of such balance relies on a more independent, resourceful, powerful, and open regulator to be in effect. A stronger legal system is also suggested to confine the market power of state-owned grid operators and foster a healthy market in the future. 1. INTRODUCTION

The electricity industry, which has long been considered by China as a foundation of the national industry and of strategic importance for the country’s socialist market economy, has undergone a series of reforms in the last decade. In year 2002 the State Council released its “Annual Scheme Number 5”, titled “Scheme of Reforms in China’s Electricity System”. On the one hand it set the goal of reforms as to breach the originally monopolistic operation and to introduce market competition into a restructured electricity industry. One the other hand, the major measures to be taken in the reforms were determined as to separate electricity generation from power grids, to detach the ancillary services from the industry’s core business, to unbundle electricity...
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