By Feng Fei& Liang Yangchun, Research Department of Industrial Economy of DRC

Research Report No.283, 2006

I. The Progress and Problems of Electric Power System Reform in the Tenth Five-Year Plan Period

Since the State Council promulgated the reform plan of electric power system in 2002, the electric power system reform in China has made much progress, which can be described as the following: the rapid growth in the power supply and grid construction has effectively relieved the power shortage; the separation of the power plant and power grid has helped create a market pattern favorable for introducing a fair competition to the electricity generation side; the establishment of the independent regulator for the electricity industry indicates a basic step toward a modern regulatory system; the pilot work about the electricity market has been done in some areas to test the applicability of different market system in China (even in different areas); the issuance of the electricity price reform plan has clearly defined goals and approaches for the electricity price reform.

Nonetheless, the problems arising in the reform are equally prominent, which mainly include:

First, the transformation of government function lags behind, the management system is not yet rationalized, and the new system has not been established since the abolishment of the old one. As a result, government function has not been fulfilled, authority absence and overstepping coexist, the problem of "multi-level management" is still obvious, the discretionary power of the administration organization is too strong, and an open, transparent and well-supervised administration system is to be set up.

Second, the sustainable development of electric power is increasingly important. During the Tenth Five-Year Plan period, to solve the problem of power shortage in China as soon as possible, the state over-emphasized power supply, but neglected energy conservation management at the demand side. The goal of "prioritizing energy conservation" was not effectively supported by means of policy implementation. The unreasonable distribution of power supply had not been altered in the real sense. The pollution caused by the electricity industry was worsened. All the above problems have posed new challenges to the sustainable development of the industry.

Third, the immediate goal of the reform has not been attained and the systematic risk is great. It is mainly demonstrated by the incomplete separation of power plant and power grid and the unfinished separation of main industry from subsidiary industry. Therefore, it is difficult for a fair competition to come into being. The risks of the reform, such as lacking investment incentives, the disharmony between the growth of power supply and grid etc. keep deteriorating. The development of power grid enterprises and subsidiary industry as well as the stability of the staff will be greatly affected in case of any relative surplus of electric power in the future.

Fourth, no substantial progress has ever been attained in the reform of key sectors, such as electricity price and market system. The future direction and anticipated objectives need to be further defined. The shortage of power supply makes the system of on-grid price bidding far from being realized, and the reform of transmission and distribution price is proceeding slowly. The lag of electricity price reform has seriously affected the interest structure of different market players.

Fifth, the legislation for the electricity industry lags behind and the reform leading work needs to be strengthened. Due to the lack of legislation, interested parties may distort original direction of the reform, hence increasing both the cost and the risk of the reform. Besides, the leading team which was set up at the early stage of the reform cannot play its due role,which has caused the interests of different market players to be hard to coordinate.

II. The Deepening of the Electric Power Reform Requires the Establishment of Four Mechanisms

1. To create an effective and moderate market competition mechanism

The introduction of competition mechanism into the electricity industry demands the clarification of three fundamental questions: first, how to match the competition mechanism with technological and economic characteristics of the industry; second, how to deal with the relations between competition and development; third, how to deal with the relations between market competition and government supervision.

First, it has been debated for long that the competition mechanism must take

technological and economic characteristics of the industry into account. It is acknowledged internationally that competition mechanism can be introduced into electricity generation and sales. Electricity transmission and distribution are sectors of natural monopoly, which can only be solved through regulation. Therefore, roughly breaking monopoly and introducing competition into the whole transmission and distribution sectors will probably cause the misuse of competition concept. Three elements decide the pattern of the grid companies: first, whether the competition optimizes resources distribution; second, whether the regulator can keep an effective control over the grid companies; third, the administrative scope of grid companies. Considering the peculiarities of the power grid, based on current administrative system and market condition, forcing the separation of the power plant and the grid will only replace "big monopolies" with "small monopolies". What is worse, the grid sector loses not only economy of scope (vertical monopoly is not allowed), but also economy of scale. Thus, the grid cannot be rashly split due to the temporary problems in establishing regulation systems.

Second, the relation between competition and development. In theelectricity industry, overemphasis on unrealistic competition will affect stability and sustainable development. One of the problems confronting the countries that had introduced reforms earlier is the lack of investment incentives due to the mishandling of the relation between reform and development. These countries are taking great pain in rectifying the situation. For example, the State of California of the United States altered the market pattern of total-quantity real-time bidding and the Britain government changed the power pool mode to develop the long-term contract market. By so doing, they seek to strike a balance between market competition and investment incentives in order to achieve sustainable development. The electricity demand in China grows much faster than that of the developed countries. Therefore, the reform goal must be differentiated from that of these countries, which means we must promote competition and development as dual goals of the reform, enhance efficiency through competition and then create an effective incentive mechanism to ensure sustainable and stable development of the electricity industry. To meet these goals, two crucial problems must be addressed: first, which market pattern should we adopt, total-quantity bidding or partial-quantity bidding? Second, which approach should be adopted in the regulation of electricity prices to ensure that the power grid companies are willing and have the capacity to make investment in the long run?

Third, it is necessary to deal with the relation between competition and regulation properly. The introduction of competition into the electric power system also entails a reform in regulation. Regulators should keep a close eye not only over the price and fair access issue when the monopolized grid is concerned, but also over the competitive distribution and sales sectors. However, revolutionary changes should take place in the scope of regulation (also called a regulation revolution), from traditional economic regulation to social regulation, which may include environment, security, quality, market structure (in case of the misuse of market power) and resources efficiencies.

...

If you need the full context, please leave a message on the website.