Revitalizing China’s Green Economy Through Market-Oriented Energy Pricing Reforms

Unlocking New Momentum in China’s Green Economy

On February 9, 2025, China’s National Development and Reform Commission (NDRC) and National Energy Administration (NEA) jointly issued a notice titled “Notice on Deepening the Market-Oriented Reform of New Energy On-Grid Electricity Prices to Promote High-Quality Development of New Energy.” This reform aims to fully integrate wind and solar power generation into the electricity market, marking a historic transition in China’s new energy pricing mechanism from a “planned pricing” system to a “market-based pricing” approach.

From a long-term perspective, enhancing the marketization of new energy on-grid electricity pricing will not only inject vitality into the high-quality development of the new energy sector but also provide institutional guarantees for the construction of a new power system. The institutional innovations embedded in this reform will profoundly influence the country’s energy transition process and the implementation of its “dual carbon” strategy, which aims to peak carbon dioxide emissions before 2030 and achieve carbon neutrality by 2060.

Background and Necessity of the Reform

China’s new energy development is at a critical juncture. By the end of 2024, the total installed capacity of wind and solar power exceeded 1.2 billion kilowatts, accounting for over 35 percent of the country’s total power generation. As installation scales continue to grow, the existing policy framework, which is based on fixed electricity prices and guaranteed purchases, has become increasingly inadequate.

With the phase-out of financial subsidies, a new pricing mechanism is essential for supporting sustainable industry development. Additionally, the inherent volatility of new energy generation has created tensions with the operational mechanisms of the traditional power system.

The core of the market-oriented reform is to create a price signaling mechanism that guides resource allocation. Previously, new energy projects benefited from fixed-price guarantees, which facilitated large-scale expansion but also weakened the market’s regulatory function. As the construction of the electricity spot market accelerates, it’s essential for new energy projects to be integrated into this market framework to generate accurate price signals and incentivize participants to enhance system flexibility.

Implementation Path for Market-Oriented Pricing

The reform framework consists of three main approaches:

1. Comprehensive Market Integration: All new energy electricity must enter the power market, either through quantity-based bidding or by accepting the market-clearing price. This “full market entry” policy will break the previous dual-track operation model, ensuring that new energy is fully integrated into the power market system.

2. Fostering Market Mechanism Innovation: In the spot market, price caps have been relaxed, and bidding rules optimized to allow new energy to leverage its marginal cost advantages. The introduction of a “multi-year power purchase agreement” mechanism in the medium- and long-term market will encourage stable trading relationships.

3. Introduction of a Differential Settlement Mechanism: This mechanism aims to mitigate potential price volatility during the early market operation stages. It combines “market transaction + mechanism price” differential compensation, maintaining policy continuity for existing projects while requiring new projects to undergo competitive bidding for market access.

Facilitating High-Quality Development

Market-based pricing will fundamentally reshape the development logic of the new energy industry. It will push enterprises to focus on “value creation” rather than mere “scale expansion,” driving technological innovation to reduce the levelized cost of electricity and optimize operations. The low marginal cost advantage of new energy projects will exert pressure on traditional power sources to enhance flexibility.

Market mechanisms will significantly improve the system’s capacity to integrate new energy. As new energy electricity is incorporated into market clearing, its volatility will be transmitted through price signals, incentivizing investment in energy storage, demand response, and other flexible resources. Pilot data from various provinces indicate that market-based trading has increased new energy utilization rates by an average of 3 to 5 percentage points.

New Opportunities for New Energy Enterprises

The market-oriented reform of new energy electricity pricing will open new opportunities for enterprises in China:

1. Establishment of Market-Based Entity Status: New energy enterprises will transition from being electricity producers to integrated energy service providers, developing new capabilities in power trading, risk management, and value-added services.

2. Diversification of Revenue Sources: The reform will enable enterprises to generate revenue not only from electricity sales but also from capacity leasing, flexibility services, and environmental attribute trading, creating a stable cash flow system and reducing reliance on government subsidies.

3. Accelerating Internationalization: As pricing mechanisms align with global energy markets, Chinese enterprises will gain a competitive edge in overseas project development, equipment exports, and international electricity trading, solidifying China’s role in the global energy transition.

Conclusion

The market-oriented reform of new energy electricity pricing is a pivotal step in China’s energy transformation. By leveraging market mechanisms to optimize resource allocation, improve system flexibility, and enhance investment returns, this reform will accelerate the achievement of the “dual carbon” goals while fostering new drivers of green economic growth. Continued policy refinement and deepened marketization will be crucial for ensuring the long-term stability and prosperity of the nation’s new energy sector, providing a valuable reference for global energy transition efforts.