China should establish a national spot power market and lift the barriers of interprovincial trade to advance power markets that support the country's green energy transition, according to a recent report.

China's power market, after more than two decades of reform, boasts the world's largest installed capacity — twice that of the United States. However, diversified moves are still necessary to support coordination between national and local markets, according to a report on building a unified national power market system in China released by the International Energy Agency in late April.

Wind turbine blades are delivered to a wind farm in Zhangye, Gansu province, in March. [WANG JIANG/FOR CHINA DAILY]

It is necessary for the government to further reinforce the role of national institutions to supervise market implementation and ensure coordination among national plans, markets and operational protocols to allow more flexible trading arrangements, it said.

According to Jacques Warichet, a researcher from the IEA, China should also step up the deployment of short-term markets to implement an economic dispatch and unlock flexibility from supply and demand resources, as markets are playing a growing role in the power system in China.

The mid to long-term markets, with a duration of one month to one year, are the most developed form of markets in China, with their contracts covering half of the electricity consumed and about four-fifths of the traded volume. The short-term markets, on the other hand, have not achieved their full potential despite the possibilities they bring to unlock flexibility from supply and demand resources, he said.

"In market-based systems, the short-term markets play a central role in price formation and support electricity security," he said.

The IEA believes China has been making big steps towards building a unified national power market system. The goals of peaking carbon dioxide emissions by 2030 and carbon neutrality by 2060 will continue to add momentum, expanding its footprint.

"Spot markets are expanding across China after the first provincial spot market pilots were launched in 2019, but their share in trade remains small and the connection with other established markets is still being completed," Warichet said.

He suggested the government should further step up regional trade coordination through a national market to deliver substantial efficiency benefits and increased resilience. In addition to operational efficiency gains, regional trade improves resource sharing across larger areas while bringing many benefits in terms of resilience and can contribute to reducing needed investments in generation assets for reserve.

Calculations by the IEA show that reductions in operating costs range from 6-12 percent and decreases in carbon dioxide emissions range from 2-10 percent compared with a situation where regional coordination is not improved.

An analyst said increased participation in markets on both the supply and demand sides is expected to continue as the 14th Five-Year Plan (2021-25) aims to give a leading role to markets.

According to Lin Boqiang, head of the China Institute for Studies in Energy Policy at Xiamen University, power markets can accelerate the decarbonization of the Chinese power sector.

Reducing the carbon intensity of China's electricity is crucial for achieving the government's ambition of peaking carbon dioxide emissions by 2030 and carbon neutrality by 2060, as well as meeting global climate goals, he said.

Accelerating decarbonization and the further deployment of power markets can create a framework in which a carbon pricing mechanism can take effect and achieve the dual carbon goals smoothly, he added.

For China, well-functioning power markets, together with carbon pricing, play a key role in the green transition.

National institutions can play a bigger role together as integrating the existing markets towards a unified national system will require a higher level of coordination, said the report.

The guidance for market design and market supervision by a national authority can secure the future practices and efficient functioning of markets, it said.

（Picture: Veer）