China’s huge commitment to renewable energy, from vast solar farms in Xinjiang to offshore wind projects in Guangdong, is a well-known success story — such plants together accounted for over a third of the country’s total electricity generation last year. 

Getting the price right for all the power those wind and solar plants produce, to ensure it doesn’t go to waste and China’s energy system becomes less polluting, has been more of an issue.

Beijing is now taking steps to correct that problem. Starting from June 1, prices for power produced from new wind and solar projects will be more influenced by market factors, instead of being set at rates linked to energy produced from coal. Experts say the shift reflects China’s effort to unify its renewable power market countrywide, and to steer its vast electricity system with price signals rather than administrative orders.

“By moving toward market-based pricing, the Chinese government is tackling inefficiencies in the subsidy system and nudging renewable energy producers to become more price-competitive,” wrote Wendy Chang, an analyst at the Mercator Institute for China Studies, in an email.

Introducing more marketization may seem a laudable aim. Yet questions remain as to whether the new pricing system can help China achieve its twin aims of weaning itself of its reliance on coal-powered electricity, and improving its energy security — or whether it could actually lead to slower growth in renewable energy investment. 

“It’s been a very slow moving reform, I’m not too optimistic about it really happening,” says Lauri Myllyvirta, lead analyst and Co-founder at Centre for Research on Energy and Clean Air. He notes that the pricing issue was being discussed as early as 2012, but has long faced resistance from entrenched interest groups, adding that his “biggest concern is that this policy could lead to a slowdown in China’s clean energy deployment.”

For years, Chinese electricity grid companies have purchased renewable electricity at prices pegged to coal-fired power, regardless of the actual production cost. This effective subsidy allowed renewable developers to earn stable, predictable profits, and encouraged the sector’s capacity growth. 

Under the new rules, provincial governments will set a ‘strike’ price for power from new renewable projects based on competitive auctions — the policy does not specify how often these will take place. On paper, that could mean power generated from renewable electricity plants would be cheaper than from coal. The result: electricity grid demand for wind and solar power would rise, leading to less waste and a less polluting energy system overall. 

A potential downside is higher price volatility for renewable energy producers, making investment in new capacity less attractive. 

“I think [the reform] is a necessary and good step,” says David Fishman, a senior manager at the Lantau Group, an energy consultancy in Shanghai. “Although I believe it will slow down new renewable builds for a year or two.”

To mitigate that risk, companies that sell their power to grids below the ‘strike’ price — due to fluctuations in actual energy supply and demand — will receive compensation from China’s State Grid companies, while those selling above it may be required to return their excess earnings.

The timing of the reform reflects the falling cost of China’s clean energy production. With the price of solar panels, wind turbines, and energy storage dropping sharply in recent years, the government believes the industry is now mature and low-cost enough to withstand market competition.

“Compared with previous periods, the cost of new energy development has dropped significantly,” the National Development and Reform Commission said in a statement. For example, solar energy production costs in China have fallen by 80 percent over the past decade, according to the International Energy Agency.

The change also reflects the fact that as China’s economic growth slows, policymakers are under pressure to rein in spending on subsidies for policies such as promoting renewable energy generation.

“If you [the Chinese government] maintain the previous arrangement, you’re actually overpaying,” said Li Shuo, director of the China Climate Hub at the Asia Society Policy Institute. “If you don’t correct it, this system cannot sustain itself over the long term and will collapse.”

They [the power companies] are quite comfortable trading power on annual contracts and would probably prefer to trade most power in that way… I expect we will need to see some mandates for spot market usage to encourage power trading entities to actually use it.

David Fishman, a senior manager at the Lantau Group, an energy consultancy in Shanghai

Still, reducing the role of coal in China’s energy mix remains complex. Despite President Xi Jinping’s April 2021 pledge to “strictly control” new coal power projects, large-scale blackouts later that year raised serious concerns in Beijing about energy security. As a result, the government has remained cautious about reducing China’s reliance on coal.

The result is a policy mix where subsidies for renewable energy are being reduced, yet coal-fired power plants continue to receive government support — leading to the highest number of new coal plant approvals in China in a decade in 2024.

“The parts that are not market-oriented, such as coal-fired power plants and similar sectors, are heavily influenced by vested interests and economic policies. Personally, I am not optimistic about further market-oriented reforms in this area,” says Li.

Another challenge lies in the policy’s emphasis on improving China’s so-called ‘spot’ markets where energy is bought and sold for immediate delivery. Having efficient spot markets is a key element in the price reform plan, as they provide real-time prices based on actual supply and demand conditions. 

Although energy spot markets have been established in many provinces, nearly all electricity in China is still traded through medium- and long-term contracts, which companies often prefer due to the certainty over revenue they provide. 

“They [the power companies] are quite comfortable trading power on annual contracts and would probably prefer to trade most power in that way unless they are forced to reserve some power for the spot market,” says Fishman. “I expect we will need to see some mandates for spot market usage to encourage power trading entities to actually use it.”

In addition, even if a unified electricity market is successfully established, a long-standing issue remains: China’s under-used grid means that green energy is still being wasted. During the first two months of this year 6.2 percent of China’s wind power and 6.1 percent of its solar power were wasted, an increase of about 2 percentage points compared to the same period last year, according to a recent report issued by an agency under the National Energy Administration.

Part of the problem is geographical: China’s most abundant wind and hydropower resources are in the northwest, north and northeast, while the highest demand is in the densely populated eastern regions. Although Beijing has invested heavily in ultra-high voltage power transmission lines to address this imbalance, competition among provinces has made it difficult for energy to flow efficiently across regional borders.

Despite such issues, several observers say Beijing’s moves should provide a boost to renewable energy over time, as its price starts to better reflect the cost of its production.

“Wind and solar are now the most affordable forms of power generation, so they can hold their own in competition if the rules are set right,” says Myllyvirta.

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