Insights from European and American Power Development Models for China's Power Reform
The recent large-scale power outage in Europe surprised many and was regarded as a signal of power shortages and weak power grids in Europe and the United States. China's power reform model, which takes Western power reforms as a benchmark, has bypassed the government intervention market model that has been used in the West for nearly a century and has chosen the popular market competition model. The "market mechanism" is an unavoidable hurdle. How to make the market the main force in resource allocation will become an increasingly clear focus of reform. European and American power reforms were once called the "textbook" for Chinese power reforms. Now, this textbook has an upgraded version. In October 2006, the Cambridge Energy Research Associates (CERA) completed the research report "Lessons from Foreign Power Reforms for China." Recently, the author interviewed Dr. Zhang Chi, a senior researcher at CERA who chaired the project.From Efficiency Excavation to Attracting Investment Dr. Zhang Chi believes that in the four years since the start of China's power reform, the global power reform process, which serves as a reference, has progressed much slower than expected. To date, no country has completed the complete separation of "generation, transmission, distribution, and sales" as outlined in the "textbook." The design of "efficiency excavation" on the basis of "mature markets" in Europe and the United States is being troubled by power shortages and environmental issues. Attracting power investment has become an increasingly serious problem. The U.S. power system is currently in a "hybrid mode" of "half regulation and half freedom." The "New Energy Act" introduced in 2005 is considered a "system patch that recognizes the status quo." To encourage corporate investment in power grids, the U.S. Federal Energy Regulatory Commission announced tax refunds or tax reductions for grid investors and increased reasonable profit margins. After the surge in natural gas prices, new power producers have chosen coal-fired power generation, and more discussions are being held about nuclear energy projects. "It has become easier to renew licenses for old nuclear power plants." "The recent federal government policies encouraging grid and clean energy investments all need to bear huge environmental pressures, fully demonstrating the importance the U.S. attaches to power investment," Zhang Chi said. "At the beginning of China's power reform, there were two misunderstandings. One was that developed countries did not need power investment, and only developing countries like China did. However, it now seems that attracting investment is a common challenge. The other misunderstanding was that attention should be focused on competition in power generation. However, in recent years, more and more countries have found that if the grid lacks investment, the foundation of the power market is difficult to guarantee." But attracting power generation investment is not easy. Due to the large amounts and long cycles involved, investors often need sufficient commitments. The lessons from the failure of California's power reform prove that long-term transitional contracts are the foundation for market stability. Another "universal principle" is that the transmission and distribution links must be completely independent of market transactions to dispel concerns about fair competition among market participants. However, these issues have become somewhat unique in China. After the cancellation of long-term power purchase contracts in 2002, on one hand, state-owned power generation groups expanded aggressively, while on the other hand, foreign investors shifted their interest from building factories to the stock market. Private capital, limited by funds and channels, tested the waters in small thermal or hydroelectric power. Existing power producers are concerned about fairness, while the potential danger lies in new investors being hesitant to enter. Can't China's rapid economic growth dispel foreign investors' concerns? "Investors across the Pacific value regulatory risks and clear returns. China's power reform has no definite timetable, and only state-owned enterprises dare to invest. After 2002, foreign power plant investors withdrew, and those who entered were buying stocks and bonds," Zhang Chi said. "Korean Electric Power Corporation, Hong Kong's CLP Holdings, and some Southeast Asian companies familiar with China's system and culture are relatively bolder." The core issue is not whether China's five major power generation groups can meet the needs of power development, but whether the quality of development has lost its standard. "China introduced foreign investment largely to use foreign companies as benchmarks to pressure Chinese companies. But in power generation enterprises, this pressure does not exist because foreigners have all withdrawn." More challenging is grid investment. On congested sections, even a Ferrari may not outrun a tricycle. The "rally race" of the power market will be constrained by weak grids. Compared with the world average ratio of 1:0.5:0.7 for generation, transmission, and distribution investment, China's ratio is 1:0.23:0.2. The long-term imbalance in investment is becoming increasingly apparent. However, there is still controversy over increasing grid investment. A strong grid is seen as a tool and symbol of monopoly. The State Grid Corporation's investment plan for ultra-high voltage grids has sparked numerous questions. Compared with Brazil's successful use of nodal pricing to attract transmission facility investment, China's grid projects rely mainly on bank loans, and the listing plans of grid companies have been repeatedly shelved.Markets Do Not Pursue Administrative Divisions "Now the EU grid is somewhat like China's grid. China's grid needs to break provincial barriers, while the EU needs policies to promote grid investment and strengthen power interconnection to break the division between countries," Zhang Chi said. To ensure that power interconnection becomes the "public transportation system" of member states, the EU initiated 50 related lawsuits in April 2006 against 17 member states for not following the reform direction of the electricity and natural gas directives. In July 2007, Europe will operate a unified power market. While Europe has chosen market integration with a "synchronized grid, the bigger the better," Chinese experts are still debating the scope and model of the power market. Zhang Chi believes that the power market is an auxiliary to commercial power transactions, not to mandate or force these transactions. It is not a political or geographical concept. For example, the PJM power market in the United States spans multiple states but only includes parts of certain states, not all of them. Even within the PJM market, there are local areas that do not participate in competition and operate under traditional regulatory methods. On the one hand, the market needs to start at a certain point, but the most important thing is that it is dynamic and expands with the development of power transactions and grids. Establishing a unified and effective power market requires strong political authorization. For example, in countries like the UK and Sweden, strong national will has ensured the true integration of domestic markets with neighboring countries, thereby truly opening up the power market. On the other hand, it is necessary to avoid artificially defining market boundaries based on traditional government jurisdiction concepts. Currently, China's power reform deliberately emphasizes the establishment of six regional markets while excluding any other considerations (this could be modified to be more neutral, such as "Currently, the construction of power markets is constrained by administrative boundaries at the provincial or regional level, which may hinder the development of power transactions"). In fact, this approach has not captured the essence of building a market: it is about providing a platform for transactions and voluntary and independent transactions between buyers and sellers, not government-mandated transactions. Energy resources being far from load centers is not unique to China. Like China, large countries such as India, Brazil, Russia, and the United States have long-distance transmission issues and market trends of selling cheap electricity from remote areas to load centers. Their experience proves that competition in the wholesale market is of great significance for resource optimization. For example, the PJM regional market in the United States is currently expanding to the south and Midwest. Its boundaries are not artificially defined. New power generation resources benefit a large number of consumers in the market. Especially when natural gas prices are high and unstable, the allocation of resources over a larger area is one of the main manifestations of its market success. Are national, regional, and provincial power markets mutually exclusive or open to each other? Domestic debates cannot overshadow the voice of the market: the loss of trading opportunities is the real loss of efficiency and social welfare.Increasingly Clear Reform Focus The basic debate on power reform is called the debate between engineers and economists, but everyone also believes that a path suitable for national conditions must be taken. What is unclear is how to combine the thinking of engineers and economists. What exactly are the "national conditions" of China's power reform? "The way engineers think is not the real factor affecting China's power reform. The real factor is that people have not theoretically established full trust in the market," Zhang Chi said. Tracing back to the source, Zhang Chi pointed out that the starting point of China's power reform is different from that of the West. The traditional models of "state-owned and state-operated" and "privately owned and state-supervised" at the beginning of Western power reforms are still market models, but competition was introduced after the reforms. In China, the government is the controller and decision-maker of resource allocation. In contrast, in the West, electricity is allocated according to the market, and all parties are subject to legal systems that maintain market fairness. Due to the physical characteristics of the power network, market failure is inevitable. Western governments try to correct market failures by simulating market environments as much as possible, such as implementing emission trading or formulating energy policies, using measures like taxes, regulating financing costs, electricity prices, and profit margins to overcome monopolies, reduce pollution, and attract investment. In comparison, these policies in the West often achieve good expected results without distorting the energy market. It is as if the government's role is to repair roads and traffic lights, rather than stepping on the brakes or pressing the accelerator for businesses. Now, domestic attention is increasingly shifting to unbundling, as if the means have become the end. But who can clearly explain what comes after unbundling?
