Electricity Market Creation in China: Policy Options from Political Economics Perspective

In 2015, a new round reform of the marketization for the electricity sales in China is launched. This paper investigates the policy selection for this reform in China, from the perspective of political economics. We analyze the policy selection of the 2015 reform from two aspects of market structure and pricing mechanism. According to the policy of the 2015 reform, China’s power industry is of great potential to develop the market structures of “integration of generation and retail services while integrating transmission and distribution” versus “integration of generation, distribution and retail services while independent of transmission”. Those two market structures have advantages on competition efficiency and political practicability. For the pricing mechanisms, the power exchange market of China can take bilateral contracts for the long-term trading and double-sided auctions for the short-term trading, as well as for the spot market. In addition, electricity financial market can be set up as a supplement for the power exchange market, which is of potential contribution to manage the risk and discover the effective price. The 2015, reform assigns two state-owned grid companies the responsibility of the demand side management. The intelligent system to improve the information management of energy consumption can be established. Utilization of renewable energy is also emphasized in the 2015 reform for energy sustainability in China. Effective policy instruments, such as the efficient subsidy policy, an independent exchange market, and a quota system, for the promotion of renewable energy utilization, can be implemented