Excessive coal usage in China leads to unfavorable energy prices
In the heart of China's power market reforms lies an "off-market price settlement mechanism" for renewables, a system that compensates producers if market electricity prices fall below a benchmark price but requires them to repay if prices exceed it. This mechanism, however, creates uncertainty and risks for renewable investors due to the difficulty local authorities face in setting the benchmark price [1].
This uncertainty has tangible effects. In 2025, solar power installations fell sharply, indicating diminished developer confidence and reduced investment activity due to volatile and unpredictable returns tied to off-market power-purchase agreements (PPAs) [1]. This decline in investment risks stalling China's green energy transition, as renewables are central to reducing coal dependence and achieving carbon neutrality. Maintaining stable pricing and investor certainty is therefore critical for continuing the rollout of renewable generation needed for decarbonisation [1].
The complexity of market reforms and the balancing of low-cost electricity, grid stability, and renewable incentives remain challenging for China. This complexity affects not only prices but also the overall pace and scale of decarbonisation efforts in the power sector [1][4].
The overuse of coal power, low or negative prices, and lack of flexibility are three aspects of one problem in China's electricity system. Negative electricity prices prevent wind and solar power from earning their market value [1][5]. To eliminate frequent negative prices on the spot market, China needs to prevent the overuse of coal power [6].
The Chinese government has announced reforms in how renewables are sold to the grid, including the implementation of Contract for Difference-type mechanisms [7]. The existing, entirely market-based method of determining revenue for renewable generators is being replaced with subsidies and taxes, based on expected pricing [8].
As China's electricity demand rockets with annual growth between 8 per cent and 10 per cent in many parts of the country, the generation mix needs to be improved. Operational decisions should be made in line with market prices or cost signals to avoid overuse or excessive retention of coal power [9].
If China is to achieve its ambitious carbon reduction and decarbonisation goals, addressing the risks and uncertainties in its electricity market will be essential. Clearer price mechanisms and supportive policies are needed to accelerate China's energy transition [1]. The outcomes of the new arrangements in China's electricity system remain to be seen.
References:
- www.carbonbrief.org
- www.reuters.com
- www.ft.com
- www.bloomberg.com
- www.recharge.news
- www.climatechangenews.com
- www.chinadaily.com.cn
- www.scmp.com
- www.iea.org
- The off-market price settlement mechanism for renewables in China's power market reforms is creating uncertainty and risks for renewable investors due to the difficulty local authorities face in setting the benchmark price.
- In 2025, solar power installations fell sharply in China, signaling diminished developer confidence and reduced investment activity due to volatile and unpredictable returns tied to off-market power-purchase agreements.
- Maintaining stable pricing and investor certainty is critical for continuing the rollout of renewable generation needed for decarbonisation, as renewables are central to reducing coal dependence and achieving carbon neutrality.
- Negative electricity prices prevent wind and solar power from earning their market value, and to eliminate frequent negative prices on the spot market, China needs to prevent the overuse of coal power.
- The Chinese government has announced reforms in how renewables are sold to the grid, including the implementation of Contract for Difference-type mechanisms, replacing the existing market-based method of determining revenue for renewable generators with subsidies and taxes based on expected pricing.
- If China is to achieve its bold carbon reduction and decarbonisation goals, addressing the risks and uncertainties in its electricity market will be essential, requiring clearer price mechanisms and supportive policies to accelerate China's energy transition.
