Gaining new traction in China's green economy
China's new energy sector is currently experiencing a historic turning point.
TroibNews 
Editor's note: Wang Peng is a research fellow at the Institute of State Governance, Huazhong University of Science and Technology, and the Eurasian Research Institute at Renmin University of China. The article represents the author's personal views and does not necessarily reflect the views of CN.
On February 9, 2025, China's National Development and Reform Commission and National Energy Administration announced the Notice on Deepening the Market-Oriented Reform of New Energy On-Grid Electricity Prices to Promote High-Quality Development of New Energy. This reform aims to fully integrate wind and solar energy into the electricity market, representing a significant evolution in China's pricing strategy, moving away from "planned pricing" towards a "market-based pricing" model. In the long term, enhancing the market orientation of new energy electricity pricing is set to invigorate the sector's growth and provide essential institutional support for establishing a new power system. The innovations introduced in this reform are expected to significantly influence the energy transition and the implementation of China’s "dual carbon" strategy, which aims to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060.
### Background and Necessity of the Reform
China's new energy sector is at a pivotal moment, with total installed wind and solar capacity surpassing 1.2 billion kilowatts by the end of 2024, representing over 35 percent of total power generation. However, as installed capacities grow, the existing framework—characterized by fixed pricing and guaranteed purchases—proves increasingly inadequate. With the removal of financial subsidies, there is a pressing need for a new mechanism to support sustainable growth in the industry. Simultaneously, the variable nature of new energy generation is increasingly at odds with the traditional power system's operational mechanisms.
The heart of the reform lies in creating a price signaling mechanism to guide resource allocation. Previously, fixed-price guarantees for new energy projects spurred industrial growth but diluted market regulatory functions and blurred consumption responsibilities. As the electricity spot market develops, keeping new energy projects outside this framework hinders the generation of accurate pricing signals necessary for market participants to enhance system flexibility.
This reform directly confronts the longstanding challenges faced by the new energy sector. Implementing a "market pricing + differential settlement" dual-track mechanism will enforce policy continuity while boosting market incentives. This system ensures that existing projects receive reasonable returns while allowing new projects to compete within the market. The gradual reform strategy considered the current stage of China’s power market and the industry's adaptability to changes, embodying the principle of "progress while maintaining stability."
### Implementation Path for Market-Oriented Pricing
The reform framework introduces a three-pronged approach to marketization.
Firstly, comprehensive market integration will mandate that all new energy electricity enters the power market, either through quantity-based bidding or acceptance of market-clearing prices. This "full market entry" policy breaks away from the previous dual-track model, integrating new energy completely into the power market system.
Secondly, the reform encourages innovation in market mechanisms. Price caps in the spot market have been relaxed, and bidding rules optimized to enable new energy projects to leverage their marginal cost advantages for flexible participation in real-time competition. Additionally, a "multi-year power purchase agreement" mechanism will incentivize stable long-term trading relationships among power generators and consumers, accommodating new energy's unique output characteristics while providing effective risk management tools.
The reform's most innovative feature is the introduction of a differential settlement mechanism. To mitigate potential early-stage price volatility, a "market transaction + mechanism price" differential compensation system has been designed. This maintains existing project protections while requiring competitive bidding for new projects, resulting in a dynamic adjustment mechanism that prevents excessive revenue fluctuations during market transitions and prioritizes efficiency in project selection.
### Facilitating High-Quality Development
Price signals resulting from the reform are expected to fundamentally transform industry development logic. Market-based pricing will compel enterprises to transition from focusing on "scale expansion" to "value creation," spurring technological innovations aimed at reducing electricity costs and optimizing operations for increased competitiveness. In the spot market, the inherent low marginal cost of new energy projects will produce pressure on traditional power sources to improve flexibility.
Moreover, market-based mechanisms will enhance the system's capacity to integrate new energy. With full market incorporation, the volatility of new energy generation will be reflected in price signals across the system, incentivizing investment in energy storage, demand response programs, and other flexible resources. This approach will contribute to developing an interactive "source-grid-load-storage" new power system. Data from pilot provinces suggest that market-based trading has boosted new energy utilization rates by approximately 3 to 5 percentage points.
Unlocking the monetization of green value also holds vital strategic importance. The reform requires that green power transactions specify green certificate prices, thus establishing a market-based pricing framework for environmental rights. The concurrent development of the carbon and electricity markets will make the environmental premium of new energy projects increasingly apparent, presenting new growth opportunities for the sector. Estimates indicate that monetizing these environmental benefits could enhance the return on investment for new energy projects by 2 to 3 percentage points.
### New Opportunities for Enterprises
The market-oriented reform of new energy electricity pricing presents fresh opportunities for Chinese enterprises in the sector.
Firstly, the establishment of a market-based identity will prompt a development paradigm shift. New energy companies will evolve from being simple electricity producers to integrated energy service providers, necessitating the development of new competencies in power trading, risk management, and value-added services. Pioneering companies have started exploring areas like virtual power plants and green certificate trading to gain competitive advantages.
Secondly, diversifying revenue sources will enhance the sector's resilience. The reform will allow companies to generate income not only from electricity sales but also from capacity leasing, flexibility services, and environmental attribute trading. This multifaceted business model will create a stable cash flow system for new energy firms in a market-driven environment, reducing dependency on government subsidies.
Finally, the transformation will expedite the internationalization of Chinese new energy enterprises. As pricing strategies and market regulations align more closely with global energy markets, Chinese companies will be better positioned to excel in overseas project development, equipment exports, and international electricity trading, reinforcing the nation’s leadership in global energy transitions.
### Conclusion
The market-oriented reform of new energy electricity pricing represents a vital step in China’s energy transformation. By leveraging market mechanisms to optimize resource allocation, enhance system flexibility, and improve investment returns, this reform is poised to accelerate the achievement of dual carbon goals while nurturing new avenues for green economic growth. Moving forward, ongoing policy refinement and enhanced marketization will be crucial for the long-term stability and prosperity of the new energy sector. This reform not only provides clear guidance for domestic energy development but also serves as a valuable reference in the global transition to sustainable energy.
Ramin Sohrabi for TROIB News
On February 9, 2025, China's National Development and Reform Commission and National Energy Administration announced the Notice on Deepening the Market-Oriented Reform of New Energy On-Grid Electricity Prices to Promote High-Quality Development of New Energy. This reform aims to fully integrate wind and solar energy into the electricity market, representing a significant evolution in China's pricing strategy, moving away from "planned pricing" towards a "market-based pricing" model. In the long term, enhancing the market orientation of new energy electricity pricing is set to invigorate the sector's growth and provide essential institutional support for establishing a new power system. The innovations introduced in this reform are expected to significantly influence the energy transition and the implementation of China’s "dual carbon" strategy, which aims to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060.
### Background and Necessity of the Reform
China's new energy sector is at a pivotal moment, with total installed wind and solar capacity surpassing 1.2 billion kilowatts by the end of 2024, representing over 35 percent of total power generation. However, as installed capacities grow, the existing framework—characterized by fixed pricing and guaranteed purchases—proves increasingly inadequate. With the removal of financial subsidies, there is a pressing need for a new mechanism to support sustainable growth in the industry. Simultaneously, the variable nature of new energy generation is increasingly at odds with the traditional power system's operational mechanisms.
The heart of the reform lies in creating a price signaling mechanism to guide resource allocation. Previously, fixed-price guarantees for new energy projects spurred industrial growth but diluted market regulatory functions and blurred consumption responsibilities. As the electricity spot market develops, keeping new energy projects outside this framework hinders the generation of accurate pricing signals necessary for market participants to enhance system flexibility.
This reform directly confronts the longstanding challenges faced by the new energy sector. Implementing a "market pricing + differential settlement" dual-track mechanism will enforce policy continuity while boosting market incentives. This system ensures that existing projects receive reasonable returns while allowing new projects to compete within the market. The gradual reform strategy considered the current stage of China’s power market and the industry's adaptability to changes, embodying the principle of "progress while maintaining stability."
### Implementation Path for Market-Oriented Pricing
The reform framework introduces a three-pronged approach to marketization.
Firstly, comprehensive market integration will mandate that all new energy electricity enters the power market, either through quantity-based bidding or acceptance of market-clearing prices. This "full market entry" policy breaks away from the previous dual-track model, integrating new energy completely into the power market system.
Secondly, the reform encourages innovation in market mechanisms. Price caps in the spot market have been relaxed, and bidding rules optimized to enable new energy projects to leverage their marginal cost advantages for flexible participation in real-time competition. Additionally, a "multi-year power purchase agreement" mechanism will incentivize stable long-term trading relationships among power generators and consumers, accommodating new energy's unique output characteristics while providing effective risk management tools.
The reform's most innovative feature is the introduction of a differential settlement mechanism. To mitigate potential early-stage price volatility, a "market transaction + mechanism price" differential compensation system has been designed. This maintains existing project protections while requiring competitive bidding for new projects, resulting in a dynamic adjustment mechanism that prevents excessive revenue fluctuations during market transitions and prioritizes efficiency in project selection.
### Facilitating High-Quality Development
Price signals resulting from the reform are expected to fundamentally transform industry development logic. Market-based pricing will compel enterprises to transition from focusing on "scale expansion" to "value creation," spurring technological innovations aimed at reducing electricity costs and optimizing operations for increased competitiveness. In the spot market, the inherent low marginal cost of new energy projects will produce pressure on traditional power sources to improve flexibility.
Moreover, market-based mechanisms will enhance the system's capacity to integrate new energy. With full market incorporation, the volatility of new energy generation will be reflected in price signals across the system, incentivizing investment in energy storage, demand response programs, and other flexible resources. This approach will contribute to developing an interactive "source-grid-load-storage" new power system. Data from pilot provinces suggest that market-based trading has boosted new energy utilization rates by approximately 3 to 5 percentage points.
Unlocking the monetization of green value also holds vital strategic importance. The reform requires that green power transactions specify green certificate prices, thus establishing a market-based pricing framework for environmental rights. The concurrent development of the carbon and electricity markets will make the environmental premium of new energy projects increasingly apparent, presenting new growth opportunities for the sector. Estimates indicate that monetizing these environmental benefits could enhance the return on investment for new energy projects by 2 to 3 percentage points.
### New Opportunities for Enterprises
The market-oriented reform of new energy electricity pricing presents fresh opportunities for Chinese enterprises in the sector.
Firstly, the establishment of a market-based identity will prompt a development paradigm shift. New energy companies will evolve from being simple electricity producers to integrated energy service providers, necessitating the development of new competencies in power trading, risk management, and value-added services. Pioneering companies have started exploring areas like virtual power plants and green certificate trading to gain competitive advantages.
Secondly, diversifying revenue sources will enhance the sector's resilience. The reform will allow companies to generate income not only from electricity sales but also from capacity leasing, flexibility services, and environmental attribute trading. This multifaceted business model will create a stable cash flow system for new energy firms in a market-driven environment, reducing dependency on government subsidies.
Finally, the transformation will expedite the internationalization of Chinese new energy enterprises. As pricing strategies and market regulations align more closely with global energy markets, Chinese companies will be better positioned to excel in overseas project development, equipment exports, and international electricity trading, reinforcing the nation’s leadership in global energy transitions.
### Conclusion
The market-oriented reform of new energy electricity pricing represents a vital step in China’s energy transformation. By leveraging market mechanisms to optimize resource allocation, enhance system flexibility, and improve investment returns, this reform is poised to accelerate the achievement of dual carbon goals while nurturing new avenues for green economic growth. Moving forward, ongoing policy refinement and enhanced marketization will be crucial for the long-term stability and prosperity of the new energy sector. This reform not only provides clear guidance for domestic energy development but also serves as a valuable reference in the global transition to sustainable energy.
Ramin Sohrabi for TROIB News
