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Ascending Opportunities on China PPA Market

Background of China PPA

PPA (Power Purchase Agreement) is an effective way to purchase electricity at stable and predictable prices. It is widely used in Europe with a long-term deal of 5 years or more. While China, as the biggest renewable power supplier, its domestic renewable power PPA market is still in its infancy. With volatility and poor predictability, renewable power provides limited benefits in the electricity commodities market, so it has natural disadvantage compared to thermal power.

In China’s ‘Dual Carbon’ background, renewable PPA, as a vital way to use renewable energy, has become much more popular than before. Renewable power trading pilots were first operated in Beijing Power Exchange Center and Guangzhou Power Exchange Center on September 7th, 2021. The transaction method is mainly bilateral negotiation, and the price is an average premium of 3-5 cents per degree compared with traditional PPA transactions. And while the technology focuses on wind and photovoltaic at first, it will gradually add trading varieties like hydro in the future. By the end of 2021, a total of 25 provinces across the country will have engaged in renewable power transactions.

Renewable PPA Encourage Policy

As the pilots operated successfully, China decided to pace up PPA signings this year. On December 22, 2022, the state issued the "Notice on Signing and Performance of Mid-to Long-Term Power Agreements in 2023", pointing out that power users are encouraged to sign more than one-year PPAs with green energy companies. Organization and execution priority will be given to those who sign long-term contracts. This is a breakthrough. Not only will the PPA market be liberalized, but there will be mandatory high-ratio indicators. It is generally required that the trading electricity PPA in 2023 should be more than 80% higher than the electricity consumption of the previous year. In terms of price, it will provide renewable companies with long-term and stable prices. The price of green electricity is formed according to supply and demand, both the electricity and environmental value are indicated in the transaction price. Other regulations include contract digitalization, improvement of inter-provincial PPA mechanism, flexible contract adjustment, agreement performance, etc. Domestic renewable power PPAs will be improved gradually, and more enterprises will be able to use long-term green power. Large-scale electricity users are encouraged to sign medium and long-term PPAs.

Southern Regional PPA Market

Recently, the southern power market—— Guangzhou Power Exchange Center released ‘The Medium and Long-term Trading Scheme of Southern Regional Power Market in 2023’. This is the first official PPA scheme since the southern regional power market was officially launched for trial operation. The southern regional power market covers five southern provinces including Guangdong, Guangxi, Yunnan, Guizhou, and Hainan. With an early start and rich experience of the southern power market, this PPA Scheme will also set a great example for other regions.

According to the ‘2022 Southern Region Inter-Provincial Power Market Operation Report’, the medium to long-term market-oriented transactions in the southern region in 2022 was 738.86 billion kWh, a year-on-year increase of 27.4%, accounting for 50.1% of the total electricity consumption in the southern region.[1]

In 2023, the scale of market-oriented transactions in the southern region will be further expanded. The scheme predicts that in 2023,market-oriented transactions in the southern region (including power purchased by the power grid) will be around 1,119.6 billion kWh. Among them, the trans-provincial and trans-regional trading power (excluding retained power) is expected to be 218.7 billion kWh; Guangdong's transaction scale is expected to be the biggest, which is 550 billion kWh. And Guangxi, Guizhou, Yunnan, Hainan are as follows:

Source: The Medium and Long-term Trading Scheme of Southern Regional Power Market in 2023

Although the country has accelerated its pace in establishing PPA market, corporates willingness to enter this market is also important. The cost of renewable power is always higher than traditional gas and oil power. So how can the government enhance corporates ‘motivation to purchase renewable energy? Mandatory policy is the key. Renewable power transaction market shall be combined with renewable energy consumption responsibility mechanism. It’s vital to improve region’s renewable energy consumption responsibility weight and implement the accounting and assessment on these corporates' consumption weight performance.

The National Development and Reform Commission and the National Energy Administration would issue new energy power consumption responsibility weights every year. Each region’s government shall reasonably formulate the consumption weights of various entities, and clarifies the consumption distribution and accounting methods. Local government authorities shall organize market supervisors to regularly announce the performance of market players' consumption responsibilities, and enforce punitive measures against those market players who have not completed their annual consumption responsibilities.

Moreover, renewable power tradings shall expand to a longer time scale in the future. Foreign long-term PPAs that integrate electricity and certificates are generally 8 to 15 years. This has many benefits, including providing stable income expectations for renewable energy companies, attracting investment, and promoting their healthy development. Under the background of the "Daul Carbon" goal and the accelerated construction of the power market, on the one hand, China must continue to enhance the reliability of the power system and build a large number of flexible resources. On the other hand, the high power prices caused by the shortage of supply during peak hours should be alleviated; Only with Renewable Energy PPA that expands to a longer time-scale transaction method, can give renewable energy corporates long-term and stable income expectations, and renewable energy can be a more common choice for corporate power users.

Source: [1] 2022 Southern Region Inter-Provincial Power Market Operation Report

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