Reforming the pricing of coal-fired power for a future of renewables

China’s energy authorities have surprised industry observers by announcing the introduction of a capacity tariff for coal-fired power in the country, earlier than had been expected. This marks the last step in a series of heavyweight reform plans for the electricity market this year, demonstrating the country’s dedication to reshaping the power system and paving the way for an increase of renewable power in China’s overall energy mix.

The capacity tariff can be regarded as an electricity price, only charged to industrial and commercial consumers, based on the maximum available output of coal power plants. This stands in contrast with the existing power tariff, which is based on actual power generation – this will continue but at a lower rate. In 2024 and 2025, most provinces and municipalities will adopt an annual capacity tariff of RMB 100/kW.

By introducing the capacity tariff, regulators are preparing China’s power system for the transition of coal to a more auxiliary but equally important role – away from being a base load power supplier to a flexible energy source. Coal plants are expected to adjust their output according to fluctuations of renewable energy in a “greened” grid. With the guarantee of a fixed income, coal power plants can fulfil their responsibilities in ensuring China’s energy security without worrying about their financial health.