What new developments are there this year in the “buying and selling” of electricity?

　　As a commodity with time value, electricity not only affects the quality of people’s production and daily life but also reflects changes in the economy and society. For both power generators and purchasers, entering into medium- and long-term electricity contracts in advance serves as a stabilizing anchor, helping to mitigate market risks and ensure a reliable supply of power.

　　Recently, the National Development and Reform Commission and the National Energy Administration issued the “Notice on Ensuring the Signing and Fulfillment of 2023 Medium- and Long-Term Power Contracts,” setting out specific requirements for this year’s medium- and long-term power trading.

　　Why do we need to sign?

　　— Mitigate the impact of spot market price volatility and ensure overall stability in the electricity supply-demand balance.

　　“My monthly electricity bill is usually around 100 yuan. In summer and winter, when the air conditioner is used more often, the bill goes up a bit.” Luo Dong, who lives in Shanghai’s Putuo District, often pays for and “buys” electricity through a mobile app. On the other end of the line, the “seller” is the local power grid company.

　　If we liken residential electricity purchases to grocery shopping, the grid operator—acting as the “grocer”—typically sources its supply from the “farmers”—that is, various power-generation companies. To ensure a long-term, stable supply, both parties often enter into medium- and long-term trading contracts.

　　Lian Weiliang, Deputy Director of the National Development and Reform Commission, stated that medium- and long-term energy contracts have become a “ballast” and a “stabilizer” for ensuring energy supply and price stability, playing a crucial role in anchoring expectations on both the supply and demand sides, securing resource commitments, stabilizing prices, controlling costs, and safeguarding supply.

　　“Based on practical experience, the buyers participating in medium- and long-term power contracts include not only grid enterprises that act as agents for end‑user electricity procurement, but also retail power companies, industrial and commercial users, pumped-storage hydropower stations, energy‑storage operators, and independent ancillary service providers—essentially, a broad spectrum of market‑oriented electricity consumers,” said Han Fang, Deputy Director of the Planning and Development Department of the China Electricity Council, to our reporter. Entering into medium- and long-term power contracts helps both buyers and sellers to plan ahead.

　　First, let’s examine the upstream segment of power supply. Coal is a critical resource for electricity generation, and the conclusion of medium- and long-term power contracts directly influences the negotiation of similar coal‑power contracts between coal producers and power utilities, thereby guiding coal companies in optimizing production schedules and enabling transportation authorities to allocate freight capacity appropriately. From the perspective of both generators and consumers participating in electricity markets, entering into medium- and long-term power contracts provides stable production expectations. These contracts specify output levels and pricing, serving as an important tool for market participants to mitigate market risks, dampen price volatility, and ensure a reliable energy supply.

　　“For grid operators and electricity trading and system‑operation entities, medium- and long-term power contracts provide the foundational framework for balancing supply and demand in the power system, enabling stakeholders to plan operational schedules in advance and enhancing the reliability of power supply,” said Han Fang.

　　Signing medium- and long-term power contracts plays a crucial role in stabilizing inter‑provincial power transmission and reception. In China, disparities in regional resource endowments have given rise to energy supply patterns such as “power from the west to the east.” “Amid fluctuations in the prices of primary energy sources like coal and natural gas, and a complex and volatile electricity supply‑demand landscape, a high proportion of medium‑ and long‑term power contracts helps maintain the fundamental framework of inter‑provincial power flows. It also enables provinces to proactively coordinate factors such as coal inventories, reservoir operations, unit maintenance, and production scheduling for electricity‑intensive users, thereby enabling rational planning of intra‑provincial generation and consumption and underpinning the stability of inter‑provincial power transmission and each province’s energy‑supply security,” said Ma Li, Deputy Chief Engineer at the State Grid Energy Research Institute.

　　What are the key considerations when trading electricity?

　　— Promote time-of-use contracting to help shift peak demand and fill valleys, and encourage active participation of new‑energy generation in market transactions.

　　To ensure a stable power supply, “vegetable traders” must increase their purchases from “vegetable farmers” and maintain long-term, stable cooperative relationships. In accordance with the requirements of notices issued by the National Development and Reform Commission and the National Energy Administration, electricity market participants are required to secure a high proportion of contracted capacity. For 2023, commercial and industrial electricity users must sign annual medium- and long-term contracts covering at least 80% of their previous year’s electricity consumption, and through subsequent quarterly, monthly, and intra-monthly contract signings, ensure that the total volume of medium- and long-term contracts for the year exceeds 90% of the previous year’s electricity consumption.

　　Electricity is a resource whose value varies significantly over time. Just as fresh produce commands a higher price, the value of electricity can also differ across different time periods. The notice requires that, based on changes in the power‑generation mix, the electricity supply‑demand dynamics of the past three years, and the trial‑run plan for the electricity spot market, local authorities should assess their respective regions’ 2023 supply‑demand outlooks and further refine the segmentation of trading periods. Specifically, the number of trading intervals will be expanded from 3–5 to five or more, with peak‑shaving and deep‑valley periods clearly defined according to regional load profiles and the characteristics of renewable energy output. Industry experts view this measure as a means to differentiate the value of electricity across time slots and establish corresponding price differentials, thereby encouraging consumers to shift their usage to off‑peak hours, smoothing demand peaks and valleys, and promoting a better balance between supply and consumption.

　　“In 2023, the relevant authorities further strengthened the requirements for time-of-use contracting and expanded the number of time periods covered, which helps guide users to adjust their generation schedules and electricity consumption patterns through price signals across different time slots, thereby easing the pressure on dispatching agencies to ensure real-time balance between supply and demand,” said Ma Li. “This measure also widens the peak–valley price differential, encouraging new market participants such as energy storage systems and virtual power plants to actively engage in grid regulation and capture arbitrage profits. Moreover, the gradual refinement of time‑of‑use contracting will provide a reliable foundation for the seamless integration of medium‑ and long‑term markets with the spot market.”

　　New energy sources are also benefiting from increasingly favorable market conditions. At present, the share of clean‑energy generation in China continues to rise. According to data from the National Bureau of Statistics, in 2022, total electricity generation by industrial enterprises above designated size reached 8.4 trillion kilowatt‑hours. Among these, clean‑energy sources—including hydropower, nuclear power, wind power, and solar power—grew by 5.3%, and their share of total generation increased by 0.9 percentage points compared with the previous year. Under the “Guiding Opinions on Accelerating the Development of a Nationally Unified Electricity Market System,” jointly issued earlier by the National Development and Reform Commission and the National Energy Administration, new energy sources are slated to participate fully in market trading by 2023. The integration of new energy into the electricity market has become an irreversible trend.

　　“This notice proposes measures such as refining the mechanism for setting green electricity prices and improving the market‑based adjustment mechanism for new‑energy contracts, which will play a positive role in encouraging new energy to participate in market transactions, mitigating market risks, and reflecting its green environmental value,” said Han Fang. On the one hand, by allowing flexible adjustments to contracted volumes and load profiles under medium- and long-term contracts, these measures can help reduce market risks arising from inaccuracies in new‑energy generation forecasts. On the other hand, while new energy possesses intrinsic electricity‑supply value, it also carries green value. By explicitly specifying both the electricity‑energy price and the green environmental premium in the transaction prices of medium- and long-term contracts, this approach not only enhances the revenue streams associated with green attributes for new‑energy producers but also helps foster society‑wide incentives for purchasing green electricity, build a shared consensus on green consumption, and accelerate the low‑carbon transition.

　　Guide electricity prices in transactions to reflect changes in costs.

　　— Encourage both buyers and sellers to include clauses linking electricity prices to coal and natural gas prices.

　　Industry insiders believe that medium- and long-term power contracts have played a positive role in moderating energy price volatility and ensuring stable electricity supply. However, the signing of such contracts by market participants also entails a certain degree of price risk.

　　“At present, coal-fired power remains the mainstay of China’s power supply, and its pricing is largely determined by the market. When the prices of primary resources such as coal and natural gas rise, if on-grid electricity tariffs for coal-fired plants cannot be adjusted through an appropriate mechanism to reflect these cost increases, production costs may not be covered, potentially leading to widespread losses among coal‑fired power producers—conditions that undermine the sustainable development of the power sector and jeopardize reliable supply,” said Han Fang. At the end of 2021, many domestic coal‑fired power companies reported substantial losses; to ease the financial strain, numerous localities proposed switching to medium- and long-term contracts, a move that drew widespread public attention.

　　This notice clarifies that the market‑based price‑formation mechanism will be refined to ensure that market‑traded electricity prices fully reflect changes in costs. Taking into account both fuel production costs and the affordability of power generators, it encourages both buyers and sellers to include clauses in medium- and long-term contracts that link electricity prices to coal and natural gas prices, thereby fostering a mechanism whereby trading prices adjust reasonably in response to fluctuations in these commodity markets and better safeguarding a stable energy supply. Industry experts note that the aim is precisely to establish a market‑determined pricing system, mitigate market risks stemming from volatility in primary energy prices, and more effectively protect the interests of both power producers and consumers, thus ensuring a reliable energy supply. “In the long run,” says Han Fang, “as a commodity, electricity prices should reflect changes in production costs.”

　　Looking at the broader energy supply landscape, factors such as the continued rise in the share of domestic renewable power generation, uncertainties in primary energy supplies, and the full market access of industrial and commercial consumers are driving more frequent short-term fluctuations in electricity supply and demand. Consequently, the electricity market’s need to differentiate between the time‑varying value of electric energy is growing ever stronger. To incentivize generators to produce and ensure reliable power supply for consumers, it is essential to further strengthen the coordination between the medium‑ and long‑term electricity markets and the spot market.

　　“In the future, it will remain essential to continuously refine the time‑slot allocation mechanism for medium- and long-term electricity trading, ensuring full‑capacity contract execution and stable long‑term price signals while enabling a swifter and more effective response to short‑term, ad hoc changes in production conditions, thereby meeting the needs of market participants for flexible adjustments,” said Ma Li. She added that, at the same time, efforts must be accelerated to build a spot market aligned with bilateral trading models, expand its coverage, and further improve the price‑linkage mechanism between medium‑ and long‑term and spot transactions. (Reporter: Liao Ruiling)

Source: People’s Daily Overseas Edition