On February 9, China’s National Development and Reform Commission and National Energy Agency jointly published a “Notice on Deepening Market-Based Reform of Renewable Energy On-Grid Tariffs to Promote High-Quality Renewable Energy Development.” Hereafter referred to as Document #136, this policy drastically changed the character of China’s power sector, advancing market liberalization reforms in one of the nation’s most stubbornly top-down sectors.
Document 136 is significant because it pushes all new wind and solar electricity projects to sell their electricity production through the market. This is a huge change from today, whennearly 50 percent of all renewable energy is still sold via guaranteed offtake agreements at predetermined volumes and prices to the grid, regardless of market dynamics like supply and demand.
According to Cosimo Ries, Renewable Energy Analyst at Trivium China, “this marks the end of an era.”
The Bygone Era
To understand the impact of Document #136, it’s important to understand the problem it is trying to fix.
In the decade since China embarked on the third round of power sector reforms, regulators have been walking a fine line between trying to gradually liberalize the nation’s power sector while simultaneously decarbonizing it. Until recently, this has meant exposing fossil fuel generation to market volatility while supporting renewables with subsidies – first with a Feed in Tariff (FiT) and then with a guaranteed offtaking mechanism. These efforts to encourage renewable development were so successful that today, China has the largest fleet of renewable power in the world and is struggling to make use of all the clean electricity it can generate.
The crux of the problem is that under the guaranteed offtaking scheme, the grid is responsible for consuming a set amount of clean power at a prefixed price, even when that supply exceeds grid demand. The specific situation varies by region, but the amount reflects a mix of supply and demand dynamics, as well as the renewable energy goals that each province sets for itself (a topicI have covered before in The Diplomat).
Unlike in many Western markets, where the price of power can shift to moderate the balance of supply and demand, under the guaranteed offtake mechanism, the price is fixed at the coal-fired benchmark price. According to David Fishman, senior manager at The Lantau Group, though the benchmark price varies regionally, “it hasn’t changed since 2017.”
Fishman explained that in 2017, provincial governments calculated a benchmark price for coal-fired electricity – basically cost to produce plus a reasonable profit margin – and that price has become the tariff paid to renewable electricity generators for each MWh of clean power they sell through the guaranteed offtaking mechanism.
These steady, generous revenue streams have made it easy to incentivize developers to build renewable projects, but it is creating an enormous burden for the grid.
Many parts of China’s electricity grid suffer from what energy analysts call the duck curve – a mismatch between when people consume electricity and when solar arrays generate electricity. Essentially, the grid is stuck paying high prices for large quantities of electricity that it doesn’t need.
The response to this is to push more generation into the market, where price can better moderate supply and demand, and that forms the second avenue for generators to sell their electricity.
China’s electricity market has been gradually gaining prominence as more electricity volume is traded each year, representingmore than 60 percent of total electricity consumption in 2024, up from 17 percent in 2016. There are two primary avenues for trading – medium- and long-term trading, and spot market trading.
The problem is that even in the electricity market, the price is strictly controlled.Since 2021, Chinese regulators have limited electricity price volatility to 20 percent above or below the benchmark coal-fired price, and that holds for renewable energy. It’s important to note that restriction is not binding in the spot market, and it has been relaxed in a few western provinces, but it still restricts the vast majority of electricity sold in China.
Restricted as it may be, Chinese regulators have been desperate to push more and more renewable production into the electricity market. The reasoning seems to be that by introducing price volatility into renewable energy project development, they can rationalize the relationship between supply/demand dynamics and pursue market liberalization and decarbonization simultaneously.
Seen from this perspective, Document #136 comes into focus.
What Is Document #136?
Released to the public just over one month ago, Document #136 has alreadycaused no shortage of consternationas renewable energy developers adjust to this new reality. By far the most significant change is the requirement that by the end of 2025, all renewable electricity must be sold on the market. This will expose renewable energy projects to significant market volatility, but Document #136 also offers generators some protection.
The most significant protection is what has been termed the “sustainable mechanism price” (SMP).
Under the SMP, generators will sell their electricity in the market as normal, but at the end of each month, the grid will compensate them for the difference between the average market price and the mechanism price. The former is calculated differently in different provinces – in regions that have a continuously operating spot market, the spot market price forms the average, and in regions where the spot market is still in trial stages, pricing in the medium- and long-term market will form the average.
For the latter, the calculation varies based on when the projects came online. For those that came online prior to June 1, 2025, Document #136 indicates that theprice-level will be in line with current pricing policies, not to exceed the coal-fired benchmark. According to Fishman, for these projects, “the effect on their volumes and earned rate should be negligible, but the mechanics will be different.” He explained that under the SMP, these generators would sell into the market and then “be made whole” back to the level of the mechanism price, which is likely to be virtually identical to the current coal-fired benchmark.
For projects reaching grid connection after June 1, 2025, however, the process is more exacting. For these projects, the mechanism price will be formed by a reverse auction in which the grid operator in each province announces how much production can participate in the SMP, and then generators bid in, with the cheapest accepted first until the quota is satisfied. Once the quota is met, the price of the final accepted bid, which is necessarily the highest, is then awarded to all participating generators.
Though the name is different, the SMP is similar to a two-way contract for difference (CfD), a mechanism popular in the United Kingdom and Germany.
This is not the first time that Chinese regulators have borrowed from Europe to refine decarbonization policy. The FiT policy – basically a subsidy for renewable electricity generation – was lifted directly from the German playbook, and according to Yan Qin, a principal analyst at ClearBlue Markets, the CfD is the natural next step.
“This is an intuitive path that many countries follow in the discovery of how to promote renewable energy. First you start with direct subsidies, and then you move into more marketized support systems,” Yan explained.
Because of her deep expertise in both European and Chinese power markets, Chinese regulators frequently consulted Yan to better understand Europe’s experience marketizing renewable generation. “I was not surprised [when Document #136 was published] because Chinese policymakers had been asking me about CfD for years,” she said.
Unfortunately for Chinese policymakers, the European experience can only take them so far, and the CfD mechanism needs to be updated to better fit the Chinese reality.
The thorniest questions are also the simplest: what will be the volume and price of China’s SMP?
“These are the million dollar questions,” said Ries. “The volume will probably differ significantly between provinces. In provinces like Jiangsu and Zhejiang, where the grid is more flexible, demand is higher, and renewable penetration rates are currently lower, we will likely see a higher volume included in the mechanism. In provinces like Gansu and Qinghai, where renewable energy supply already outpaces demand, it will likely be lower.”
Ries added that “provinces need to walk a fine line between reducing the financial burden on their local grid operator without losing momentum on their decarbonization goals.”
Fishman predicted the volume will be closely correlated with therenewable energy consumption benchmarks. “Every province has a minimum consumption quota and the grid is obligated to meet that,” he pointed out. “They have existing contracts which make up most of it, but the bar is raised every year, so the difference between the obligation and what they already have contracted will likely inform the volume included in the SMP.”
When it comes to the SMP price, the only guidance in Document #136 is that the price from the reverse auction process cannot exceed the coal-fired benchmark price. Fishman, though, expects that it will be significantly lower than that.
“Chinese developers are really aggressive and will likely submit bids just above, or even at, the cost of production. It will be a game of chicken, with every developer assuming that someone else will bid in at a higher price with a more reasonable profit margin, so that everyone can enjoy that rate,” Fishman explained.
For the time being, developers will anxiously await the details in the provincial implementation plans.
What Does This Mean More Broadly?
Ultimately the impact that Document #136 has on developers will be a microcosm for the impact it has on China’s broader power sector goals – creating a nationally unified market and decarbonizing the economy. The era of light-speed development in China’s installed wind and solar capacity is over, but policymakers hope it will be replaced by an era of more rational development, with installations tied more directly to consumption appetite.
In late February, theChina Photovoltaic Industry Association predicted that 2025 would see 215-255 GW of new installations, down from 277.5 GW in 2024. If accurate, this would be the first decrease in the rate of change in six years.
For Fishman, though, this isn’t necessarily a problem. “We are likely to see decreased installation numbers for the next few years, but I’m not sure how much it will affect generation, and that is what really matters,” he explained. “At the end of the day if you are building unnecessary capacity, that isn’t good for much.”
Ries also highlighted that this could open up new opportunities. Regulators used to require that new renewable projects were accompanied by an energy storage system, typically 5-10 percent as large as the nameplate capacity of the asset they were paired with.Today, that requirement is gone, but Ries predicted that energy storage systems will benefit tremendously from deeper market reforms. “More volatility means that storage system operators can take advantage of huge price differentials and store electricity while the price is low, and sell it to the grid when it is high.”
Flexible consumers can benefit from the same dynamic, Ries continued. “Industrial consumers who can adjust their laid patterns will benefit from significantly cheaper electricity.” He explained that this also serves a crucial function in balancing supply and demand for the grid.
Another clear winner from the new policy framework are corporations that have renewable energy procurement goals. For both international companies trying to comply with standard setting bodies like RE100 or SBTi, and Chinese firms interested in continuing to import to Western markets where sustainability rules are becoming stricter, access to verifiably green power is a priority.
Historically, that has been difficult both because offtaking mechanisms popular in more liberalized Western markets like PPAs are still nascent in China but also, because generators were offered such a good deal by the grid that they saw little benefit in signing a contract with an outside offtaker. If they are forced to sell all their electricity on the market, though, that calculus starts to change.
“I think we are going to see that generators are eager to sign long term contracts to sell their clean power, because that offers more stable revenue streams,” explained Fishman. In such cases, “the SMP might also act as a reference point for aligning on a PPA price.” Opaque pricing in China’s power sector has been a further hindrance to corporate involvement, and Document #136 blows open the black box.
To Yan Qin, the best way to view Document #136 is as a compromise. “There is a lot that policymakers are trying to do,” she said. “They want 200 GW of solar each year, but they don’t want to increase the government burden too much. They want to decarbonize, but they want to build a flexible power sector. They want to protect low and stable electricity price levels, but they want to lower emissions. It’s hard to find the right balance.”
With that in mind, Yan also speculated that Document #136 won’t be the only major policy updates this year: “I wouldn’t be surprised if we see an update to the renewable consumption obligation, or a more formal PPA structure soon.”