Deepening Supply-Side Structural Reforms in Coal Power with a Power Market

Abstract

ABSTRACT The new round of reforms in power system gradually liberalizes the wholesale market for power generation, but the current average dispatch model does not support the new market system. We use Guangdong Province as a case study to analyze the cost of new entry (CONE) and net revenue of new and old coal power plants. We find that the real CONE of low-efficiency plants that were put into production earlier is significantly lower than that of the new high-efficiency plants. Meanwhile, the fact that net revenues are higher for low-efficiency plants than high-efficiency plants has led to distortion in the incentives aimed at retiring old low-efficiency plants from the market, and new investment is economically justified under existing market rules. By simulating a market system, we find that the “scarce returns” of peak plants are depressed because of excessive capacity, which leads to losses from all coal power plants. Accelerating market reforms, including reshaping the market mechanism of short-term operations and long-term investment decision-making is key to the successful implementation of supply-side reform policies. They are important for ensuring both economic operations in the short-run wholesale market and the long-term sufficiency of the power supply via careful regulatory mechanisms.