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China’s Higher Peak Power Tariff to Drive Energy Savings, Demand-Side Storage

The forthcoming increase in China’s peak retail tariff will help to address the widening peak-trough power supply gaps that result from the increasing share of intermittent sources in power generation, says Fitch Ratings. This may also spur development in demand-side storage, which would improve the cost efficiency of large commercial and industrial (C&I) power users, while reducing pressure on grids to manage peak loads.

The rising share of renewables in China’s power-generation fuel mix has led to widening peak-trough load differences, which, if unadjusted, may lead to severe power shortages when consumption increases, and threaten the country’s power supply security.

Historically, load adjustment was less of a challenge, as the dominance of coal-fired plants meant output was stable with little exposure to natural-resource volatility. However, as China shifts away from coal, we expect the share of renewables in rated Chinese coal-fired power generators’ fuel mix to rise by 5pp-16pp to 39% on average by 2023.

We expect C&I customers, especially large, energy-intensive companies, to be motivated to manage their production schedules more efficiently to reduce energy costs, following the new policy, which was announced by the central government on 26 July 2021. The policy will be implemented once provincial authorities develop local rules. Several provinces, including Guangdong, Guizhou and Ningxia, expect to formally implement the new policy from October 2021.

The new policy requires provincial regulators to raise peak tariffs to at least 3x the trough tariffs (4x if the peak-trough demand gap exceeds 40%), and set the critical-peak tariffs at no less than 120% of the peak tariffs. Before this policy, the peak-trough tariff gap of the majority of Chinese provinces ranged from 2.2x-3x, with only a few with large peak-trough demand gaps that exceed 3x, including Beijing, Shanghai, Jiangsu, Anhui and Guangdong.

Large C&I customers may also be incentivised to build their own storage, which will enable them to improve cost-efficiency and develop arbitrage opportunities, by storing power at troughs when it is cheaper, and using or selling the stored power when it becomes expensive.

One of the historical obstacles for investing in demand-side storage was profitability, which, in our view, will improve, as the peak-trough tariff gap will rise by 15% to around CNY660/MWh on average, sufficient to recoup a levelised cost for electrochemical power storage of CNY500/MWh-CNY550/MWh with returns. The collection of even higher critical-peak tariffs of above CNY1,000/MWh, coupled with declining lithium-ion battery prices, will further enhance the returns of developing storage, and serve to alleviate China’s peak-shaving pressure.

Developers of distributed solar power projects will also benefit, as they settle power bills or contracts directly with customers (if the projects are built for external sales) and may offer more competitive power prices against the higher peak retail tariffs.
Source: Fitch Ratings

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