In September 2023, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) officially issued the Basic Rules for Electricity Spot Market (for Trial Implementation) (hereinafter referred to as the Basic Rules). As a normative document for the building of national electricity spot market, the Basic Rules aims to standardize the operation and management of the market and help promote the building of a unified, open, competitive and orderly electricity market system. The document is distinctly instructive, general and universal. This article hereby interprets and analyzes the background significance and main contents of the Basic Rules.

Since a new round of electricity system reform was initiated in 2015, China’s electricity market has been further developed while the layout of diversified competitors has taken shape. In 2017 and 2021, China respectively started the pilot building of the first batch of 8 and the second batch of 6 electricity spot markets. Through sustained exploration and improvement, the electricity spot market building of China has entered a stage of comprehensive promotion and steady progress, as a number of spot market pilot projects have started long-period settlement trial operation. The market building has proven to be highly successful, and the optimal allocation of resources has been realized in a market-oriented manner. Electricity safety and security has been improved. The consumption of new energy has been promoted. Yet the electricity spot market still faces such problems as incomplete systems, inadequate functions and inconsistent trading rules. Based on the pilot experience of the spot market, the Basic Rules aims to establish a framework for the operation of provincial and regional electricity spot markets, and offer a legal basis for advancing the building of spot markets nationwide.

The Basic Rules aims to build a unified, open, competitive and orderly electricity market system. The Basic Rules apply to market participants, structure, price, operation, connection mechanism, measurement and settlement mechanisms. The release of the Basic Rules will standardize the operation and management of the electricity spot market and fully deepen the implementation of a national unified electricity market system. The implementation of the Basic Rules will leverage the decisive role of the market in the allocation of electricity resources. Hence the regulation capability of the electricity system will be enhanced, the consumption of renewable energy promoted, safe and secure electricity supply ensured, and long-term planning and investment in electricity guided. The Basic Rules will help to achieve a clean, low-carbon, safe and efficient electricity system.

1. Clarify directions for implementation to build a national unified electricity market

The Basic Rules clarifies the orientation of the electricity spot market in the short, medium and long term. Recently, inter-provincial, provincial (autonomous regions and municipalities) and regional spot markets will be built in line with the framework of “unified market and coordinated operation”. Day-ahead, intra-day and real-time markets will be established and further improved. The medium and long-term markets will be strengthened, the connection between service markets and spot markets will be formed, and the participation of new energy in the electricity market will be promoted steadily and orderly. In the medium and long term, continuous efforts will be made to improve the electricity market mechanism that adapts to the new electricity system. The coordination and connection among the national, provincial (autonomous regions and municipalities) and regional electricity markets will be reinforced.

2. Propose operational requirements to advance the normal operation of the electricity spot market

The Basic Rules proposes the operational requirements for the electricity spot market, clarifying the start conditions and contents for the simulated test run, settlement test run, and formal operation of the electricity spot market. The electricity spot market should firstly launch simulated and settlement test runs and only enter formal operation when proven qualified. Before starting the relevant test runs and formal operations, related market operation efforts should conform with the procedures set by the provincial (autonomous regions and municipalities) and regional electricity spot markets to ensure the electricity spot market enters normal operation in a steady and sound manner.

3. Perfect the price mechanism to form price signals that reflects the supply and demand of the system

The Basic Rules further clarifies the price mechanism of the electricity spot market. The spot market consists of day-ahead market, intra-day market and real-time market while price mechanism includes locational marginal price (LMP), zone marginal price (ZMP) and system marginal price (SMP). Provinces (autonomous regions and municipalities) and regions can choose market structure and price mechanism based on actual situation of grid structure and congestion. Market price cap and floor should take economic and social affordability into account, which is conducive to market price discovery and investment stimulation. It will also help guide peak load shifting, improve the capability of safe and secure electricity supply and prevent market operational risks.

4. Strengthen the connection mechanism and improve the function of the unified electricity market system

The Basic Rules strengthens the connection mechanism between the electricity spot market and the medium and long-term market, proxy electricity purchase, the auxiliary service market and the capacity compensation. The medium and long-term market should make continuous efforts to optimize the operational connection with the spot market, carry out medium and long-term time-slot transaction with curves to increase transaction frequency. Electricity purchase proxy should forecast the typical load curve and time-of-use consumption of industrial and commercial users on a regular basis, forming time-of-use contracts by participating in centralized transaction on exchange. The frequency regulation and reserve ancillary service market shall be cleared jointly with the spot market in due time. In principle, when the mechanism is fully capable of peak-shaving of the system, there will be no more peak-shaving auxiliary services. The capacity compensation mechanism and the spot market shall be effectively connected in terms of price cap and floor, settlement, etc.

5. Refine settlement methods to maintain the openness and transparency of market members’ earnings

The Basic Rules refines the settlement methods of the electricity spot market. The spot market may adopt daily clearing and monthly settlement method. Unbalanced capital pool shall not be set in electricity market settlements, as each settlement item shall be recorded independently and categorized clearly. The methods for allocation and return of all settlement items shall be approved in advance based on the principle of producers and beneficiaries take full responsibility. Reasonable rights and obligations of all parties shall be clarified as well.

6. Establish the risk control mechanism to ensure a safe and stable electricity market

The Basic Rules builds a risk control mechanism for the electricity spot market. The electricity market faces risks such as supply and demand, market prices, system security, operation system, cyber security and prudential deposit. In the electricity market, operation agencies and members shall both abide by rules and undertake the responsibilities of risk prevention and control. By taking corresponding measures during and after the risks, the consequences can be effectively minimized. The parties involved shall ensure a safe electricity system and a stable market, while safeguarding the legitimate rights and interests of the business entities and the public interest of the society.

7. Standardize market intervention and enhance emergency response capability of the electricity market

The Basic Rules clarifies the intervention mechanism of the electricity spot market. Market intervention consists of government intervention and operation agencies intervention. Market operation agencies shall record the causes and measures for intervention, analyze existing problems, provide suggestions, and promptly report to the local branches of National Energy Administration (NEA) and provincial pricing authorities for archival purposes. As for market intervention, the government and market operation agencies shall consider the triggering conditions, abnormal situations and remedial measures to carry out market suspension and resumption operations accordingly.

As a Chinese saying goes, “Despite the bumpy road ahead, we pursue our goals with constant efforts.” The building of the electricity spot market faces challenges and opportunities. The release of the Basic Rules will provide farsighted guidance for the leading provinces in market building. At the same time, successful experience will be promoted timely to minimize trial-and-error costs.