Guangdong is so far one of the provinces and regions where new energy is shielded from the market risks. However, the situation will change starting from next year. In December, right before the organization of the annual contract signing for the power transaction in 2023, Guangdong Power Exchange released the implementation plan for Guangdong New Energy’s Pilot Participation in Spot Market, signifying that wind and solar projects in Guangdong will start to be partially market-based.
Which are the projects supposed to participate in spot market?
According to the plan, only the wind and solar projects connected at 200kV and above, which are dispatched by Guangdong power grid, are supposed to participate in spot market for the time being. The projects connected at the 110kV level will be included later and gradually, in accordance with the status of market demand for new energy. Projects that start trading in the spot market are in theory not allowed to withdraw from it consecutively.
How are these projects going to trade in the spot market?
New energy projects need to participate in the spot market with their full energy production. They shall make bids for price and volume together with other sources of energy. In many other provinces where new energy is already trading in spot markets, green power is not required to quote but to accept the price determined by the other sources of energy.
The ceiling of new energy’s bidding price in the Guangdong spot market will be in line with that of the other sources of energy, which is variable in accordance with the marginal cost of the power generation unit with the highest fuel cost. The lowest bidding price is 0 CNY/MWh.
However, does it mean that on-grid price of these new energy projects, i.e. the price they can receive for selling each kWh, will be fully determined by the spot market in Guangdong? The answer is NO, for the time being. Based on the rules, the hourly on-grid power volume of these projects can be divided into two portions: base contract volume and spot market traded volume. Base contract volume is defined by the variant multiplied by the actual on-grid power volume, and is set at 90% temporarily. Base contract volume will be settled at the coal-fired base price, which is the usual on-grid price for new energy. Therefore, new energy projects can keep for a conventional pricing for 90% of the hourly on-grid power volume. But the rest of 10% will be settled at the spot market price. In a nut shell, the former grid-off taking contract will function as a price hedging tool for 90% of the total actual energy production of new energy projects who will sell the remains to spot market at real time price variants. The percentage of this risk-free portion will be subject to changes.
As for the projects entitled to subsidy, they will still receive the subsidy paid by the power grid companies on behalf of the Ministry of Finance according to the relevant NDRC policy. Nevertheless, one important question to clarify for the government will be the variable spot market price of the 10% actual power production. Wind and solar utilization hours in Guangdong are generally quite low(except offshore wind projects), and often lower than the “Reasonable Utilization Hours” guaranteed by the NDRC for subsidized project. Such projects should in theory receive the Feed-in-Tariff (“FiT”) for their full production. The FiT within reasonable utilization hours includes coal-fired base price paid by power grid company and the balance paid by the central government. Now that a portion of the AEP will be sold at the spot market prices instead of being sold at the fixed coal-fired base price, project owners will be confronted with market volatility, which shouldn’t have existed otherwise.
(Depiction: Weighted price curve of Guangdong power generation units in spot market, Dec.16,2022. Source: Guangdong Power Exchange)
Integration with the Green Power Trading
New energy projects cannot participate in both spot market trading and Green Power Trading simultaneously. Regulators will work out an integrative mechanism to enable new energy projects to trade in spot market and forward market including the Green Power Trading later in due course.
Punitive measures, cost-sharing and compensation
New energy projects in the spot market shall be subject to penalties for deviations from to their short-term and ultra-short term power forecasts.
Besides, new energy projects shall bear shared-costs (e.g. imbalance fees) and enjoy compensation (e.g. variable cost compensation tariff, details of which are to be clarified by regulators. ) similarly to other sources of energy in the market, on the basis of the volume of their market-based power.