[This following commentary is by China Electric Power Enterprise Federation]
Current situation of carbon and electricity markets
At present, the national carbon market is in the initial stage of construction, and the electricity market is in the process of deepening reform. China has issued policies to promote the coordinated development of the carbon and electricity market, but due to the different authorities and trading platforms of the two markets, which operate under their own independent institutional frameworks and market rules, there has been no substantial progress enhancing coordination between the national carbon market and the electricity market.
However, at the local level, the carbon and electricity markets have carried out some exploratory work in a coordinated manner, and Beijing, Shanghai, Tianjin, etc., have issued policies stipulating the relevant requirements for green electricity to be deducted from the indirect emissions of carbon trading enterprises. There are similarities and connections between the carbon market and the electricity market in terms of policy positioning, participants, and operating mechanisms. However, the two market authorities are different, and the trading operation systems are not linked.
The main challenges constraining the coordination between the carbon market and the electricity market
After investigation, the main factors restricting the coordinated development of the carbon market and the electricity market were sorted out, which are:
- The lack of overall coordination of the two markets
- The inefficient price transmission mechanism
- The barriers to information transmission
- The lack of coordinated supervision
Lack of coordination between carbon and electricity markets
The carbon market and electricity market operate independently under different authorities, enabling a lack of cohesion and coordination. A carbon-electricity synergy mechanism to facilitate and support the transition to coal power has not yet been established. Coal power participates in both the national carbon market and the electricity market, and accounts for a large proportion of both markets, but neither market has been able to solve the problem of coal power transition. China’s new energy participation market types include the electricity market, green power market, Green Electricity Certificate (GEC) market, carbon market and comprehensive energy services and other new business formats. The different markets are related, but there is a lack of effective connection and mechanism coordination, limiting effectiveness of efforts to sync the markets.
Inefficient price transmission mechanism for carbon and electricity prices
The transmission of carbon price to electricity price is inefficient, which affects the optimal allocation of resources in the market. The implementation of the grid-based benchmark electricity price and cost linkage of coal-fired power in China is not timely and insufficient, and the floating price range is limited, which is the main reason why carbon costs cannot be effectively channeled. The setting of the allowance allocation scheme is an important factor affecting the carbon price level and the carbon cost transmission rate.
Barriers to the transmission of information in the carbon-electricity market
The carbon market and the electricity market have their own information management systems. However, the two markets operate relatively independently, and the data and information generated are not shared with each other. Data sharing between both markets has not been established. There are barriers to carbon and electricity data sharing and mutual recognition of environmental benefits, which are not conducive to the coordinated development of carbon and electricity mechanisms.
Lack of coordinated supervision of the carbon-electricity market
At present, the national carbon market and the electricity market are respectively supervised by different departments. Although the two markets have certain commonalities and connections, but the regulatory positioning, regulatory objectives and regulatory mechanisms of the two markets are different, and it is necessary to further form a synergistic regulatory force.
Ideas and measures to improve coordination between carbon and electricity markets
It is necessary to promote the coordinated development of the two markets and here are some ideas.
Coordinated measures
Framework cohesion:
- To gradually build a national coordinated carbon-electricity market coordination framework
- To ensure smooth operation of the carbon-electricity synergy mechanism to promote the transformation of the functional positioning of coal power, and ensure that the various costs of coal power (including the cost of carbon emission reduction) are timely and fully reflected in the electricity price
- To improve the carbon-electricity synergy mechanism that effectively stimulates the development of new energy.
Price transmission:
- To gradually establish and improve the transmission mechanism of carbon price and electricity price.
- To establish a supporting compensation mechanism for carbon cost transmission.
- To construct a fully competitive power market that is conducive to the transmission of carbon prices.
Information sharing:
Carbon and electricity market transaction data and information should be shared between the two markets. These include relying on advanced technologies such as 5G, big data, cloud computing, and blockchain.
Collaborative supervision:
There is a need to improve laws and policies, strengthen the legal basis for carbon-electricity coordinated supervision, and ensure the effective implementation of various systems in the carbon-electricity market with higher-level legislation.
Policy recommendations
The following are recommendations to enhance the carbon-electricity market.
- The carbon-electricity market convergence and synergy should be considered as a whole under the national “dual carbon” mechanism with the establishment and improvement of cross-departmental and cross-field coordination mechanisms.
- It is recommended to promote the coordinated development of the carbon market and the electricity market with a focus on price coordination and information coordination.
- It is recommended that the national carbon market accelerate the expansion and optimise the key mechanisms of the carbon market, and better coordinate with the electricity market by improving its own mechanism construction.
- It is recommended to strengthen the green power trading mechanism and accelerate the construction of the ancillary service market.
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