2021 and 2022 saw several provinces in China experience power shortages. As a result, many provincial governments decided to approve and build large amounts of new coal capacity to address the power shortage issue. However, this solution does not address the core reasons for the power shortages in China. 

The Centre for Research on Energy and Clean Air (CREA) and WaterRock Energy Economics have published a report reviewing the solutions to near-term power shortages in China. The report outlines reasons for power shortages, such as the current tariff-setting mechanism, and the associated dispatch protocol. Their specific designs have led to distorted incentives for power capacity operations and investments within and across the provinces.

• Coal power tariffs are not high enough to cover high coal fuel prices, particularly during peak demand seasons. This incentivises the coal capacity owners to generate less power to reduce loss at times when the system needs them to generate more power to meet peaks in demand. 
• The ‘equal’ dispatch protocol and ‘average’ tariff-setting approach do not reward power plants for high flexibility. Thus, generators are not incentivised to invest and operate their plants more flexibly or to proactively manage their fuel procurement. The lack of the ‘flexibility’ features in the physical capacity mix and the rigid dispatch and tariff-setting approach makes it almost impossible for the power system to respond quickly to avoid power shortages when unexpected events occur, such as the dry and hot weather conditions experienced in 2022.
• The inter-provincial power flows are still primarily based on rigid government-to-government contractual arrangements. Their scheduling and dispatch are largely fixed ahead of time and are not easy to change, even when conditions change materially within the year. For example, even when Sichuan experienced power shortages in summer 2022 due to unexpected dry and hot weather conditions, it had to continue to export power that was agreed in late 2021. 

The report also outlines solutions to resolve power shortages and to meet future system needs of rising renewable penetration, such as: 

• maximising the contribution of existing generating capacity and inter-provincial transmission infrastructure through regulatory and policy changes;  
• maximising the contribution of the demand side to managing peak loads;
• incentivising the expansion of the right technology mix of new capacity to meet evolving system needs and long-term sustainability goals. 

The detailed quantitative analysis shows that accelerating capacity expansion of solar, wind and energy storage solutions will be more cost effective than building more coal capacity. Such a portfolio option also aligns with the long-term decarbonisation strategy and reduces the long-term risk of stranded coal assets in China.