“Rules” ensure order; “standards” foster a thriving market

—On the “Rules” and “Standards” in the Basic Rules for the Mid- to Long-Term Electricity Market

Recently, the National Development and Reform Commission and the National Energy Administration officially issued the Basic Rules for the Mid- to Long-Term Electricity Market (hereinafter referred to as the “Basic Rules”). Here are a few thoughts on this.

1. The current situation has imposed stricter requirements for “rules” and “standards” in power market construction.

At present, China’s power market reform is at a critical juncture where “three transformation and development phases converge and three major strategic goals are equally emphasized”:

First, the power market reform has shifted from the pilot phase to the deep-water zone. Currently, the nationwide unified electricity market system is being accelerated, and the electricity spot market has entered a substantive trial operation phase. The pattern of interests is undergoing profound restructuring, with increasingly extensive adjustments to vested interests, making interest conflicts more likely to arise and occur more frequently. It is required that the development of the electricity market always remain true to the original aspirations of reform and bear in mind its reform mission, so as to genuinely unlock the benefits of reform and deliver tangible advantages to the people. Second, the power system is in a transitional phase as it evolves from a “traditional” to a “new-type” system. Currently, the installed capacity of new energy sources has surpassed that of conventional coal-fired power units, marking a critical phase in the development of a new type of power system. The scale of market participants has surged, business models are constantly innovating, and trading strategies are being adjusted with increasing frequency. It is required that the development of the electricity market be aligned with the requirements of a new-type power system, creating favorable conditions for the cultivation and growth of new market participants, and providing institutional safeguards to support the transformation and upgrading of the power system. Third, we are in a phase of upgrading and transitioning governance technologies as part of the modernization of national governance. Currently, the modernization of national governance has permeated all aspects of state functioning and is having a substantial and significant impact. Governance requirements are continuously being raised, governance approaches are constantly being innovated, and governance measures are being steadily deepened. It is required that the development of the electricity market strengthen technological innovation and, taking the advancement of artificial intelligence as an opportunity, enhance market governance capabilities, effectively mitigate risks in market operations, and provide a continuous and stable energy infrastructure to support economic and social development.

The aforementioned historical context has defined the objectives and direction of the Basic Rules, while also imposing two requirements upon them: “rule-making” and “standard-setting.”

First is “rule-making.” “Regulations” serve as a binding framework for all market participants’ engagement in market operations. They establish the fundamental structure and guidelines governing the conduct and actions of all market participants, and are characterized by their mandatory, restrictive, and rule-based nature. By rigorously establishing rules and regulations, we can ensure that the development of the electricity market is aligned with the right objectives and follows a sound trajectory. Second, establish “models.” “Model” refers to specific, replicable standards that serve as a reference for all market participants in conducting market transactions. It is characterized by replicability, template-like structure, and demonstrative value. By carefully establishing model practices, we will provide a “unified, open, competitive, and orderly” market environment for all market participants, thereby creating the conditions for the transformation of the power system and for its prosperous and stable development.

2. Be strict in establishing “rules” and meticulous in setting “models” to meet the demands of the times for power market-oriented reform

First is the “interest rule”: ensure that the original aspiration of power market-oriented reform remains unchanged, and firmly safeguard the fundamental interests of the people. Establishing a market-based mechanism for electricity price formation in the power market is directly linked to the vital interests of the general public and to social well-being. Article 45 of the new Energy Law stipulates clearly: “The State shall improve the energy price regulation and control system, enhance the effectiveness of energy price regulation, and establish a mechanism for preventing and responding to risks arising from abnormal fluctuations in energy market prices.” The reform of the power market must unlock the benefits of reform without compromising the interests of the general public; this is what constitutes “interest regulation.” To this end, the Basic Rules explicitly identify abnormal market price risks and unfair competition risks—both of which may directly affect the vital interests of electricity consumers—as key risks to be prevented. Abnormal market price risk is defined as “the risk that market prices in a particular region or time period persistently deviate significantly upward or downward, with volatility or duration markedly exceeding normal ranges.” Unfair competition risk is defined as “the risk that market participants, by unlawfully exercising market power to manipulate prices, withhold capacity, enter into monopoly agreements, or collude on bids and drive up prices, seriously compromise the integrity of trading outcomes.” With regard to the two major categories of risks mentioned above, the Basic Rules stipulate that “members of the electricity market shall strictly comply with market rules, exercise self-discipline, and shall not manipulate market prices or impair the legitimate rights and interests of other market members.” At the same time, in order to prevent market manipulation and cutthroat competition, “the government pricing authority, in conjunction with the authorities responsible for energy and power system operations and the electricity regulatory agency, shall set upper and lower limits on bid prices and clearing prices.” Through the foregoing provisions, all market participants are hereby informed that encroaching upon the interests of the general public is an inviolable red line in the electricity market. Second is the “Stability Regulation”: It focuses on enhancing market governance capabilities to provide continuous and stable energy infrastructure services that support economic and social development. Electricity is the cornerstone of modern economic and social development. A stable and well-ordered electricity market is an important guarantee for sustainable economic and social development. To this end, the Basic Rules establish a “Stability Framework” from the perspectives of law, technology, and governance.

From a legal perspective, the Basic Rules stipulate that the obligations of electricity trading institutions include “conducting market operation monitoring and analysis, implementing market intervention measures in accordance with laws and regulations, disclosing the reasons for such interventions to market participants, and mitigating market risks”; as well as “promptly reporting any violations by market participants to the electricity regulatory authority and relevant government departments, and cooperating with investigations.”

Technically, the Basic Rules stipulate that the power trading platform “shall strengthen its foundational operational reliability to meet the requirements for continuous operation of the medium- and long-term electricity market, and establish a backup system or a parallel active-active operating system,” and “shall conduct real-time monitoring and early warning of electricity market operations.”

In terms of governance, a tiered risk management framework has been established, encompassing the entire risk management cycle from pre-event planning to ongoing monitoring and post-event review. Local authorities “shall formulate contingency plans for risk prevention and handling in the electricity market, and conduct monitoring, early warning, and preventive and responsive measures against electricity market risks in accordance with relevant procedures”; electricity market operators “shall strengthen monitoring and early warning of all types of trading activities in the electricity market, enhance risk prevention, and report as required to the electricity regulatory authority and other relevant government departments”; when an emergency risk arises in market operations, market operators shall “implement market intervention measures in accordance with applicable government regulations”; no entity or individual shall “improperly interfere with market operations,” and it is further specified that “anyone who disrupts the order of the electricity market and impedes the normal conduct of market activities, or endangers the security of the electricity market and its supporting technical systems, shall be dealt with in accordance with relevant provisions; if such conduct constitutes a crime, criminal liability shall be pursued in accordance with the law.” Third is the “innovation paradigm”: comprehensively accommodating new types of market participants in the power sector to accelerate the transformation and development of the power system. The electricity market serves as a critical pillar of the new power system and provides the institutional framework necessary for its construction and development. The “Basic Rules” embody comprehensive support for new market participants, business forms, and models under the new power system, setting an “innovation benchmark.” Full coverage of market entities. The Basic Rules define new types of market participants as “all resources in the distribution segment that possess power and energy regulation capabilities, exhibit characteristics of new technologies, and operate under novel business models. These can be categorized into single-technology-based new market participants and resource-aggregation-based new market participants.” Among them, new business entities of the single-technology type primarily include distributed photovoltaic systems, distributed wind power, energy storage, and other distributed power sources, as well as adjustable loads. New business entities of the resource-aggregation type mainly comprise virtual power plants (load aggregators) and smart microgrids. Integrated source-network-load-storage projects in the distribution segment that possess the requisite characteristics can be regarded as smart microgrids. Code of conduct covers all areas. The Basic Rules stipulate that “the trading declaration limits for power sales companies, virtual power plants, and load aggregators shall be determined based on risk-mitigation capabilities, including total registered assets, the amount of performance guarantees, and the historical electricity consumption levels of the users they represent or aggregate”; “when a virtual power plant aggregates distributed new energy resources to participate in green electricity trading, it shall establish an aggregation service relationship with such resources in advance and, during the trading declaration process, link all declared green electricity volume to the respective distributed new energy projects”; “decentralized resources may enter into aggregation service contracts with new types of market entities engaged in resource aggregation and participate in the electricity medium- and long-term markets”; “where different decentralized resources aggregated by a new type of market entity simultaneously exhibit both import and export electricity flows, the import and export volumes for each time period shall be distinguished”; and “new types of market entities engaged in resource aggregation and decentralized resources shall settle electricity energy transactions separately at the prices specified in the aggregation service contract.” Fourth is the “development paradigm”: continuously strengthening the foundational pillars of power market development to lay the groundwork for its sustained prosperity. A thriving market requires an open market environment, sound market integrity, convenient market services, and effective dispute-resolution mechanisms. The Basic Rules establish a “development paradigm” from the aforementioned four aspects. Ensure market openness through uniformity. The Basic Rules stipulate that power market operators “shall conduct market registration, trading organization, trade settlement, information disclosure, and other related work in accordance with unified standards”; grid enterprises “shall, in the processes of market registration, trading organization, trade settlement, and information disclosure, dynamically exchange information with power trading institutions according to unified standards”; the technical support system “shall adopt a unified platform architecture, unified technical standards, unified core functions, and unified interaction protocols to facilitate the vertical integration and horizontal interconnection of data and information across the national unified power market”; market participants “shall, in accordance with the requirements of the Basic Rules for Power Market Registration, complete market registration, amendment, and cancellation on the power trading platform and undergo real-name authentication”; and all power trading platforms “shall achieve mutual recognition and interoperability of registration information, thereby ensuring that market participants can register in one location and have their information shared nationwide.” It clarifies the requirements for market integrity from both positive and negative perspectives. On the one hand, it explicitly stipulates that power sales companies and new market entities are obligated to “submit performance bonds, margin deposits, or other settlement collateral to the electricity trading institution as prescribed.” On the other hand, it clearly identifies contractual default risk as one of the primary market risks to be mitigated, specifying that “the transaction bidding limits for power sales companies, virtual power plants, and load aggregators shall be determined based on the risk-mitigation capacity of their respective performance bond amounts.”

Clearly stipulate the requirement to provide comprehensive services to market entities. In addition to the standard market registration, trading, metering and settlement, information disclosure, access to electricity, grid connection, and transmission and distribution services, the regulations stipulate that when participating in green power transactions, retail power companies “shall establish an agency service relationship with power users in advance and, during transaction bidding, link all of the green power demand volume to the designated agent users.” Similarly, virtual power plants, when aggregating distributed renewable energy resources to participate in green power trading, “shall establish an aggregation service relationship with such resources in advance and, during transaction bidding, link all of the declared green power volume to the respective distributed renewable energy projects.” Furthermore, “decentralized resources may enter into aggregation service contracts with new types of resource aggregation entities,” and “power trading institutions shall establish green power traceability relationships based on these contracts and provide traceability services to market participants,” thereby meeting the service requirements arising from the participation of these new market entities. It has provided diversified channels for dispute resolution for market entities. When disputes arise among market participants, they may either “resolve them through their own negotiations,” or, if “negotiation fails to reach an agreement, submit the matter to the electricity regulatory authority and relevant government departments for lawful coordination.” Alternatively, they may “submit the dispute to an arbitration commission for arbitration in accordance with the law, or file a lawsuit with the people’s court,” thereby ensuring both the convenience and effectiveness of dispute resolution. The market is one mechanism for allocating resources and, at its core, exists to support economic and social development. The Basic Rules, formulated in the form of “regulations” and “standards,” integrate the objectives and direction of power market reform into the market rules. By doing so, they not only promote the stable and prosperous development of the market but also better support the construction of a new-type power system and overall economic and social development.

(Xie Jingdong, Professor at Shanghai University of Electric Power)