A scientific, orderly, and coordinated electricity mid- and long-term market

How can it support the high-quality development of new energy?

-- Reflections on the Basic Rules for the Electricity Mid- and Long-Term Market

The Basic Rules for the Electricity Mid- and Long-Term Market (hereinafter referred to as the “25 Rules”), recently released, represent China’s first nationwide set of fundamental rules governing the mid- and long-term electricity market under a spot-market framework. Against the backdrop of rapid new-energy growth and its full participation in the power sector, these rules carry significant importance. Drawing on the changes between this document and the 2020 Edition of the Basic Rules for the Electricity Mid- and Long-Term Market (hereinafter referred to as the “20 Rules”), this paper discusses the importance of the mid- and long-term electricity market and its principles of development.

1. The Connotation of Medium- and Long-Term

In the medium- and long-term electricity market, “medium- and long-term” can encompass two aspects: distant and prolonged. “Far” emphasizes transactions that are settled at a time far removed from the current point, such as one month, one year, or several years in the future. “Long” highlights that a single transaction covers a relatively extended period of electricity supply, for example, one month’s, one year’s, or even ten years’ worth of electricity. Before the spot market was established, the terms “long-term” and “forward” essentially carried the same meaning. After the spot market was introduced, however, they came to have distinct connotations. For example, a transaction executed in the “forward” period does not necessarily imply a long time horizon; it may instead pertain to electricity for a relatively short time scale. A case in point is the trading of power for a specific peak-demand period one month in advance, which constitutes a “forward” yet “short-term” transaction. This is also why the “20 Rules” explicitly state that the rules are primarily applicable to regions where spot trading has not yet been launched. Article 2 of the “Rules for Electricity Mid- and Long-Term Trading” stipulates: “Electricity mid- and long-term trading refers to transactions for the delivery of electricity products or services over a specified future period, encompassing various time horizons such as several years, one year, one month, and intramonth (including ten-day periods, weekly, and multi-day) trading.” Here, a distinction is made between the concepts of “far” and “long.” On the one hand, it is pointed out that the subject of the transaction is electricity products or services to be delivered at “a certain future period,” which embodies the notion of “far.” On the other hand, it is noted that transactions can encompass different “time dimensions,” meaning transactions with varying degrees of “long.” Correctly distinguishing between these two concepts provides a clear framework for better understanding their medium- and long-term implications, as well as for developing more granular operational and regulatory rules in the future.

2. Medium- and long-term effects

In the electricity market, both the spot market and the medium- and long-term market are indispensable and serve different purposes. The primary function of the spot market is to promptly and accurately reflect changes in supply and demand. By allowing prices to fluctuate in response to varying supply-and-demand conditions, it guides all market participants to contribute to the balance of electricity supply and demand. The role of the medium- and long-term market can be seen in two aspects. From a “long-term” perspective, the role of the mid- and long-term electricity market is to facilitate forward trading, enabling generators and consumers to lock in supply–demand relationships, prices, and either revenues or costs through mid- and long-term contracts. This helps mitigate electricity supply risks and financial risks arising from fluctuations in supply and demand. Simply put, its function is to reduce uncertainty and manage the risks posed by “randomness.” From a “long-term” perspective, the role of the mid- and long-term electricity market is to facilitate the trading of electricity across multiple time periods with varying price levels over an extended horizon. By hedging across these different time periods through multi-period pricing, it helps mitigate the risks associated with price volatility—effectively managing “volatility risk.” Taking price controls as an example, from both a long-term and a short-term perspective, regulations setting price ceilings and floors should adhere to different principles. For medium- and long-term contracts concerning “forward” delivery, prices should align with those in the spot market, and price caps and floors should also be as consistent as possible, allowing for a broad range of fluctuations. Relevant provisions in Articles 35 and 39 of the “Rule 25” reflect this principle: “For market participants engaging directly in trading, artificially prescribed time-of-use electricity price levels and time periods shall no longer be imposed,” and “Price limits for medium- and long-term power transactions within a month or shorter cycles should be gradually aligned with those for spot-market transactions.” For medium- and long-term contracts with a “long-term” duration, price hedging across different time periods reduces overall price volatility compared with single-period contracts. Therefore, caps and floors on prices should be set more strictly. Therefore, lifting the price caps on time-of-use tariffs does not mean there will be no constraints on overall or average prices; it simply requires using more sophisticated modeling to determine appropriate price bands.

3. Changes and developments in the new regulations

First, new types of business entities have been included. In addition to power generators, end-users, and retail electricity providers, the market participants in the mid- and long-term electricity market now also include new types of market entities, such as energy storage operators and virtual power plants. This inclusion paves the way for further innovation in trading mechanisms and regulatory frameworks, providing a solid foundation for the evolution of the electricity market. There are no longer any references to priority power dispatch, intergovernmental agreements, or similar provisions; the focus has shifted to market-based medium- and long-term electricity trading. One of the roles of power sales companies and certain new market participants in the electricity market is risk management: they assume the risks associated with spot market price volatility and, at the same time, hedge these risks through well-established, highly liquid mid- to long-term markets, thereby reducing financial risk. Second, “rights” and “obligations” are now more clearly defined. Rights and obligations are set out in separate chapters, thereby clarifying responsibilities and authorities. Regarding the description of “obligations,” the requirements for information to be provided by each market participant are specified in greater detail, including power plant maintenance schedules, measured operational parameters, forecasted operating data, and emergency outage notifications; electricity demand and typical load profiles of end-users, retail power companies, and new types of aggregators; as well as retail power companies’ tariff package information, among others. Third, the trading mechanism helps enhance market liquidity. In terms of trading methods, they are broadly categorized into centralized trading and bilateral negotiation. Centralized trading, in turn, comprises centralized auctions, continuous matching, and quotation-based trading. The main difference compared with the “20 Rules” lies in the description of trading opening mechanisms, which sets higher requirements for both periodic and continuous trading: “Multi-year, annual, and monthly contracts shall be opened for trading on a periodic basis; continuous trading may be explored. Intra-month contracts, in principle, shall be opened for continuous daily trading.” These requirements are conducive to enhancing market liquidity, thereby mitigating the uncertainty and risks associated with the increasing penetration of new energy sources. Fourth, trading products are being incorporated into green electricity trading. Green electricity trading shall be incorporated, with a separate chapter dedicated to regulating its organizational framework. This includes: encouraging market participants to engage in multi-year green power transactions and exploring mechanisms for the regular, year-round operation of such markets; establishing a flexible contract adjustment mechanism for green power trading agreements, enabling the transfer of contracts and other transactions on a monthly or even shorter periodic basis. The descriptions of multi-year transactions and power purchase agreements have been enhanced to better support and guide capacity investment through mid- and long-term trading. Fifth, pricing and settlement emphasize coordination. On the one hand, it stresses that, except for electricity volumes subject to government-set prices, prices should be determined by the market. On the other hand, it emphasizes the need to ensure alignment with spot-market mechanisms, such as linking contract prices to spot prices, establishing settlement reference points and reference prices (e.g., day-ahead or real-time) in the settlement process, and allowing settlement either based on price differentials or quantity differentials. Sixth, transaction constraints and transaction verification. The safety-check provisions in the “20 Rules” shall be revised to “transaction verification,” which is divided into pre-trade and intra-trade clearing verification conducted by the trading institution, and grid safety verification undertaken by the dispatching agency after a preliminary trade match has been established. Against the backdrop of rapid new energy development, establishing a comprehensive, low‑transaction‑cost, information‑transparent, highly liquid, and well‑coordinated medium‑ and long‑term electricity market that seamlessly integrates short‑, medium‑, and long‑term planning is a necessary and effective measure to mitigate the risks of power supply–demand imbalances and price volatility arising from the swift expansion of new energy. The issuance of the “25 Rules” will strongly support the scientific, orderly, and coordinated development of the mid- and long-term markets within a spot-market environment, thereby facilitating the high-quality development of a new type of power system and enabling a more efficient, stable decarbonization and transformation of the energy system.

(Professor Jing Chaoxia, South China University of Technology)