The rapid wind and solar PV growth is driving an urgent need for system flexibility in the People’s Republic of China. China's power system is undergoing a profound transformation, spurred by a sharp increase in variable renewable energy (VRE) capacity and the electrification of various sectors. Between 2022 and 2030, short-term flexibility for daily operations – characterised by hourly and daily ramping requirements – is expected to triple, primarily due to the rapid expansion of solar PV.

Power sector reforms are accelerating the deployment of market-based mechanisms. Reforms since 2015 have been giving markets a growing role. Over the past 12 months, there have been notable achievements, such as the official launch of four provincial spot markets and the inter-provincial spot market. In 2022, the National Development and Reform Commission’s Document No. 118 pushed for the establishment of a unified national power market system, incentivising market integration across provinces and regions.   

Well-designed power market reforms are critical to unlocking flexibility and meeting 2030 energy targets. As China transitions to a market-based power system, power markets need to be designed to prioritise flexibility and deployed in a co-ordinated way. If China is to meet its objective to peak carbon emissions before 2030, non-fossil resources such as hydropower, battery storage and demand response could fulfil nearly 60% of the short-term flexibility needs in 2030, enabled by well-functioning spot and ancillary services markets. A unified national power market system will also unlock system-wide flexibility, enabling efficient resource sharing across provinces and regions. Delays in market implementation could prolong reliance on thermal plants, jeopardising progress towards a more sustainable energy system.

The 15^th Five-Year Plan (2026-2030) presents a pivotal opportunity for China to implement critical power market reforms. This period is crucial for China to solidify its commitment to reforms that support system flexibility and enable the integration of vast amounts of VRE. Achieving this transformation while maintaining grid stability and reliability will require a paradigm shift towards planning and operating practices centred around markets and flexibility. 

Market designs must provide effective price signals to incentivise flexibility. Currently, over 90% of traded electricity in China is tied up in medium- to long-term (MLT) contracts, which fix prices and volumes over extended periods, preventing adjustments that reflect real-time system needs. The underdevelopment of spot and ancillary services markets in many provinces and regions further hampers flexibility, limiting incentives to respond to changing system conditions.

Most of the needed flexibility can be unlocked through improvements to the dispatching practices. Implementing efficient economic dispatch at the provincial and regional levels yields the most substantial gains in flexibility and VRE integration. By developing and expanding spot markets with the right design features, economic dispatch prioritises the use of resources based on their marginal cost, ensuring cost-effective power system operation.

Regulatory reforms should focus on harmonising policy frameworks and expanding market participation. Requirements and rewards for provision of flexibility often differ across provinces and regions, creating barriers to entry for flexibility providers and hindering the scalability of solutions. New and smaller players face restricted access to markets, reducing competition and innovation. By facilitating inter-provincial market access and better integrating inter-provincial trade into provincial systems, China can broaden its flexibility base and enhance cross-regional cooperation.

Expanding and optimising the use of infrastructure is essential to achieve a national market system. China’s inter-provincial and distribution grid infrastructure is falling behind the requirements of a flexible and modern power system.  Underutilised battery storage assets highlight the misalignment between flexibility needs and the business models for these assets. This underscores the importance of scaling up the necessary infrastructure, including grids and digital technologies, to align with China’s decarbonisation goals.

Reforms should accompany coal plants in their transition from energy suppliers to providers of flexibility services. While coal plants will continue to play a key role in providing grid stability and flexibility, their contribution in terms of electricity generation will have to decline. This shift requires targeted policies that support coal plants in becoming providers of system services, such as frequency regulation and ramping support, and seasonal flexibility, to ensure a smooth transition towards a more flexible and low-carbon power system.

China urgently needs a comprehensive policy toolkit to address its growing flexibility challenges and manage the complexity of its power sector. Identifying the right reforms is not easy, given the sector’s coverage of a vast geography, diverse climate zones and the varying levels of VRE penetration across regions. Different areas face unique challenges, requiring tailored policies based on local conditions while co-ordinating reforms across key market segments, including MLT contracts, spot markets, ancillary services and capacity remuneration mechanisms. Without a unified, carefully targeted strategy, fragmented development could prevent China from achieving system-wide flexibility.

The toolkit provides a practical framework with tailored recommendations for achieving flexibility by 2030. Recommendations cover all market segments, ensuring each market fulfils its primary function without interfering negatively with other areas. The toolkit also supports provincial and regional implementation, helping provinces and regions prioritise reforms based on the VRE penetration levels and the maturity of their spot market.

Strong governance and institutional capacity will be crucial for the successful implementation of the policy toolkit. While the toolkit outlines necessary reforms for flexibility, the broader success will depend on a robust governance framework, institutional capacity and a commitment to ambitious reforms. With firm regulatory support, China can ensure that the toolkit helps meet its climate and energy goals while securing a reliable, efficient and sustainable power system.