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On 21 December 2021, China's National Energy Administration
(NEA) published a draft update to the Measures for
Administration of Ancillary Services (the "Measures")
(电力辅助服务管理办法), the overarching document governing ancillary services
in China. The update—the first since the "Measures" was
originally published in 2006—was long due given the significant
changes that have occurred in China's power system since. Not only
have market reforms progress across the value chain, but also
China's power generation mix and demand profile have evolved.
Variable generation sources like wind and solar power swelled along
with demand. From 2006 to 2021, wind and solar's share in
generation grew more than tenfold, from less than 1% to 12%, while
power demand nearly tripled.
In line with the changing power system and overall reform
direction, the 2021 "Measures" draft document proposes three main
changes to China's ancillary services market rules:
Adding more ancillary products
Expanding eligible market participants
Changing the ancillary cost allocation mechanism to include
power end-users for the first time.
What do these changes mean for key stakeholders?
Power consumers:
While ancillary services costs were previously cycled among
generators, the update proposes passing through these costs to
power consumers for the first time, codifying the long-discussed
"who benefits, who pays" principle. In other words, power consumers
are named as beneficiaries of ancillary services and will now help
pay for them. While only marketized power users will be subject to
these costs in the initial stages of implementation, this marks a
fundamental change in power tariff setting, introducing a new
ancillary cost component.
Power generators:
The rule changes will impact renewable and thermal generation
differently depending on the ancillary product. Variable renewable
sources like wind and solar are still named as the main
beneficiaries of the downward ramping (peak shifting) ancillary
product. As wind and solar power generation increases, demand for
downward ramping ancillary services will also increase, resulting
in higher allocation fees. These same fees, meanwhile, will likely
decrease for thermal plants as more of the allocation expenses are
passed on to power consumers. Thermal plants may enjoy higher net
revenues given they are still the major providers of ancillary
services in the Chinese power market. On the other hand, they will
also face increasing competition as more participants enter the
market.
Load aggregators and battery storage:
The new rules bode well for load aggregators and battery storage
projects. Previously, these users were largely barred from
participating in ancillary services markets since they were not
classified as power generators. The new rules specifically name
non-generating assets as eligible market participants, removing the
market-entry barrier and enabling new revenue streams for them.
The "Measures" is a high-level document so specific details on
implementation are largely awaiting follow-up documents. While this
leaves several questions unanswered, the overall direction set by
the updated "Measures" document is clear. Removing the operational
barriers in previous ancillary market rules will allow more players
into the market. This has the potential to spur on development of
novel business models like energy demand services or electric
vehicle smart charging. Demand for ancillary services will only
grow as China's rapidly deploys renewable power to achieve its
carbon neutrality pledge. As ancillary services costs grow, the
question of who pays will also become more crucial.
