Electricity regulation in China: overview
A Q&A guide to electricity regulation in China.
The Q&A gives a high level overview of the domestic electricity market, including domestic electricity companies, electricity generation and renewable energy, transmission, distribution, supply and tax issues. It covers the regulatory structure; foreign ownership; import of electricity; authorisation and operating requirements; trading between generators and suppliers; rates and conditions of sale and proposals for reform.
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This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.
As the government struggles to maintain electricity supply to meet increasing need, the Chinese electricity market has grown immensely after its reconstruction over the past decade. In the first half of 2014, the investment in fixed assets reached RMB167.6 billion, including investment in grid which increased by 8.9% compared to 2013. The total sales of electricity reached 1.7 trillion KWH, up 5.1% from 2013. The total electricity transactions in the national electricity market reached 291.1 billion KWH, up 11.5% from 2013 (Source: News report from ifeng.com).
The participants in the Chinese electric power market include power generation, power transmission, power distribution and power supply enterprises that have relevant electric power business licences and users.
Generation. The market structure in China includes a mixture of essentially state-owned and private generation enterprises (IPPs), which helps to cultivate competition in the generation side of the electricity market.
Transmission, distribution and sale of power. The transmission, distribution and sale of power are not separated (although reform is being considered), and are still controlled by the two state-owned power grid operators and their regional and provincial subsidiaries:
State Grid Corporation of China (north, northwest, northeast, east and central) (State Grid).
China Southern Power Grid Co., Ltd. (south and Guangdong Province) (South Grid).
China's electricity sector is now oriented towards sustainable growth by developing clean energy sources, under the 12th Five-Year Plan (12-5 Plan), approved by the China National People's Congress (NPC). Three out of seven strategic investment areas related to the electricity sector include clean energy, energy conservation and clean energy cars.
The electric power system has been undergoing reform since 2002. To meet the targets of the electric power system reform, the electricity regulatory bodies are making efforts to promote on-grid bidding and separation of transmission, distribution and sale of power, to achieve full market competition in the electricity sector.
Currently, a ladder-type price (that is, the electricity price differentiated based on the amount of the electricity consumption), is implemented for resident electricity use.
Government policy. The National People's Congress (NPC) approved the 12-5 Plan, setting national development strategy for the next five years (2011 to 2015), in March 2011. Important goals affecting the electricity sector in the 12-5 Plan include:
Protecting the environment and improving energy efficiency.
Developing clean energy, energy conservation and clean energy cars among seven priority industries. The aim is for the GDP contributions of these industries to increase from 2% of the GDP to 8% by 2015.
Reducing energy use.
In July 2012, the State Council issued the 12th Five-Year National Strategic Development Plan of Emerging Industries (Development Plan), providing a detailed roadmap for the development of clean energy industries, including nuclear power technology, wind power, solar energy and biomass energy industries. The Development Plan also provides schemes of integrated application of multiple new energy sources.
Legislative framework. The main law governing the electricity sector is the Electric Power Law 1996. The Regulations on Electricity Regulation have been issued to strengthen and improve electricity regulation in 2005, focusing on maintaining the order of the electricity markets and promoting the development of the electric power industry.
The Energy Conservation Law 2008 is aimed at promoting energy conservation. The amended Renewable Energy Law 2010 sets general principles on renewable energy.
In addition, there are numerous regulations and rules enacted by administrative authorities, to define specific procedures or particular issues with respect to the electricity sector under the framework of the main laws and regulations.
The regulatory authorities are the:
National People's Congress (NPC). This is the top legislative body with the only authority to promulgate laws.
State Council. This is the leading administrative unit responsible for implementing the NPC's laws and policies, and enacting regulations under the legal framework.
National Energy Commission (NEC). A high-level discussion body or think tank with ministerial rank. It is the highest authority overseeing energy issues.
National Development and Reform Commission (NDRC). A macro-economic management agency under the State Council.
National Energy Administration (NEA). A unit under the NDRC. It also undertakes the daily work of the NEC.
All of these regulators are governmental agencies within their respective scope of administration, to establish rules, measures and plans for electricity market operations under the legal framework and State Council's regulations. Other relevant regulatory authorities include the:
Ministry of Commerce (MOFCOM).
Ministry of Finance (MOF).
Ministry of Environmental Protection (MEP).
National Nuclear Safety Administration (NNSA).
See box, The regulatory authorities.
The market structure in China includes a mixture of essentially state-owned and private generation enterprises (IPPs), which helps to cultivate competition in the generation side of the electricity market. The main IPPs include China Datang Corporation, China Guodian Corporation, China Huadian Corporation, China Huaneng Group, and China Power Investment Corporation. The rest of the electricity market is shared by local state-owned companies and private companies, and a few foreign investors.
The transmission, distribution and sale of power are not separated (although reform is being considered), and are still controlled by the State Grid and South Grid (see Question 1), and their regional and provincial subsidiaries.
Before the reform in 2002, the whole electricity industry was controlled by the State Power Company. The reform separated power generation and power transmission, but there are no further unbundling requirements. This reform assigned the State Power Company's generation assets to the seven state-owned companies that still dominate the electricity market.
Investment projects are classified by the industry sector in the Catalogue of Industries for Guiding Foreign Investment (Catalogue) as "encouraged", "restricted" or "prohibited". The Catalogue classification affects both the investment approval process and the permissible level of foreign equity holding. Majority Chinese equity is required in some restricted industry sectors, while in other restricted sectors, wholly foreign-owned enterprises are prohibited.
According to the Catalogue, the following types of power industry are encouraged:
The construction and operation of clean combustion technology power stations using integrated gasification combined cycle (IGCC), circulating:
a fluidised bed of 300,000 kilowatt or more; or
a pressurised fluidised bed combination (PFBC) of 100,000 kilowatt or more.
The construction and operation of back-pressure combined heat and power stations.
The construction and operation of hydropower stations for the primary purpose of power generation.
The construction and operation of nuclear power stations (with Chinese parties as controlling shareholders).
The construction and operation of new energy power stations (including solar energy, wind energy, geothermal energy, tidal energy, wave energy and biomass energy).
The following types of power industry are restricted:
Within small grids, the construction and operation of:
power plants using coal-fired and steam condensation thermal generator sets with a single generator capacity of 300,000 kilowatts or less; and
thermoelectric power stations using coal-fired, steam condensation and extraction thermal generator sets with a single generator capacity of 100,000 kilowatts or less.
(This is prohibited outside small grids.)
The construction and operation of grids (Chinese parties as controlling shareholders).
Generally, foreign-owned domestic enterprises/projects must be approved by MOFCOM, subject to the requirements and limitations provided in the Catalogue, (which may restrict or prohibit certain acquisitions conducted by foreign companies). If the interests to be acquired belong to a state-owned enterprise, State-owned Assets Supervision and Administration Commission (SASAC) approval must be obtained. In addition, if the acquisition causes a change of the approved shareholders/investors of the target electric power enterprise/project, corresponding variation approval for the change of shareholders/investors must be obtained from the competent development and reform commissions.
Import of electricity
In 2013, China imported 7.438 billion KWH of electricity from other countries (Source: www.cia.gov/library/publications/the-world-factbook/fields/2235.html#62), up 8.3% from 2012. According to the statistical data from the Customs Information Network, the imported electricity reached 6.87 billion KWH in 2012, up 4.7% from 2011. The state-owned companies are the principle importers of electricity. In 2013, the state-owned companies imported 6.73 billion KWH in total, accounting for 97.9% of the total imported electricity in China (Source: statistical data from the customs information network (www.haiguan.info/OnLineSearch/index.aspx)).
China has launched projects to solve some interconnection problems in relation to electricity importation, such as the China-Russia Back-to-Back Transmission Project.
Electricity generation and renewable energy
Sources of electricity generation
According to the China New Energy Power Report (2013), the main sources of electricity generation in China were:
Fossil fuels: 78%. Fossil fuels include coal, oil and natural gas.
Nuclear fission: 2%.
Renewable energy: 20%. Renewable energy sources in China include wind, solar, hydro and biomass energy.
The state prioritises the development and use of renewable energy, and emphasises the development of clean energy industries, including nuclear power technology, wind power, solar energy and biomass energy industries. The Development Plan (see Question 2) also includes schemes for integrated application of multiple new energy sources.
The state encourages industrial enterprises to employ combined heat and power generation, make use of residual heat and pressure, use clean coal, and adopt advanced technologies in monitoring and controlling the use of energy.
A renewable energy development fund is established with the state budget. The state can also grant tax benefits. In addition, financial institutions can offer preferential loans with a financial interest subsidy to renewable energy development and use projects that are listed in the National Renewable Energy Industrial Development Guidance Catalogue.
Renewable energy targets
As part of government policies in response to climate change, the State Council set the objective to reduce energy consumption and to save 670 million tonnes of standard coal in the 12-5 Plan period (see Question 1). The State Council also sets the goal of adjusting the energy structure, by promoting non-fossil energy consumption to reach 11.4% by 2015 in primary energy consumption.
Grid operators are obliged to reform the methods of power generation scheduling, preferentially:
Scheduling renewable power generation (RPG).
Arranging the power generation of energy-conserving, environmentally friendly and high-efficiency thermal power units.
In addition, the state has established a clean development mechanism fund to support constructions and industrial activities that are beneficial to strengthen proper responses to climate change.
See Question 6.
The main obstacles to the development of renewable energy in China are:
Pricing. In China's electricity power market, the price of electricity power is set by authorities instead of market.
Interconnection. The interconnection of renewable energy plants is another obstacle to the development of renewable energy in China. Some grid companies are reluctant to connect the renewable energy plants in view of the cost problem.
Structural overcapacity. Too many companies have entered into the electricity power market while the majority of them do not possess advanced technology. In addition, many renewable energy plants are underdeveloped, which leads to the instability in electricity power generation during transmission.
Due to this, the market for renewable energy is relatively small and the risk of investment in renewable energy leads to insufficient investment capital. These are likely to have an adverse impact on the development of renewable energy in China.
During the period of the 12-5 Plan (see Question 1), China will only construct a small number of new nuclear power stations in the coastal provinces. Inland nuclear power projects are not arranged. The government encourages cautious development of nuclear power plants only when safety is ensured.
Specifically, the Development Plan (see Question 2) provides a cautious and prudent roadmap for developing the nuclear power industry with emphasis on strengthening nuclear safety, nuclear fuel reprocessing and waste disposal technology research. By 2015, the operating nuclear power installed capacity is expected to reach 40 million kilowatts.
On 18 April 2014, at the first meeting of the National Energy Commission (NEC), the issue of the construction of a new nuclear power project was raised. On 17 July 2014, the spokesman for the State Nuclear Power Technology Corporation (SNPTC) talked about the promising merger between the SNPTC and the China Power Investment Corporation, which had been reported to the State-owned Assets Supervision and Administration Commission (SASAC). The SNPTC developed nuclear power technology called CAP1400 (based on AP1000), which has passed the National Energy Administration (NEA)'s censorship. The testing and proving experiments will be finished at the end of this year.
Authorisation and operating requirements
Without a National Energy Administration (NEA) electric power business licence, electricity generation plants must not engage in the electricity generation business except in the following circumstances (Provisions on the Administration of the Electric Power Business Licence and Notification of National Energy Administration on the Clarification of Administration Matters of the Electric Power Business Licence):
Distributed electricity generation projects that are registered with or approved by the competent departments of energy.
Small hydropower stations whose single-station generating capacity is below 1MW.
New energy generation projects such as solar, wind, biomass, ocean energy and geothermal energy whose generating capacity is below 6MW.
Power projects with comprehensive use of the by-product heat and pressure.
Captive power plants without direct combustion of fossil fuel which are dispatched by dispatching organisations at city level or below.
There is no requirement to ensure new power stations are ready for carbon capture and storage (CCS) technology, or requiring a plant to retrofit CC technology once this is ready. However, the government is co-operating with other countries in CCS technology to reduce greenhouse gas emissions (for example, the Co-operation Action with CCS China-EU (COACH) programme and the Near Zero Emissions Coal (NZEC) for China project with the UK). China is seeking possibilities for implementing CCS technology now.
To engage in the electricity generation business, an electric power business licence for electricity generation must be obtained from the NEA. Before starting operation, an electricity generation plant must prove that:
The authorities have approved its construction.
It satisfies environmental requirements and has the capacity to generate electricity.
Its technical, safety and financial managers have at least three years' experience in the electricity power industry and have no less than mid-level professional qualifications.
If the generation enterprise meets a series of technical and safety requirements under law, the grid operator must accept a request by a generation enterprise as a qualified independent legal person to upload the power generated to the transmission grid. The generation enterprise and the grid operator must sign an interconnection agreement to specify the terms and conditions of the interconnection (including upload capacity).
For renewable power generation (RPG) enterprises, grid operators are responsible for:
Building and managing the access system for grid-connected RPG projects.
Entering into grid connection agreements with qualified RPG enterprises.
Buying all the on-grid power produced by the grid-connected RPG projects.
Authorisation and operating requirements
To construct electricity transmission networks, an electric power business licence for transmission networks must be obtained from the NEA. An electricity transmission plant must prove that:
The authorities have approved its construction.
It satisfies environmental requirements and has the capacity to transmit electricity.
Its technical, safety and financial managers have at least three years' experience in electricity power industry and have at least mid-level professional qualifications.
It has established the competent transmission networks corresponding to the applied electricity transmission business.
The electricity transmission project has passed the completion inspection.
To engage in the electricity transmission business, an electric power business licence for electricity transmission must be obtained from the National Energy Administration (NEA).
According to the Catalogue (see Question 4) (effective on 30 January 2012), construction and operation of grids by foreign investors are in the restricted category, and the investment business must be operated with Chinese parties as the controlling shareholders.
Since distribution and transmission networks are currently not separated and are operated by the State Grid and South Grid, the power transmission and distribution price refers to the total price at which a grid management enterprise offers access into a system, grid connection, transmission of electric energy and sales.
The government sets the power transmission and distribution prices under the principles of reasonable cost, reasonable profits, lawful tax calculation and fair burden. The measures for examining and approving the cost of power transmission and distribution price are jointly formulated and promulgated by the NDRC and the NEA.
Authorisation and operating requirements
These are the same as those required for transmission networks (as distribution and transmission networks are not separated) (see Question 15).
A power distribution enterprise must obtain an electric power business license for power supply. The business operation of power supply includes power distribution and power sale.
Only one power supply enterprise can obtain an electric power business licence for power supply in each electricity service area.
Electricity distributors must ensure a non-discriminatory offering and cannot refuse to supply electricity within their authorised area. Electricity distributors must also supply electricity without interruption. Where outage is unavoidable, they must notify consumers in advance and resume the supply of electricity as soon as possible. They must also maintain their facilities' safe operation. Serious accidents must be reported to the authorised administration immediately.
The distribution service price is a part of the total power transmission and distribution price. For rates, terms and legal standard applicable for distribution, see Question 16.
Authorisation and operating requirements
Sale of power to customers is currently managed and performed exclusively by the State Grid and South Grid through their subsidiaries, which are required to obtain an electric power business licence from the NEA for power supply. The business operation of power supply includes power distribution and power sale.
Trading between generators and suppliers
Although the regulators are currently considering reform, the transmission, distribution and sale of power are not separated, and are still controlled by the State Grid and South Grid and their regional and provincial subsidiaries. Therefore, there is no electricity trading system between generators and suppliers.
As a general practice, an agreement-based electricity trading:
Can be specifically executed by eligible generation enterprises and the power distribution enterprises.
In rare cases, and subject to relevant approvals, can be carried out through negotiation between the power generation enterprises and the end users who demand a large volume of electricity.
Electricity price and conditions of sale
The government sets the power selling price, taking into account four factors:
The power purchasing cost.
Loss from power transmission and distribution.
Power transmission and distribution price.
The government fund.
Two types of power selling price are adopted:
The time-of-use price.
The season-of-use price.
The power selling price is undergoing reform. The aim of the reform is to divide the power selling prices into three categories:
The price of residential daily power consumption.
The price of agricultural power consumption.
The price of industrial and commercial power consumption as well as other industrial power consumption.
A uniform watt-hour power pricing system is implemented for the residential daily use of power and the agricultural consumption of power. The two-tier power pricing system for industrial, commercial and other consumers is implemented according to different capacity type and parameters.
Periodic price adjustment and interactive price adjustment are adopted for the adjustment of power selling prices.
Currently, the State Grid and South Grid operate most of the power sales through their subsidiaries, and the government determines the power sale price. However, under the current scheme of power system reform, power sales from power generation directly to large consumers is under trial in some designated areas (in which case the price is negotiated between the power generation enterprises and the consumers).
Laws and regulations do not provide a power wholesale concept concerning power sale from distribution network to end users. Instead, power wholesale is regarded as the purchase by grid operators (responsible for transmission, distribution and sale of power) from power generation enterprises with an on-grid price that is standardised or regulated by the government.
On-grid price before the grid bidding. In principle, the grid power prices of newly built electricity generating units are uniform within the same region. The prices are announced to the general public in advance. The grid power prices of existing electricity generation enterprises will also be unified step by step.
On-grid price after the grid bidding. After a regional competitive power market is established and grid bidding is carried out, the electricity generation units participating in the competition will apply the two-tier power price (according to which the capacity power price is determined by the price administrative department of the government, while the power price is set through market competition). The capacity power price is determined gradually through market competition.
Grid bidding is being piloted in certain designated regions and has not launched nationwide.
Enterprise income tax (EIT)
Electricity companies must pay EIT at 25% on their profits. For electricity companies incorporated in western China which engage in the construction and operation of hydropower stations, nuclear power plants and new energy power plants, the earned income tax rate is reduced to 15%. Electricity companies can apply for a three-year earned income tax exemption starting the first year operating income is generated, with an additional three years of reduced earned income tax at 50%.
Value added tax (VAT)
Electricity companies with general VAT payer status are subject to VAT at 17%. Head offices and their branches must be registered as individual VAT payers and pay VAT locally. Electricity companies can allocate their VAT between their head offices and branches. Head offices must calculate their company's VAT on the basis of the total revenue. All branches engaging in distribution must prepay VAT locally on the basis of their total revenue and a deemed tax rate set by the local government.
Electricity companies generating electricity in an environmentally friendly manner or in a manner that saves energy can apply for a tax refund. VAT paid on electricity generated by burning refuse is fully refundable. 50% of the VAT paid on electricity generated from stone coal, coal slime, oil shale, and wind is refundable in the first 15 years following the month after they began commercial production.
Transmission, distribution and sale of power are not currently separated, and are controlled by the State Grid and South Grid and their regional and provincial subsidiaries. It is very common for state-owned capital to dominate the electricity power enterprises. The vast majority of prefectural and municipal electricity power enterprises are branches of provincial electricity power enterprises. These branches do not observe independent legal status and market qualifications. To establish a standard electricity regulation regime, reform of China's state-owned power companies is required:
The administrative functions and management functions of enterprises should be separated. In addition, the classification and status of power generation, power transmission and power supply enterprises should be clarified.
Reform of the equity holdings of China's state-owned power companies should be undertaken, to form a modern equity system with clear ownership and strict protection, breaking the state-owned capital domination by introducing social investors.
A standardised corporation administering structure should be established in China's state-owned power companies.
The regulatory authorities
Address. 1 Fuyou Avenue, Xicheng District, Beijng, 100031
Main responsibilities. The State Council is the leading administrative unit responsible for implementing laws and policies of the NPC, and enacting regulations under the legal framework.
National Development and Reform Commission (NDRC)
Address. 38 Yuetan Nanjie, Xicheng District, Beijng, 100824
T + 8610 6850 2000
F +8610 6850 1090
Main responsibilities. The NDRC studies and formulates policies for economic and social development, maintains a balance of economic aggregates and guides the overall economic system restructuring. The NDRC is not only responsible for formulating policy measures of energy development, but also for administering and regulating price policies.
National Energy Commission (NEC)
Address. 38 Yuetan Nanjie, Xicheng District, Beijng, 100824
Main responsibilities. The NEC is responsible for drafting the energy development strategy, considering energy security and development issues, and monitoring implementation. While the NEC, chaired by the Premier, is the highest authority overseeing energy issues, the general price-setting power for electricity resides with the NDRC.
National Energy Administration (NEA)
Address. 38 Yuetan Nanjie, Xicheng District, Beijng, 100824
Main responsibilities. The NEA is responsible for formulating and implementing energy development plans and industrial policies, promoting institutional reform in the energy sector, administering energy sectors, and undertaking the daily work of the NEC.
Provincial governments can implement local pricing policies, as there are regional sub-divisions holding local power delegated to them from the central government. Development and Reform Commissions at the provincial level are the key units responsible for formulating and implementing pricing policies for energy.
Description. This is the official State Council website. It is up to date.
Description. This is the official National Development and Reform Commission (NDRC) website. It is up to date.
Description. This is the official National Energy Administration (NEA) website. It is up to date.
Wang Weidong, Managing Partner
Grandall Law Firm
Professional qualifications. China, lawyer
Areas of practice. Infrastructure; power; energy and resources; capital markets; corporate finance; M&A.
Non-professional qualifications. Training Certificate for BOT Projects, Asian Development Bank
- Acquisition of Meiya Power by China Guangdong Nuclear Power Corporation (CGNPC).
- AES Corporation on Haineng (Sichuan Province) Hydro-Power Project.
- Provided legal services on behalf of GCL-Poly Energy Holding Limited in its acquisition of 100% of the shares in a wind power project in Huitengliang, Inner Mongolia.
- Legal advisor for State Grid Corporation of China (SGCC) in the China-Russia Energy Cooperation Project.
- China Datang Corporation on China-Myanmar Cooperation Hydropower Project.
- Shanghai Electric Power Co., Ltd on its investment in Indonesia Bali Power Plant.
- Provided legal services to American Superconductor for its multi-billion dollar contract dispute with a Chinese enterprise.
Languages. Chinese, English
Professional associations/memberships. Kuala Lumpur Regional Centre for Arbitration (KLRCA); China International Economic and Trade Arbitration Commission (CIETAC); Chairman of the Infrastructure Committee of the Beijing Bar Association; International Law Commission on Natural Resources and Energy law.