New Power Market Design in the Context of Renewable Energy and the Energy Internet

Since the issuance of Document No. 9 in September 2015, electricity market reform in China has advanced rapidly. In particular, in September this year, the National Development and Reform Commission (NDRC) issued a notice selecting eight regions to pilot electricity spot market construction, prompting many scholars and experts to revisit overseas electricity markets and draw lessons from mature European and U.S. electricity market experiences. However, China’s power sector reform coincides with the global rise of the energy internet: the share of renewable energy—especially ‘uncontrollable’ sources such as photovoltaic (PV) and wind power—is steadily increasing; various types of energy storage are becoming progressively more cost-effective; smart meters are widely deployed; and next-generation communication technologies are gradually moving out of laboratories. All these developments are driving a fundamental transformation of electricity markets. Indeed, the European Union’s December 2016 proposal for new electricity market design rules sharply observed: ‘Today’s energy market rules were designed for yesterday’s energy system—dominated by conventional thermal generation and lacking demand-side response.’ Similarly, a 2014 report by the U.S. National Renewable Energy Laboratory (NREL) explicitly noted that U.S. Independent System Operators (ISOs) have continuously refined their electricity market rules in response to rising renewables—but it remains uncertain whether these incremental improvements can still ensure the most stable and economically efficient electricity market. China’s construction of electricity markets within the context of the energy internet presents both a challenge—there is no fully ‘mature’ electricity market model to follow—and an opportunity: just as China’s automobile industry skipped internal combustion engines to leap directly into electric vehicles, and its telecommunications sector bypassed widespread 3G deployment to roll out 4G nationwide, China now has the chance to pioneer world-leading electricity market solutions. The low marginal cost of PV and wind power will displace conventional thermal generation in marginal-cost-based bidding, depressing wholesale electricity prices—even pushing them into negative territory—thus threatening the economic viability of thermal plants. At the same time, the inherent unpredictability and volatility of PV and wind output pose new challenges to power system reliability and flexibility. This raises two core issues: ・ How to ensure a sufficient quantity of generation resources remain economically viable to support long-term system adequacy and necessary redundancy; ・ How to incentivize generation resources to enhance—and actively deploy—their flexibility. Over more than a decade of electricity market operation, Europe and North America have experimented with numerous reforms and innovations—experiences well worth incorporating into the initial design of China’s electricity market. More Capacity, Higher Prices Two mainstream approaches exist for ensuring long-term generation capacity adequacy: 1. Capacity Markets A separate capacity market is established alongside the energy market. The system operator calculates the minimum required generation capacity and procures it via centralized auctions—or mandates end-users to purchase capacity, akin to a quota system. 2. Scarcity Pricing Within the energy market, prices are allowed to surge sharply during periods of tight supply, enabling generators to earn sufficient revenue from relatively few high-price hours to sustain long-term operations. In theory, when generation resources are scarce, power plants may bid infinitely high prices—hence nearly all global electricity markets impose price caps.

Representative Liu Hanyuan: Replacing the Traditional Power Pool Mechanism with a ‘Bilateral Contracts + Balancing Market’ Model to Enhance Electricity Market Operational Stability

In 2025, China’s cumulative installed capacity of photovoltaic (PV) and wind power historically surpassed that of thermal power, reaching 1.84 billion kW—making renewables the absolute dominant source of new power generation capacity. Renewables accounted for 47.3% of total installed capacity and nearly half of global PV and wind capacity, establishing the world’s largest and fastest-growing renewable energy system. This structural shift has solidified the energy foundation for achieving China’s carbon peak and carbon neutrality goals on schedule. However, due to the inherent intermittency and volatility of renewable generation—compounded by dynamic shifts in electricity supply-demand balance—price volatility risk has significantly intensified, emerging as a prominent bottleneck constraining stable electricity market operation. At this year’s National People’s Congress (NPC), National People’s Congress Deputy Liu Hanyuan—Vice Chairman of the All-China Federation of Industry and Commerce and Chairman of the Board of Tongwei Group—proposed recommendations to accelerate the development of electricity derivatives markets. Deputy Liu stated that practical experience shows deepening electricity market reform cannot proceed without coordinated support from derivatives markets. During their own electricity market liberalization processes, European and U.S. countries similarly confronted severe electricity price volatility triggered by the rapid rise of new energy sources—and comprehensive application of derivatives instruments became the core pathway to resolving this challenge. For instance, the UK, in its 2001 electricity market reform, introduced futures, options, and other derivatives tools and replaced the traditional power pool mechanism with a ‘bilateral contracts + balancing market’ model, markedly enhancing market operational stability. In recent years, electricity derivatives trading volumes in mature European and U.S. markets have consistently remained in the trillions of U.S. dollars annually: European electricity derivatives volume reaches 9–10 times that of the spot market, while the U.S. figure stands at 15–20 times; over 90% of electricity transactions are covered by financial contracts such as futures, effectively dampening spot price fluctuations. International practice fully confirms that a mature electricity derivatives market is critical for hedging price risk, safeguarding stable operations of market participants, and maintaining overall electricity market stability. Deputy Liu believes that, compared with mature European and U.S. markets, China’s electricity derivatives market remains in its infancy—its development pace misaligned with both the progress of electricity market reform and the demands of energy structure transformation. Three major shortcomings stand out: First, the product system lags behind—lacking electricity futures, the core standardized hedging instrument, and failing to offer specialized products covering risks such as renewable output volatility, peak-valley price spreads, and extreme weather impacts. Second, cross-regional trading barriers are pronounced: electricity market rules, accounting mechanisms, and transmission pricing policies differ significantly across provinces (autonomous regions and municipalities), while administrative intervention and local protectionism persist—hindering optimal inter-provincial allocation of electricity resources through derivatives markets. Third, policy coordination and regulatory mechanisms require improvement: insufficient synergy between energy and financial regulators; poor alignment between derivatives settlement and delivery rules and those of the electricity spot market; excessively high participation thresholds and elevated risk concerns among market players—leading to widespread reluctance or inability to use derivatives tools—thus constraining the effective functioning of the market. Currently, electricity price volatility is already exerting significant adverse impacts across the electricity industry chain. Renewable power generation enterprises suffer from deviations between actual feed-in tariffs and expectations due to output volatility—causing some project returns to fall below warning thresholds and dampening investment enthusiasm for new projects; electricity retail companies face dual pressure—high procurement costs coupled with capped retail prices—plunging them into operational distress; industrial users—especially energy-intensive enterprises—struggle to lock in electricity costs in advance, severely undermining production planning stability and, consequently, jeopardizing the security of industrial and supply chains.

ICE Joins Wind Derivatives Push as Renewables Reshape Power

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Intercontinental Exchange launches wind derivatives across seven European countries to hedge weather risk as renewables reshape electricity markets. The contracts cover 70% of Europe’s wind capacity, signaling demand for standardized hedges amid rising intermittent generation.

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ICE Joins Wind Derivatives Push as Renewables Reshape Power

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