A study on two-part generation pricing mechanism in China

In the past, dispatching department of china made generation plan mainly complied with the “justice rule”, which means most units in the same province had almost the same annual utilization hours, and based on the annual utilization hours, government determined generation price for the units to ensure that every generator had the same investment return rate. But, due to the presently implementation of energy-saving dispatching mode, it caused a great change in the annual utilization hours among different types of units, for example, the annual utilization hours of those have low energy consuming rate plants increases such as renewable plants and large scale coal-fired plants, while for the energy consuming plants such as small scale coal-fired plants, they are in the opposite situation. As the generation price still keeps constant, the grate change of annual utilization hours leads to excess profits or loss for power generation companies. Solution was proposed from the perspective of economic compensation, but the practical experiences proved that it was not workable. In fact, the essential reason of the benefit-adjustment of generation enterprises, which is caused by energy-saving dispatching, lies in the mismatch between the generation dispatching approach and the pricing mechanism. To obtain a fundamental solution of this problem, mechanism reform of generation price is needed. Two-part generation price, which is adapted to the actual conditions in China, is proposed in this paper. In the proposed mechanism, the capacity price is determined by both fixed costs of generator and K factor which reflects the relation of market supply and demand, and the energy price is determined based on the result of the present one-part generation price minus capacity price. Through the proposed mechanism, it can both encourage efficient investment of generation with the changing K factor according to the actual market situation and decrease the benefit adjustment - - caused by energy-saving dispatching policy. Calculation results based on a real electricity system shows that the proposed pricing mechanism is feasible.