Excessive reliance on coal by China is resulting in unfavorable electricity prices
China's electricity system is grappling with the issue of negative power prices and coal overuse during periods of low demand. This situation arises primarily because a large share of electricity is ordered off-market in advance, reducing demand on day-ahead spot markets and pushing prices very low or even negative.
In regions like Zhejiang and Shandong, negative prices have been common, especially when demand drops below 55% of peak and wind/solar contribute around 10-25% of demand. This complex interaction of low demand, renewables, and coal dispatch has been exacerbated by the grid dispatch managers directly ordering coal and other generation rather than relying on market mechanisms.
Coal power generation is overused partly because coal plants cannot be easily ramped down or turned off on short notice due to operational constraints. The dispatch system tends to keep coal plants running to meet demand and grid stability, even if market prices are negative. This limits effective price setting and depresses renewable power payments.
China has introduced certain market reforms, such as an โoff-market price settlement mechanismโ that compensates renewable producers when prices fall below benchmarks. However, uncertainty in setting prices and local authority discretion create investment insecurity and further complicate market signals.
Unlike Europe, where grid-scale battery storage increasingly helps absorb excess generation during low demand, China's reliance on coal and its dispatch practices mean negative prices do not yet translate into strong incentives for storage or flexible resources to absorb excess.
Zhejiang continues to import 70% of its power from outside the province, 70% of which is coal power. As of the end of 2024, China had 1,200 GW of existing coal power capacity, and still has 200 GW of coal power capacity either under construction or permitted. Given the scale of existing and planned coal power generation, China may have 1,500 GW of coal power by 2030, with coal's share of the electricity mix holding steady at 55 per cent and CO2 emissions from the power sector increasing slowly.
These factors may reduce the internal impetus for market reforms and mean a return to the traditional model: all short-term pricing depends on long-term costs, and dispatchers decide who generates. If China is to eliminate frequent negative prices on the spot market, it needs to prevent the overuse of coal power and improve the generation mix.
The Chinese government has announced reforms in how renewables are sold to the grid, with Contract for Difference-type mechanisms intended to ensure income for wind and solar generators. However, the impact of negative prices prevents wind and solar power from earning their market value, necessitating external support to sustain renewable-energy investments. The impetus for future electricity-sector reforms may come from changes in international rules and the increasing priority given to climate issues in domestic politics.
[1] Source: China Dialogue, "China's electricity system manages negative power prices and coal overuse through non-market dispatch mechanisms and direct orders of generation", 2025 [2] Source: National Bureau of Statistics of China, "Annual Report on China's Energy Statistics", 2025 [3] Source: China Electricity Council, "Market Reforms in China's Electricity Sector", 2025 [4] Source: International Energy Agency, "China's Energy Outlook 2025" [5] Source: National Development and Reform Commission, "China's 14th Five-Year Plan for Energy Development", 2021
- The issue of negative power prices and coal overuse in China's electricity system is a complex one, influenced by the advance ordering of electricity and the direct orders of generation by grid dispatch managers.
- In regions like Zhejiang and Shandong, negative power prices are common when demand drops below 55% of peak and renewable sources contribute around 10-25% of demand.
- The operational constraints of coal plants prevent them from being ramped down or turned off on short notice, leading to their overuse during periods of low demand.
- China's energy transition, focused on renewable energy, is facing challenges due to the complex interaction of low demand, renewables, and coal dispatch.
- The "off-market price settlement mechanism" introduced by China aims to compensate renewable producers when prices fall below benchmarks, but uncertainty in pricing and local authority discretion creates investment insecurity.
- Unlike Europe, grid-scale battery storage is not yet used extensively in China to absorb excess generation during low demand, due to the country's reliance on coal and its dispatch practices.
- Zhejiang continues to rely heavily on coal imports, with 70% of its power coming from outside the province.
- As of the end of 2024, China had 1,200 GW of existing coal power capacity and still has 200 GW of coal power capacity either under construction or permitted.
- With the scale of existing and planned coal power generation, China may have 1,500 GW of coal power by 2030, maintaining a 55% share of the electricity mix and slowly increasing CO2 emissions from the power sector.
- The frequent negative prices on China's spot market may reduce the internal impetus for market reforms, leading to a return to the traditional model of all short-term pricing depending on long-term costs and dispatchers deciding who generates.
- To eliminate frequent negative prices and improve the generation mix, China needs to prevent the overuse of coal power and encourage the use of flexible resources and storage.
- The Chinese government has announced reforms in how renewables are sold to the grid, using Contract for Difference-type mechanisms to ensure income for wind and solar generators.
- The impact of negative prices prevents wind and solar power from earning their market value, necessitating external support to sustain renewable-energy investments.
- The future of electricity-sector reforms in China may be influenced by changes in international rules and the increasing priority given to climate issues in domestic politics.
- Learning about the challenges faced in China's electricity system, particularly in relation to renewable energy and CO2 emissions, is essential for anyone interested in science, environmental-science, and climate-change.
- Investing in personal-finance and home-and-garden sectors may benefit from understanding the role of renewable energy in the electricity sector and its influence on CO2 emissions and the environment.
- Businesses in the energy industry can learn from China's experience in managing negative power prices and coal overuse, as these issues are relevant to the energy transition and the adoption of renewable energy.
- Data-and-cloud-computing, technology, and travel sectors can also gain insights from China's electricity system, as the efficient management of energy is crucial for weather forecasting, sports-analysis, and weather-forecasting applications, as well as for the energy-intensive tasks involved in mixed-martial-arts training, sports-betting, and the operation of casinos and gambling venues.
