Shandong Issues Detailed Implementation Plan for Renewables Pricing Reform

On Thursday, Shandong became the first province to issue a detailed guideline document for the implementation of the landmark national renewables market reforms announced by the NDRC back in February. I had heard from several sources that Shandong would likely be the first province to issue detailed implementation guideline documents, so it wasn't a surprise to see this.

Let's review some of the key items from the document; I will add my commentary after each one. With thanks for research and drafting support from Miaosu Li

Treatment of Existing Projects

Wind and solar projects connected to the grid before May 31, 2025, must begin selling all of their power in the wholesale power markets. They will have the opportunity to backstop these market sales with a Contract-for-Difference (CfD) with the Shandong grid company. The strike price (called the "mechanism price" in the Chinese original text) will be set to the coal-fired power benchmark rate in Shandong, which is 0.3949 CNY/kWh (or 394.9 CNY/MWh).

Meanwhile, the determination of annual generation volumes from a single project eligible to be covered by the CfD mechanism is described somewhat vaguely, as "with reference to practices in other provinces for non-marketised hours".

Finally, the period for which these projects may enjoy this arrangement is limited to the generation hours still remaining from its "reasonable full-lifecycle generation hours", which refers to the total lifetime generation for which a grid-parity project may enjoy guaranteed compensation from the grid company (a value that was set for grid-parity projects across different provinces in 2020).

Comments:

The strike price level for pre-existing projects being fixed to the Shandong coal-fired benchmark level is unsurprising; this is the most reasonable way to treat these grid-parity projects, considering they were originally constructed and financed under the assumption that they would earn the coal-fired benchmark rate. If they didn't at least assure this compensation level going forward, we'd have some very unhappy developers.

However, the vague phrasing about individual projects having their generation hours benchmarked to "non-marketised hours in other provinces" is potentially cause for concern for Shandong project owners. The implication could be that these "other provinces" are places which have seen their annual guaranteed generation hours for wind and solar projects reduced (and market-exposed generation increased).

Treatment of New Projects

Wind and solar projects connected to the grid after June 1, 2025, must sell all of their power in the wholesale power markets, with the opportunity to have a portion of their power backstopped by the grid company with a CfD. The strike price (again, called the "mechanism price" in the Chinese texts) is determined by provincial auction, with the auction clearing price becoming the strike price for the CfD. The first auction for the second half of 2025 will be held in June 2025, with the auction to set the mechanism price for 2026 to be held in October 2025.

The total volume of power to be procured via the auction is to be determined by provincial authorities and should be driven by the province's RPS level. The volume of all bids submitted to the auction should be at least 125% the target volume set by the province. This percentage is called the "Sufficiency Rate".

Comments:

Again, nothing too surprising here - this is all stuff we knew from Document 136 already. The 125% auction subscription threshold is interesting - aimed at ensuring sufficient participation in the auction and forcing competition on price (at least some bidders will not win access to the CfD scheme). It's surely unwelcome news for generators, of course - more competition means lower clearing prices.

In Europe, we previously saw cases where oversubscribed auctions in one year immediately turned into undersubscribed auctions in the next year (e.g. Spain 2021-2022) and Chinese policymakers are surely keen to strike a better balance and avoid repeating such mistakes.

Revenue Calculation for Green Certificates

Generation from wind and solar projects participating in the CfD scheme will not eligible to participate in green power trading and earn revenue from GEC sales; only generation volumes outside of the CfD scheme may receive GECs.

The policy goes on to further specify the volumes eligible to create green certificate revenue for the generator will be the smallest of the following three items, in accordance with the Special Chapter for Green Power Trading within the Basic Rules of Electric Power MLT Trading released last year (Document 1123).

1. The monthly contracted green power volume (in an offtake agreement between generator and buyer)
2. The green power fed into the grid, excluding that which was classified as ‘mechanism power’ (i.e. which earned the CfD already).
3. The actual end-user green consumption volume over the month

Comments:

It is not specified what happens to the GECs associated with the green attributes of the power sold under the CfD scheme; the policy only specifies they shall NOT become extra revenue for the generator. They have to go somewhere though. It’s probably a safe assumption they will go to the grid company. As the RPS policy expands in scope to cover more heavy industrial end users, policymakers must make sure sufficient green power and GECs are available for them to consume via market channels.

By specifying the eligible volume to be the SMALLEST of those three options, the policy drafters are ensuring the generator only gets GEC revenue for green power not already covered by any other compensation scheme or policy. It serves to prevent overcompensation and preserves market integrity. The result is green energy certificates are more closely linked to measurable consumption of green power, not just generation.

Market Formation

Shandong Province will continue to build and improve the market trading system to support new energy development. This includes promoting better linkage between spot market prices and primary fuel costs in determining prices in the medium/long-term (MLT) market. MLT market participants are encouraged to conduct their trades by referring to power supply and demand to determine volumes, rates, and appropriate market reference price nodes. These reference nodes could be any nodes from the day-ahead or real-time spot markets, or a unified settlement node.

Shandong will also relax the requirements for the ratio of power that must be transacted via MLT markets, removing the volume percentage floor and imposing a volume percentage cap instead (which will be set according to the generator's capability to deliver power to the grid after subtracting volumes already compensated via the CfD mechanism).

Comments:

This speaks more to the ongoing developing of spot markets as a more prominent driver of power market pricing than to renewables development specifically. These are all good developments though, as it's difficult for renewables to receive appropriate price signals, and for builders to get appropriate construction signals, when the spot market remains sidelined as a price-setting tool and so much power is transacted via MLT contracts.

The freedom to either select specific market nodes, or use a unified settlement node, will become an interesting question for power sellers to navigate. Power sellers in highly congested areas may prefer unified priced to avoid the risk of negative pricing associated with any single node.

 Arrangements For Shandong’s First Auction

• The bid cap in Shandong’s first auction will be fixed according to several factors, including a “rate of reasonable return”, the value of the green attributes, the supply/demand fundamentals in the power market, and the cost burden on end users.
• For the first auction to be held in June 2025, the price cap for a specific generator type, in principle, should not be higher than the average settlement price for that generator type in the prior year (e.g., the price cap for the 2025 solar auction can’t exceed the 2024 annual average settlement price for solar generation).
• A price floor also will be set temporarily. It will refer to the LCOE (excluding profits) derived from fixed construction costs of a modern power plant of the specific generator type.
• For any single project, there will be a cap on the share of its volume allowed to bid for CfD coverage. The exact cap level is not specified and will be announced in each year’s auction notice.
• Solar and wind projects will participate in separate CfD auctions initially. However, at a later date, they will be gradually unified to compete in a single pool, regardless of technology type.
• Distributed solar projects are also allowed to participate in the auction through an intermediary agent intermediary that acts as an aggregator. This agent will need to be a registered retailer in the Shandong power market.

Comments:

• Shandong’s average settlement price in 2024 was around 346.4 RMB/MWh for solar and 360.5 RMB/MWh for wind. Thus, the price cap for the first auction is likely to be set around/slightly below these levels.
• The LCOE-based auction price floor will surely be welcome news for generators, as it helps prevent auction manipulation by large generators willing to accept low rates of return that might be unbearable for smaller generators. A "race to the bottom" situation must be avoided. However, tying the floor specifically to fixed costs means generators might struggle to cover other integration costs, like storage.
• The volume cap policy reflects the Doc #136 phrasing that “each single project’s volume of CfD coverage may be appropriately lower than its entire generation volume”. Given the Doc #136 wording, this number is unlikely to be very low for the first auction. A reasonable guess would be somewhere around 80% - 90%, which would align with typical practice in Europe.
• As the auctions eventually converge into a single unified pool, generators will have to prepare for cross-technology competition. This will have to be phased in very cautiously, however, as the different renewable energy types are not interchangeable and have different generation characteristics. Care must be taken to avoid domination of the auctions by a single low-cost generation type (e.g., solar) that ends up further distorting pricing in the power markets.
• The distributed solar aggregation business is an emerging new business opportunity for retailers, but specific details and technical rules are not yet available, so it's hard to comment more right now.

Overall Conclusions:

Shandong is the first province to provide its detailed implementation guide for Document 136 and its choices are generally reasonable and unsurprising. Faced with a huge daytime surplus of solar generation and persistent low (and often negative) prices in the spot power market, Shandong has quite a bit of pressure to demonstrate how this policy reform is going to effectively balance the needs of different stakeholders. Generators need appropriate incentives to keep building, end-users need incentives to optimize their power consumption to align with power supply and demand conditions, and the power markets must be able to accurately transmit effective pricing signals to all participants involved.

Shandong's approach to Doc 136 implementation will probably not be totally replicable for other provinces, particularly those with weaker grids (e.g. Xinjiang) or weaker load growth (e.g. Heilongjiang). Some region-specific nuances are to be expected in the forthcoming implementation documents from those provinces.

Although Shandong generators will surely appreciate some of the risk-reducing measures, like the creation of an LCOE-based price floor in the CfD auction, the requirement for the auction be overbid to at least 125% means there will still be considerable downward pressure on the auction clearing price. If they are unable to trade power effectively in the markets, or find end-user customers, some of their planned pipeline projects that lack competitiveness will surely have to be abandoned or redesigned.

The net effect for Shandong power users, on the other hand, will probably be a decrease in power prices, especially green power prices. Even though the difference between market price and CfD strike price will be passed onto the end-user in their system costs, this should be more than balanced out by the downward pressure on the energy price.

Furthermore, as the generators are faced with thinner profits in the CfD auction scheme and a challenging market environment, this should be a good year for end-users to negotiate a long-term green power purchase agreement (PPA), providing the revenue stability that the generators are otherwise missing. This should also help them secure project financing. That being said, we still need to see how the first auction in June goes before being too confident with any big predictions.

That's all for this time. If you enjoyed this content, please give me a follow, and also check out The Lantau Group, a specialist market analytics consultancy focused on the Asia-Pacific energy sector. I'm based in The Lantau Group's Shanghai office, where I helps companies make crucial decisions about their energy strategy in China, including power tariff forecasts, budget forecasts, and sustainability planning for power customers, as well as investment/transaction/commercial support for power infrastructure developers, lenders and investors.