Creating Markets for Wind Electricity in China: Hybrid Approaches to Energy Modeling and Regulation

China’s rapid economic growth–largely industrial, energy-intensive, and reliant on coal–has generated environmental, public health, and governance challenges. While China now leads the world in renewable energy deployment, curtailment (waste) of wind and solar is high and increasing, generating much discussion on the relative contributions of technical inflexibilities and incomplete institutional reforms on integration outcomes. These integration challenges directly affect China’s ability to meet long-term environmental and economic objectives. A second, related challenge emerges from how wind integration interacts with China’s reinvigoration in 2015 of a three-decade-old process to establish competitive electricity markets. A “standard liberalization prescription” for electricity markets exists internationally, though Chinese policy-makers ignore or underemphasize many of its elements in current reforms, and some scholars question its general viability in emerging economies. This dissertation examines these interrelated phenomena by analyzing the contributions of diverse causes of wind curtailment, assessing whether current experiments will lead to efficient and politically viable electricity markets, and making prescriptions on when and how to use markets to address renewable energy integration challenges.

Curtailment in China, Texas Figure - Wind curtailment in major wind provinces of China (wind share of generation > 5% in 2016) and Electric Reliability Council of Texas. Source: NEA, NBS, ERCOT

To examine fundamentals of the technical system and the impacts of institutional incentives on system outcomes, this dissertation develops a multi-method approach that iterates between engineering models and qualitative case studies of the system operation decision-making process (Chapter 2). These are necessary to capture, respectively, production functions inclusive of physical constraints and costs, and incentive structures of formally specified as well as de facto institutions. Interviews conducted over 2013-2016 with key stakeholders in four case provinces/regions with significant wind development inform tracing of the processes of grid and market operations (Chapter 3). A mixed-integer unit commitment and economic dispatch optimization is formulated and, based on the case studies, further tailored by adding several institutions of China’s partially-liberalized system (Chapter 4). The model generates a reference picture of three of the systems as well as quantitative contributions of relevant institutions (Chapter 5). Insights from qualitative and quantitative approaches are combined iteratively for more parsimonious findings (Chapter 6).

This dissertation disentangles the causes of curtailment, focusing on the directional and relative contributions of institutions, technical issues, and potential interactive effects. Wind curtailment is found to be closely tied to engineering constraints, such as must-run combined heat and power (CHP) in northern winters. However, institutional causes–inflexibilities in both scheduling and inter-provincial trading–have a larger impact on curtailment rates. Technical parameters that are currently set administratively at the provincial level (e.g., coal generator minimum outputs) are a third and important leading cause under certain conditions.

To assess the impact of China’s broader reform of the electricity system on wind curtailment, this dissertation examines in detail “marketizing” experiments. In principle, spot markets for electricity naturally prioritize wind, with near zero marginal cost, thereby contributing to low curtailment. However, China has not yet created a spot market and this dissertation finds that its implementation of other electricity markets in practice operates far from ideal. Market designs follow a similar pattern of relying on dual-track prices and out-of-market parameters, which, in the case of electricity, leave several key institutional causes of inefficiency and curtailment untouched. Compared to other sectors with successful marketization occurring when markets “grow out of the plan,” all of the major electricity experiments examined show deficiencies in their ability to transition to an efficient market and to cost-effectively integrate wind energy.

Although China’s setting is institutionally very different, results support implementation of many elements of standard electricity market prescriptions: prioritize regional (inter-provincial) markets, eliminate conflicts of interest in dispatch, and create a consistent central policy on “transition costs” of reducing central planning. Important for China, though overlooked in standard prescriptions: markets are enhanced by clarifying the connection between dispatch and exchange settlement. As is well established, power system efficiency is expected to achieve greatest gains with a short-term merit order dispatch and primarily financial market instruments, though some workable near-term deviations for the Chinese context are proposed. Ambiguous property rights related to generation plans have helped accelerate reforms, but also delay more effective markets from evolving. China shares similarities with the large class of emerging economies undergoing electricity market restructuring, for which this suggests research efforts should disaggregate planning from scheduling institutions, analyze the range of legacy sub-national trade barriers, and prioritize finding “second-best” liberalization options fit to country context in the form and order of institutional reforms.

Committee

J. Ignacio Pérez-Arriaga (Chair), Professor & Director of the BP Chair on Energy & Sustainability, Instituto de Investigación Tecnológica (IIT), Universidad Pontificia Comillas, and Visiting Professor at MIT Sloan School of Management

Valerie J. Karplus, Assistant Professor of Global Economics and Management, MIT Sloan School of Management

Margaret Pearson, Professor of Government and Politics, University of Maryland