Solar tsunami in China and China's energy shock: What the new price reform means for YOUR industry – Image: Xpert.Digital
The impact of market-oriented pricing for renewable energy in China on industry and commerce
From fixed prices to market prices: China's path to an efficient energy future
The People's Republic of China, the world's largest energy consumer and largest emitter of greenhouse gases, is at a crucial stage in its energy transition. Faced with increasing global pressure to combat climate change and the need to ensure its own energy security, China has made massive efforts in recent years to accelerate the expansion of renewable energy. A key element of this transformation is the introduction of market-based pricing for renewable energy, a fundamental reform that will have a profound impact on the Chinese economy, particularly on the industrial and commercial sectors.
This realignment of energy policy marks a paradigm shift. Previously, the promotion of renewable energy in China was primarily based on fixed feed-in tariffs (FiTs). This system guaranteed renewable energy producers a fixed price per kilowatt-hour of electricity for a defined period, regardless of actual market conditions. While these FiTs undoubtedly played a crucial role in the initial phase of renewable energy expansion, stimulating investment and establishing technologies, they also brought disadvantages over time. For example, they led to inefficient resource allocation, as the prices did not reflect the true costs and value of energy. Furthermore, the FiTs increasingly burdened the state budget and distorted competition between different energy sources.
The transition to market-based pricing, now underway, aims to address the weaknesses of the existing system and create a more competitive and sustainable energy market. Essentially, this means that renewable energy prices will be more strongly determined by supply and demand and will be aligned with actual market prices. This reform is complex and multifaceted and will be implemented in phases, with provincial governments playing a crucial role in its specific design and implementation. The impact of this reform is far-reaching, affecting not only energy producers themselves but also the entire value chain, and in particular the energy-intensive industrial and commercial sectors, which account for a significant portion of China's electricity consumption.
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Short-term effects (up to approximately 1 year after introduction, from June 2025)
In the immediate transition phase, which begins with the planned introduction in June 2025, the impact of the new pricing will initially be moderate. An immediate and drastic change in electricity prices is unlikely. This is partly because many existing renewable energy projects still operate under the old feed-in tariffs, and these contracts typically run for a longer period. Furthermore, the transition will be gradual to ensure a smooth shift and avoid abrupt price shocks that could destabilize the economy.
Nevertheless, some adjustment effects are to be expected in the first few months and the first year after implementation. Companies, especially energy-intensive businesses, will need to familiarize themselves with the new market mechanisms and align their energy strategies accordingly. This may lead to a slight increase in electricity prices in the short term, as companies may incur additional costs for adapting to the new system, for example, by optimizing their energy procurement or concluding new contracts. However, this initial price volatility should be considered temporary and will subside over time as the market stabilizes and companies have adapted to the new conditions.
Another short-term effect could be an increase in renewable energy project installations up to the cut-off date of June 2025. Investors who still want to benefit from the guaranteed feed-in tariffs might try to complete projects before this date to secure the more attractive conditions. This "run" on the old tariffs could lead to a short-term surge in investment, which, however, is likely to level off again after the cut-off date once the new market mechanisms are fully operational. At the same time, the transition could also lead to some uncertainty among investors in the short term, as future returns are less predictable under the new market conditions than under the fixed feed-in tariff system. This uncertainty could result in a temporary slowdown in investment activity until the framework conditions have become clearer and investors have understood and accepted the new rules of the game.
Medium-term effects (approx. 2-5 years after introduction)
In the medium term, roughly two to five years after the introduction of market-oriented pricing, the effects will be more pronounced and tend to be more positive for industry and commerce. Analysts and experts overwhelmingly expect a decline in electricity prices during this period. This price decrease will be driven by several factors:
Increased competitiveness of renewable energies
Market-based pricing incentivizes renewable energy producers to reduce their costs and increase their efficiency. Competitive pressure forces less efficient and more expensive plants out of the market, while promoting innovative and cost-effective technologies. This leads to a continuous reduction in renewable energy production costs, particularly in solar and wind power, where China already holds a global leadership position and benefits from significant economies of scale.
Displacement of coal-fired power
As renewable energies become increasingly competitive due to cost reductions, they can increasingly displace coal-fired power from the grid. Coal-fired power plants, which still account for the largest share of electricity generation in China, are generally more expensive and environmentally damaging than modern renewable energy facilities. The more renewable energy is fed into the grid, the lower the demand for coal-fired power becomes, and the greater the economic pressure on coal-fired power plants. This displacement effect leads to lower average electricity prices on the grid, as cheaper renewable energies make up a larger share of the energy mix.
More efficient grid infrastructure and energy storage
Integrating large amounts of renewable energy requires modernizing and expanding the grid infrastructure, as well as deploying energy storage technologies. Market-based pricing can incentivize investment in these areas by better reflecting the value of flexibility and ancillary services. A smarter and more flexible grid, combined with large-scale energy storage, can better compensate for fluctuations in renewable energy generation and increase grid stability. This, in turn, contributes to a more reliable and cost-effective energy supply.
Reduction of electricity waste (curtailment)
In the past, China has repeatedly experienced significant amounts of electricity from renewable energy sources that could not be fed into the grid and were therefore "wasted" (a phenomenon known as curtailment). This was due, among other things, to grid congestion, a lack of grid flexibility, and insufficient matching of supply and demand. Market-based pricing can help reduce this problem by incentivizing better grid planning, the expansion of storage capacities, and the development of flexible load management systems. Reducing curtailment means that more electricity produced from renewable energy sources can actually be used, thus lowering the overall cost per kilowatt-hour.
The anticipated decline in electricity prices in the medium term will have a positive impact on the cost structure of industry and commerce. In particular, energy-intensive industries, such as the steel, aluminum, chemical, and cement sectors, which have high electricity consumption, will benefit from the falling prices. This can strengthen their competitiveness in the national and international markets and reduce their production costs. Lower electricity prices are also an important cost factor for the manufacturing sector as a whole, the service sector, and the retail trade, and can positively influence their profitability and willingness to invest.
Long-term effects (from about 5 years after introduction)
In the long term, starting around five years after the introduction of market-based pricing and beyond, the structural changes in China's energy sector will become even more apparent. The reform is expected to lead to a fundamental transformation of the energy system, characterized by the following features:
More efficient resource allocation
Market-based pricing will lead to a significantly more efficient allocation of resources in the energy sector. Prices determined by supply and demand send clear signals to investors and consumers. They reflect the true costs of energy generation, transmission, and distribution, as well as the value of flexibility and reliability. This directs investments toward the most cost-effective and efficient technologies and projects and incentivizes energy consumers to optimize their energy consumption and implement energy efficiency measures. Overall, this will lead to a reduction in the total cost of the energy system and an increase in economic efficiency.
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More stable and cost-effective energy supply
The reform aims to strengthen long-term demand for renewable energy and continuously increase its share in the energy mix. A diversified and decentralized energy supply based on renewables is less vulnerable to price shocks and geopolitical risks than a system heavily reliant on imported fossil fuels. Furthermore, renewable energy sources, particularly solar and wind power, have very low marginal operating costs, as they do not incur fuel costs. The higher the share of renewables in the energy mix, the more stable and cost-effective the overall energy supply will be in the long run. This contributes to China's energy security and strengthens the competitiveness of the Chinese economy.
Innovation and technological leadership
The competitive pressure created by market-based pricing will accelerate innovation in renewable energy and energy technologies. Companies will be compelled to invest in research and development to reduce costs, increase efficiency, and develop new products and services. China has already achieved global leadership in many areas of renewable energy, such as solar and wind power, as well as battery technology. Market-based pricing can further solidify this position and establish China as a global innovation hub for green technologies. This will create new growth opportunities for Chinese companies and strengthen the country's technological sovereignty.
Contribution to climate goals and sustainability
Promoting renewable energy through market-based pricing is a key component of China's climate policy. By expanding renewable energy sources and reducing the share of fossil fuels in its energy mix, China can significantly lower its greenhouse gas emissions and achieve its national and international climate goals. This not only contributes to the global fight against climate change but also improves air quality in Chinese cities, reduces dependence on energy imports, and creates new jobs in promising industries. A sustainable energy supply is a crucial factor for China's long-term economic and social development.
Industry-specific impacts
The impact of the new pricing will vary depending on the industry. Some industries will be more affected than others, and some will benefit more than others. Here is a more detailed look at the industry-specific impacts:
Renewable energy sector (solar, wind power, etc.)
The renewable energy sector itself will naturally be most directly affected by the new pricing structure. However, within this sector, there are significant differences between the individual technologies and value chain stages.
solar industry
The solar industry in China faces significant challenges and opportunities. China has built up massive overcapacity in solar module production, leading to a price collapse and intense competition. Solar cell prices have fallen dramatically in recent years, particularly in the last year. Market-oriented pricing will reinforce this trend, further intensifying competition and putting pressure on manufacturers' margins. At the same time, however, the reform also opens up new opportunities for innovative and cost-efficient solar companies. Companies that can reduce their production costs, improve their technologies, and focus on higher-margin segments, such as integrated solar solutions for buildings or specialized applications, will benefit from the reform. Smaller and less efficient producers, on the other hand, could come under pressure and potentially disappear from the market, which could lead to consolidation in the solar industry.
Wind power industry
Similar to the solar industry, the wind power industry in China is also facing structural change. Particularly in the offshore wind energy sector, there is still considerable growth potential, but also technological and economic challenges. Market-oriented pricing will intensify competition in the wind power sector as well, creating incentives for cost reductions and efficiency improvements. Companies capable of developing innovative and reliable wind turbines that operate efficiently even under difficult conditions (e.g., offshore, at high altitudes) and can implement projects at competitive prices will be successful in the long term. Consolidation could also occur in the wind power sector, as smaller and less competitive players come under pressure.
Battery manufacturing
The battery industry is a key sector for the energy transition, as batteries play a central role in storing renewable energy and in electromobility. The Chinese battery industry has experienced tremendous growth in recent years and is now a global leader. However, the battery sector is also characterized by intense competition and falling prices. CATL, the Chinese world market leader in batteries, has, for example, predicted a further halving of prices this year. Market-oriented pricing in the energy sector will further intensify price pressure in the battery industry, as it increases demand for cost-effective energy storage solutions. Companies capable of producing innovative and high-performance batteries at competitive prices, and which focus on promising applications such as stationary grid storage or batteries for electric vehicles, will be able to benefit from the reform.
Energy-intensive industries
As previously mentioned, energy-intensive industries are expected to be among the main beneficiaries of the new pricing structure. Lower electricity prices reduce their operating costs and improve their competitiveness. This is particularly true for industries such as steel, aluminum, cement, chemicals, paper, and glass. These industries are typically highly export-oriented and compete globally. Lower energy costs can give them a significant competitive advantage and strengthen their position in the world market. Furthermore, lower energy costs can incentivize investment in energy-efficient technologies and processes within these industries, potentially leading to further cost reductions and environmental benefits.
coal industry
The coal industry is expected to come under considerable pressure under the new pricing structure. As renewable energies become increasingly cost-effective and competitive, demand for coal-fired power is declining. Coal-fired power plants are becoming increasingly unprofitable and could be phased out of the market in the long term. This poses major challenges for the coal industry, particularly in regions heavily reliant on coal mining and power generation. The coal industry is expected to undergo a structural transformation in the coming years, which may involve job losses and economic upheaval in the affected regions. The Chinese government will need to implement measures to ensure this transformation is socially responsible and to create alternative employment opportunities for coal industry workers.
Network infrastructure and energy storage
The grid infrastructure and energy storage sectors are becoming increasingly important in the context of the energy transition and market-based pricing. A modern and flexible electricity grid, along with large-scale energy storage, is essential to compensate for fluctuations in renewable energy generation and ensure grid stability. Market-based pricing can incentivize investment in these areas, as it better reflects the value of flexibility and ancillary services. Companies capable of developing and implementing innovative grid technologies and energy storage solutions will benefit from the reform. This applies to both public grid operators and private companies active in grid management, smart grids, and energy storage.
Technology sector
The technology sector as a whole will also benefit from the energy transition and market-oriented pricing. Companies investing in renewable energy, energy efficiency, smart grid technologies, energy storage, and other green technologies will profit from the new market conditions. Lower energy costs will reduce their operating expenses and improve their competitiveness. Furthermore, the energy transition is creating new business opportunities in software development, data analytics, artificial intelligence, and digital services for the energy sector. China has the potential to assume a global leadership role in these areas and tap into new growth markets.
Impact on investments in renewable energies
Market-based pricing will also have a significant impact on investments in the renewable energy sector. The shift from fixed feed-in tariffs to market-based prices fundamentally changes the framework for investment.
Short-term effects
As previously mentioned, a surge in investment is expected in the short term before the June 2025 deadline, as investors will want to take advantage of the existing feed-in tariffs. At the same time, the transition could lead to short-term uncertainty for investors, as future returns are more difficult to predict. This uncertainty could result in a temporary slowdown in investment activity.
Long-term effects
In the long term, however, market-oriented pricing is expected to lead to more sustainable and efficient investment in the renewable energy sector. Competitive pressure will force companies to optimize their efficiency, reduce costs, and develop innovative technologies and processes. This will encourage investment in research and development, new production facilities, and innovative business models. At the same time, the reform will lead to market consolidation, as smaller and less competitive producers will come under pressure. Investors will increasingly focus on cost-effective projects to survive in the competitive market environment.
Incentives and safeguards
To ensure investment security and mitigate extreme price fluctuations, China plans to introduce a sustainable price stabilization mechanism. While details of this mechanism are not yet fully known, it is intended to guarantee long-term price stability and provide investors with planning certainty. Furthermore, prices for new projects will be set through competitive bidding processes. This system aims to ensure that renewable energy prices are competitive and that investors are incentivized to implement efficient and cost-effective projects.
Sectoral differences
The impact on investment will vary depending on the sector. The solar industry, already suffering from overcapacity and falling prices, could be particularly hard hit. Investments in new solar module production capacity may decline, while investments in innovative solar cell technologies and higher-margin segments may increase. The wind power industry will also experience adjustments, especially in offshore wind energy, where investment costs are high and project risks are greater. Conversely, investments in grid infrastructure, energy storage, and smart grid technologies are likely to increase, as these areas are essential for integrating large amounts of renewable energy.
Market-oriented pricing: The key to a sustainable energy transition in China
The introduction of market-based pricing for renewable energy in China is a far-reaching reform with the potential to fundamentally transform the Chinese energy sector and accelerate the country's energy transition. While adjustment effects and uncertainties may occur in the short term, industry and commerce will benefit in the long term from lower electricity prices, a more stable energy supply, and more efficient resource allocation. The reform will intensify competition in the energy sector, foster innovation, and advance China toward a sustainable and climate-friendly economy. The precise impact will depend on the specific implementation by provincial governments and the adaptability of companies. It is crucial that the government establishes a clear and reliable regulatory framework that ensures investment security while simultaneously promoting competition and efficiency in the energy sector. If this is achieved, market-based pricing can become a successful model for other countries also pursuing a transition to renewable energy.
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