Economy

Balance of Power

Distributed PV networks have become so popular, local grid capacity is often overwhelmed. Now China is transitioning to market pricing to encourage better local use and distribution of renewable energy

By Chen Weishan Updated Aug.1

Pictured is a village with rooftop distributed photovoltaic power, Yongning County, Ningxia Hui Autonomous Region (Photo by CNS)

Chinese solar companies are adjusting their strategies in the wake of a new government ruling that stipulates all renewable energy, including wind and solar, will have to compete on the energy market instead of relying on prices fixed by the State. The notice, issued on February 9, requires all local governments to put forward implementation plans by the end of 2025.　

For a long time, the purchase and price of renewable energy, including distributed photovoltaic (PV) power, was government-guaranteed to encourage increased uptake of renewables as part of the national energy transition strategy. Under this scheme, grid companies are required to purchase all generated renewable power at a fixed price, supported by government subsidies. But this policy resulted in a severe supply-demand imbalance, as well as integration challenges.　

It is particularly so for distributed PV that has witnessed explosive growth in the past decade. It has long been troubled by absorption constraints into the grid network. In 2024, many places including Zhejiang, Shandong and Guangdong provinces suspended integrating distributed PV power after their grid capacity reached the limit.　

In October 2024, the National Development and Reform Commission (NDRC) and other agencies released a guideline intended to encourage distributed renewable energy to engage in market trading in a stable and well-regulated manner and encourage local consumption. Some areas acted immediately by raising the proportion of distributed PV power that can be freely traded. 　

Introducing a market-based mechanism is expected to slow the expansion of distributed PV, as developers will grow more cautious without profit guarantees, and this will to some extent alleviate tensions between supply and utilization, noted interviewed analysts. But to solve the prolonged challenge of absorption, more efforts are needed in promoting local consumption of distributed PV.

Absorption Dilemma

By the end of 2024, China’s installed capacity of renewable energy, including wind and solar power, reached 1.45 billion kilowatts, surpassing the scale of coal-fired power for the first time. Often sited on residential and commercial rooftops and with a capacity of less than 6 megawatts, distributed PV is located close to where it is intended to be used. It has a lower ecological footprint than utility scale solar installations. Now, after years of development, distributed PV is an important element of power generation in China.　

Distributed PV started to develop rapidly when the Chinese government rolled out subsidies to encourage renewable energy. In June 2021, the National Energy Administration (NEA) started piloting county-wide promotion to encourage the use of rooftops and other idle spaces for PV installations. Between 2020 and 2024, the installed capacity of distributed PV surged from 78.31 million to 370 million kilowatts.　

“The rapid growth of distributed PV in rural areas is mainly driven by commercial profit,” said Zhou Feng of the clean power program at Energy Foundation China. “Before the national policy came out, some provinces put forward similar policies to develop renewable energy and motivate local industrial development.”　

Li Wenlong, chief engineer of Tianjin Tianda Qiushi Electric Power High Technology Company, noted that the explosive growth of distributed PV in rural areas is in the interests of governments, PV developers and farmers. The government can use it to boost energy transition and economic development while farmers earn from renting their rooftops. For PV developers, it is a stable income business due to the previous policy of guaranteed purchase of electricity. In Shandong Province, for example, the grid company purchased electricity generated by distributed PV at 0.4 yuan (US$0.05) per kilowatt hour (kWh), the benchmark price for coal-fired electricity.　

The rapid growth of distributed PV, however, has severely exceeded local grid capacity as demand fails to catch up. Many places that are categorized as “red zones” have temporarily suspended integrating distributed PV due to overcapacity in the local grid.　

In June 2023, the NEA demanded six pilot provinces evaluate their grid capacity for improvement. Li Wenlong joined the assessment for Shandong and Zhejiang provinces. He told NewsChina that in some districts and counties of Shandong, the power generated by distributed PV surpassed total power consumption.

Low Consumption

In the power system, the grid is classified into different levels according to voltage level. Distributed PV can only be transmitted on lower voltage grids, and cannot be transmitted to higher levels of grids – like those crossing provinces – because it impacts power system safety and the quality of electricity.　

This has been a problem for some time in regions witnessing rapid growth in distributed PV. In October 2023, Henan Province released a notice promoting the healthy development of distributed PV, which said there was little room for extra grid capacity in areas under its jurisdiction.　

The utilization of renewable power is a problem due to the random and intermittent nature of its generation. The problem is more pronounced for distributed PV than utility scale solar installations, which can be more easily absorbed by large cross-provincial grids, Zhou said. In contrast, distributed PV is usually aggregated into the provincial power network, so consumption is limited.　

Oversupply is more evident in rural areas. “For companies that use rooftops to install PV panels for commercial and industrial use, absorption is not usually a problem as they have a bigger power demand themselves. But in the case of residential distributed PV, one farmer might only use several kilowatt hours a day, so in rural areas the power from PV panels mostly or even all of it goes to the grid,” Zhou said.　

He explained that “red zones,” characterized by solar power overcapacity, are caused by rapid expansion of distributed PV in towns and villages. The situation varies across regions, but residential distributed PV, the majority of which is in rural areas, accounts for half or even more of total capacity.　

Besides supply-demand mismatch, the quality of grid infrastructure limits power uptake and transmission. Zhou said that power grids need to maintain a real-time supply-demand balance through voltage step-up and step-down transformers, changing voltages according to the situation. Long-distance grids need to increase voltages to as much as 750,000 volts to avoid power loss. It needs to be stepped-down to around 4,000 volts for distribution to users, like households.　

“It’s like a pipe, if there’s excessive water inflow, it will not be able to withstand the pressure,” Zhou said.　

The capacity to distribute energy in local grids in China is rather uneven, varying even across cities in the same province. This leads to different capacities to absorb energy from distributed sources, and in some regions the grid infrastructure has not caught up with the soaring installed capacity of distributed PV.　

In September 2022, the National New Energy Integration Monitoring and Early Warning Center estimated that PV projects in many provinces and cities faced grid integration challenges. Large-scale distributed PV in certain regions would increase peak-shaving demands (adjusting energy consumption during periods of peak demand to balance supply and demand) and lead to mismatches between transmission/distribution grids and the construction and scale of distributed PV. This will bring big challenges to the safety and stability of power systems.

Solar panels are installed at a sewage treatment plant in Wuhan, Hubei Province. The more than 10,000 panels, which cover an area equal to seven soccer ffelds, can generate nearly 20,000 kilowatt hours of electricity per day (Photo by VCG)

Profits and Losses

Now observers are calling for market-oriented reforms to guide the development of distributed PV and optimize the allocation of resources. This may affect the bottom line of energy generators in the renewables sector.　

On October 20, 2024, the NDRC and other departments issued guidance which said the country should “steadily and orderly promote distributed renewable energy generation participation in market-based trading to facilitate local consumption.”　

Some regions were quick off the mark. In December 2024, Shandong government released measures on improving the consumption system for new energy, stating that it would gradually increase the proportion of market-based trading for new energy. It said that between 2025 and 2026, new PV projects can choose to put either 15 percent or all of their power generation capacity in the trading market. Starting from 2030, all newly added wind and solar power will be required to enter the electricity market.　

“The market already took a wait-and-see attitude to the changes in the second half of 2024. Leading State-owned power suppliers even called off some of their distributed PV projects in late 2024, because entering the market will directly impact the profitability of distributed PV projects and breach developers’ expected return thresholds,” Zhou Feng said.　

This is why the rate of distributed PV installations slowed in 2024. After the NDRC guidance came out, distributed PV developers were more cautious, establishing special market analysis teams or hiring electricity trading experts.　

Zhou said that for State-owned power suppliers, distributed PV projects typically bring a 6 percent return on investment. These projects are usually developed by private enterprises such as Trina Solar and LONGi, then bundled and sold to State-owned power suppliers under purchase agreements with guaranteed pricing – a structure that inherently demands stricter profitability controls on the side of developers. But once distributed PV starts to be traded in electricity markets, there is pricing volatility based on demand.　

“During midday peak PV generation hours, spot prices may fall below 0.1 yuan/kWh, or even approach zero or negative pricing, as we witnessed in Shandong’s electricity market. This complicates return-on-investment calculus, resulting in more conservative development strategies,” Zhou said.　

According to Shi Jingli, a researcher at the energy research branch of the China Academy of Macroeconomic Research, a research institution under the NDRC, in central and eastern China, with PV module prices at 0.8 yuan/watt and 1,100 annual utilization hours, distributed PV projects require an electricity price of around 0.26 yuan/kWh to break even, if there is no energy storage available like batteries.　

Zhou said that market integration of distributed PV will inevitably reshape its development trajectory and lead to more orderly growth.　

“While the energy transition remains irreversible, policymakers aim to moderate the pace by using market price signals to steer distributed PV toward economically optimal regions. Although new installations will slow down, the efficiency of resource allocation will significantly improve,” Zhou said.

Local Absorption

The integration of distributed PV into power markets is expected to lead to more rational allocation of PV panels and as a result alleviate the grid absorption pressure. Zhou said that integrating distributed PV into power markets aims to regulate grid connection and encourage local absorption.　

Local absorption is regarded as essential. The NDRC guidance released in October 2024 stressed “promoting local consumption of distributed new energy.”　

“Promoting local absorption means relying less on feeding the electricity back to the grid,” Zhou said. In economically developed places such as Jiangsu and Zhejiang provinces, the absorption of commercial and industrial distributed PV is not a problem as companies themselves can consume. But for distributed PV installed at the user end, particularly in rural areas where power usage is minimal, local absorption is difficult unless it can be used for township enterprises or hotels. “In these places local and onsite consumption face big challenges,” Zhou said.　

Zhou suggested expanding electrification in rural areas to increase use of excess solar capacity. Promoting electric vehicles, heat pumps and electrical farm machinery will significantly increase electricity demand.　

There is also no fair trading mechanism to promote local consumption, like allowing excess electricity to be sold to nearby users directly instead of having to sell to the grid.　

Peer-to-peer electricity trading (or onsite consumption) has been discussed for years, but progress is slow. Bypassing the grid entirely means distributed PV projects only need to pay “wheeling charges” rather than selling the electricity to the grid. Wheeling charges are fees for directly transmitting electricity on grids, ensuring that the third-party wheeling provider, or utility, is paid for its services.　

“Peer-to-peer trading does not necessarily mean a physical connection between distributed PV and users. It can be realized in various ways,” Zhou said. For example, Henan Province has pioneered an integrated model that achieves direct supply of renewable electricity within distribution grids or microgrid units. In May 2024, Henan set a goal of gradually building microgrid units to guarantee stable local renewable power supply. Zhou said this is also a kind of peer-to-peer trading.　

Jia Yu, general manager of Yulin Electricity Investment Company, told media that the most economic, scientific and efficient way of using distributed new energy is local development, nearby transmission and local consumption.　

As early as 2017, the NDRC and NEA encouraged distributed PV projects and nearby end-users to cooperate to realize local consumption via various means, and grid companies to charge wheeling fees for market-based power transactions. In 2019, the NDRC and NEA publicized 26 pilot zones for market trading of distributed electricity mainly in Hubei, Henan and Shanxi provinces. In September 2022, Zhejiang Province released the first regional electricity rules, stipulating that starting from January 2023, distributed electricity generators can directly trade power with nearby users, the first of its kind in China.　

But the model is yet to be developed at large scale. Zhou believes the obstacle to peer-to-peer trading is the absence of a fair transaction mechanism.　

“While distributed PV projects sell power directly to consumers and only pay wheeling fees to grid companies, the fees fail to fully account for the latter’s infrastructure costs like capacity charges. This not only discourages grid operators but also creates unfairness for other grid users who share the infrastructure costs,” Zhou said.　

At its core, many peer-to-peer trading projects still rely on the main grid for backup power security as a fallback guarantee. Grid operators need to recover investments in grid infrastructure and maintenance costs while ensuring a reasonable return. Yet, current wheeling charges, which are decided by local regulators, fail to reflect these costs, discouraging grid companies from supporting such trading models.　

Wheeling fees range from 0.015-0.05 yuan/kWh and can drop to zero for transactions at the same voltage level. Grid companies generally charge over 0.2 yuan/kWh for electricity transmission and distribution, subsidies included.　

“The core issue lies in clarifying the underlying costs and defining fee structures, which will drive local and on-site renewable energy consumption,” Zhou said.

MAGAZINE

MOBILE

MAGAZINE

MOBILE

Balance of Power