On February 9, China’s National Development and Reform Commission and National Energy Agency jointly published a “Notice on Deepening Market-Based Reform of Renewable Energy On-Grid Tariffs to Promote High-Quality Renewable Energy Development.” Hereafter referred to as Document 136, this policy drastically changed the character of China’s power sector, advancing market liberalization reforms in one of the nation’s most stubbornly top-down sectors.
Document 136 is significant because it requires that by the end of 2025, provincial governments push all wind and solar electricity projects to sell their electricity production through the market. This is a huge change from today, when nearly 50 percent of all renewable energy is sold via guaranteed offtake agreements at predetermined volumes and prices to the grid, regardless of market dynamics like supply and demand.
According to Cosimo Ries, Renewable Energy Analyst at Trivium China, “this marks the end of an era.”
Guaranteed Offtake – The Bygone Era
To understand the impact of Document 136, it’s important to understand the problem it is trying to fix.
In the decade since China embarked on its latest round of power sector reforms, regulators have been walking a fine line between trying to liberalize the nation’s power sector while simultaneously decarbonizing it. Until recently, this has meant gradually exposing fossil fuel generation to market volatility while supporting renewables with subsidies – first with a Feed in Tariff (FiT) and then with a guaranteed offtaking mechanism. These efforts to encourage renewable development were so successful that today, China has the largest fleet of renewable power in the world.
But this success has also created problems. The government funded the FiT system – a production subsidy for renewable generators – by levying a renewable surcharge, increases to which lagged behind the rapid acceleration of its renewable energy capacity. The result was a deficit, which reached $56 billion by 2021. Under the guaranteed offtake system which replaced it, the grid is responsible for consuming a set amount of clean power at a prefixed price, even when that supply exceeds grid demand.
In a more liberalized market, the price of power can shift to moderate the balance of supply and demand. But under the guaranteed offtake mechanism, the price is fixed at the coal-fired benchmark price. According to David Fishman, senior manager at The Lantau Group, though the benchmark varies regionally, “it hasn’t changed since 2017.”
Fishman explained that in 2017, provincial governments calculated a benchmark price for coal-fired electricity – basically cost to produce at that moment in time plus a reasonable profit margin – and that price became the benchmark. Today, eight years later, that is still the price for each MWh of clean power sold through the guaranteed offtaking mechanism.
The FiT and guaranteed offtaking mechanisms spurred 1200 GW of wind and solar capacity installation, but they have also caused problems for government coffers and the electricity grid.
The crux of the problem is that solar power is most productive in the middle of the day, when electricity demand is lowest. In the evening, when electricity demand rises, solar generation starts to drop. This mismatch is especially problematic in China because even during those hours where supply outpaces demand, under the guaranteed offtaking scheme, the grid is still contractually obligated to purchase the excess generation.
The solution Chinese regulators have landed on is to push more generation into the market, where price can better moderate supply and demand. In some of China’s electricity spot markets, which are most responsive to changes in supply and demand, energy prices in January were more than 2.5 times higher at 6 p.m. than 1 p.m.
China’s electricity markets, both the spot market mentioned above and the medium-to-long term market, have been gradually gaining prominence. More electricity volume is traded each year, representing more than 60 percent of total electricity consumption in 2024, up from 17 percent in 2016.
The problem is that even in the electricity market, the price is strictly controlled. Since 2021, Chinese regulators have limited electricity price volatility to 20 percent above or below the benchmark coal-fired price, and that holds for renewable energy. It’s important to note that restriction is not binding in the spot market, and it has been relaxed in a few western provinces, but it still restricts the vast majority of electricity sold in China.
Restricted as it may be, Chinese regulators have been desperate to push more and more renewable production into the electricity market. The reasoning seems to be that by introducing price volatility into renewable energy project development, they can rationalize the relationship between supply/demand dynamics and pursue market liberalization and decarbonization simultaneously.
Seen from this perspective, Document 136 comes into focus.
What Is Document 136?
Released to the public just over one month ago, Document 136 has already caused no shortage of consternation as renewable energy developers adjust to this new reality. By far the most significant change is the requirement that by the end of 2025, all renewable electricity must be sold on the market. Though the specific implementation timeline remains ambiguous, this will expose renewable energy projects to significant market volatility. Luckily for generators, Document 136 also offers some protection.
The most significant protection is what has been termed the “sustainable mechanism price” (SMP).
For generators participating in the SMP, they will sell their electricity in the market as normal, but at the end of each month, the grid will compensate them for the difference between the average market price and the mechanism price. If the market price exceeds the tariff price, generators will pay that difference back to the grid. The former is calculated differently in different provinces – in regions that have a continuously operating spot market, the spot market price forms the average, and in regions where the spot market is still in trial stages, pricing in the medium- and long-term market will form the average.
For the latter, the calculation varies based on when the projects came online. Projects that came online prior to June 1, 2025, which is to say all projects currently online, will be priced at a level in line with current pricing policies, not to exceed the coal-fired benchmark. According to Fishman, for these projects, “the effect on their volumes and earned rate should be negligible, but the mechanics will be different.” He explained that under the SMP, these generators will sell into the market and then “be made whole” back to the level of the mechanism price, which is likely to be virtually identical to the current coal-fired benchmark.
For projects that reach grid connection after June 1, 2025, however, the process is more exacting. For these projects, the mechanism price will be formed by a reverse auction in which the grid operator in each province announces how much production can participate in the SMP, and then generators bid. The bids are accepted based on price, with the cheapest accepted first until the quota is satisfied. Once the quota is met, the price of the final accepted bid, which is the highest, is then awarded to all participating generators.
Though the name is different, the SMP is similar to a two-way contract for difference (CfD), a mechanism popular in the United Kingdom and Germany.
This is not the first time that Chinese regulators have borrowed from Europe to refine decarbonization policy. The FiT policy was lifted directly from the German playbook, and according to Yan Qin, a principal analyst at ClearBlue Markets, the CfD is the natural next step.
“This is an intuitive path that many countries follow in the discovery of how to promote renewable energy. First you start with direct subsidies, and then you move into more marketized support systems,” Yan explained.
Because of her deep expertise in both European and Chinese power markets, Chinese regulators frequently consulted Yan to better understand Europe’s experience liberalization renewable generation. “I was not surprised [when Document 136 was published] because Chinese policymakers had been asking me about CfD for years,” she said.
Unfortunately for Chinese policymakers, the European experience can only take them so far, and the CfD mechanism needs to be updated to better fit the Chinese reality.
The thorniest questions are also the simplest: what will be the volume and price of China’s SMP?
“These are the million dollar questions,” said Ries. “The volume will probably differ significantly between provinces. In provinces like Jiangsu and Zhejiang where the grid is more flexible, demand is higher, and renewable penetration rates are currently lower, we will likely see a higher volume included in the mechanism. In provinces like Gansu and Qinghai, where renewable energy supply already outpaces demand, it will likely be lower.”
Ries added that “provinces need to walk a fine line between reducing the financial burden on their local grid operator without losing momentum on their decarbonization goals.”
Fishman predicted the volume will be closely correlated with the renewable energy consumption benchmarks. “Every province has a minimum consumption quota and the grid is obligated to meet that,” he pointed out. “They have existing contracts which make up most of it, but the bar is raised every year, so the difference between the obligation and what they already have contracted will likely inform the volume included in the SMP.”
When it comes to the SMP price, the only guidance in Document 136 is that the price from the reverse auction process cannot exceed the coal-fired benchmark price. Fishman, though, expects that it will be significantly lower than that.
“Chinese developers are really aggressive and will likely submit bids just above, or even at, the cost of production. It will be a game of chicken, with every developer assuming that someone else will bid in at a higher price with a more reasonable profit margin, so that everyone can enjoy that rate,” Fishman explained.
Another unresolved issue is the implementation timeline. Yan and Fishman both emphasized that nothing will change in how electricity is sold until provinces release their individual implementation plans, which aren’t due until the end of the year. This creates significant doubt for generators trying to forecast their revenue, especially for projects reaching interconnection after the June 1 cutoff, but before the provincial implementation plans are published.
Yan speculates that for those projects, “local governments may just pay the guaranteed offtake rate temporarily. Because it will only be for a few months, the impacts will be small.” Until provincial implementation plans are published, developers remain in the dark.
What Does This Mean More Broadly?
Ultimately the impact that Document 136 has on renewables energy projects will be a microcosm for the impact it has on China’s broader power sector liberalization and decarbonization goals. The era of light-speed development in China’s wind and solar capacity is over, but policymakers hope it will be replaced by an era of more rational development, with installations tied more directly to consumption appetite.
In late February, the China Photovoltaic Industry Association predicted that 2025 would see 215-255 GW of new installations, down from 277.5 GW in 2024. If accurate this would be the first decrease in the rate of change in six years.
For Fishman, though, this isn’t necessarily a problem. “We are likely to see decreased installation numbers for the next few years, but I’m not sure how much it will affect generation, and that is what really matters,” he explained. “At the end of the day if you are building unnecessary capacity, that isn’t good for much.”
Ries also highlighted that this could open up new opportunities for energy storage projects. Regulators used to require that new renewable projects were accompanied by an energy storage system, typically 5-10 percent as large as the nameplate capacity of the asset they were paired with. Today, that requirement is gone, but Ries predicted that energy storage systems will benefit tremendously from deeper market reforms. “More price volatility means that storage system operators can take advantage of huge price differentials and store electricity while the price is low, and sell it to the grid when it is high.”
“Flexible consumers can benefit from the same dynamic”, Ries continued. “Industrial consumers who can adjust their consumption patterns will benefit from significantly cheaper electricity.” He explained that this also helps balance supply and demand for the grid.
Another clear winner from the new policy framework are corporations with renewable energy procurement goals. For international companies trying to comply with standard setting bodies like RE100 or SBTi, and for Chinese firms interested in continuing to import to Western markets where sustainability rules are becoming stricter, access to verifiably green power is a priority.
Historically, that has been difficult both because offtaking mechanisms popular in more liberalized Western markets like PPAs are still nascent in China. It was made more difficult because generators were offered such a good deal by the grid that they saw little benefit in signing a contract with an outside offtaker, but if they are forced to sell all of their electricity on the market, that calculus may change.
“I think we are going to see that generators are eager to sign long term contracts to sell their clean power, because that offers more stable revenue streams,” Fishman explained. In such cases, “the SMP might also act as a reference point for aligning on a PPA price.” Opaque pricing in China’s power sector has been a further hindrance to corporate involvement, and Document 136 makes it much more transparent.
To Yan Qin, the best way to view Document 136 is as a compromise. “There is a lot that policymakers are trying to do,” she said. “They want 200 GW of solar each year, but they don’t want to increase the government burden too much. They want to decarbonize, but they want to build a flexible power sector. They want to protect low and stable electricity prices, but they want to lower emissions. It’s hard to find the right balance.”
With that in mind, Yan also speculated that Document 136 won’t be the only major policy updates this year: “I wouldn’t be surprised if we see an update to the renewable consumption obligation, or a more formal PPA structure soon.”