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National grid internal policy 826, implications and future perspectives

Recently China national grid issued internal policy 826, and soon the document was leaked to the media and became a hotly debated topic.

So, what does policy 826 say?

Policy 826 has four parts; the key theme is to optimize the rate of return on grid’s capital expenditure. Specifically, it said:

- Set realistic grid reliability goals, no new capital expenditure for marginal reliability improvement

- No new pump hydro project, no new grid side energy storage infrastructure investment, nor lease or EPC in this space without CEA (China Energy of Administration) approval

- No new capital expenditure for grid’s money-losing units

So undoubtedly, there would be less grid related project for the next several years. Stock of listed company in this space all experienced various degree of drop. But does policy 826 mean all bad news?

Let’s look back at the history before we discuss the implications of policy 826

For the past 17 years, national grid had a strong-handed boss, chairman Liu Zhenya. Strong grid with UHV (ultra-high voltage) transmission was the tenet of his era, efficiency is rarely mentioned. In 2003, the state council issued policy no.5 to kickoff the electricity market reform, and later established CEA. But none of this has changed the dominant power of national grid. National grid had invested vertically from operations, to hardware equipment and software, as well as financial service to the landscape. In summary, the pie was big, but most of the money flowed into grid affiliated companies (several of those companies got spin off from the grid and listed publicly). The progress for the reform of electricity market is disappointing.

Things began to change in the past couple of years with the retirement of Liu. The current chairman of national grid, Kou Wei, used to be the chairmen of HuaNeng, one of the big five power generation companies, a natural supporter of electricity market reform. It is not a big surprise for industry watchers for policy 826 to come out. Under Kou’s term, the theme began to change from strong grid to high efficiency grid. We can reasonably expect grid to gradually separate its non-core business, and a true electricity market will emerge.

Some key changes happened in 2019:

1. 8 provinces including Guangdong began spot trading in electricity market. All other provinces have submitted plan to join. 30% of electricity contract is reached through the trading platform.

2. Industrial and commercial electricity price has been reduced by 10%, and further reduction is also expected. This will force the grid to restrict its investment and leave more space for the market

3. PV reached grid parity without subsidies. Leading players have been able to start new production capacity investment and grow. Subsidies for EV have receded and power battery industry showed signs of polarization. Energy storage market experienced high growth in 2018 and retreated in 2019, mainly because of the safety concern of lithium ion batteries. High non-technical costs (installation, approval, etc.) were another reason hindering large scale deployment.

Future perspectives:

National grid used to be a player and a referee in the electricity market. Limiting grid investment is a step in the right direction for electricity market reform. Grid will focus on transmission, and market will play a key role in generation and electricity sales / trading part.

Grid is a notoriously hard market to crack if you are not affiliated with the grid in someway. Going forward, rate of return will be the vital concern for all projects, grid affiliation will be less of a concern (outside transmission market). Therefore, technology choices will be more important than ever.

PV has always been the main driving force of china’s renewable energy space. The player who can have sharpest cost reduction curve will win in the age of grid parity. Inflection point for other green technologies is also become more predictable. $70/KWH for EV; higher than 5000 cycles, less than 1500RMB/kwh initial investment for energy storage; $40/KW for hydrogen fuel cell. Companies which can reach these cost target with technology innovation will get a bigger piece of the pie.

New distribution infrastructure will probably be the first segment open to companies outside grid system. Traditionally, grid see distribution as its core business and made investment in this space even when the return is negative. Now with strict rate of return requirement, grid will probably retreat from this kind of investment. Companies with good understanding of user’s future electricity demand, or/ and have lower cost distributed power solutions will get more opportunities.

As every reform in China goes, the road will be bumpy. Policy 826, bad news for some, finally gave us a clear direction of electricity reform. It is definitely good news for non-grid affiliated companies to get a fair play in the market.

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