In brief: electricity distribution and sales in China

Regulation of electricity utilities – distribution

What authorisations are required to construct and operate distribution networks?

Like the transmission networks, most distribution networks in China are mainly built and operated by three major grid companies. Reforms have allowed private investors to participate in incremental distribution networks, including local area networks of 110kV and below, industrial park networks up to 220kV, and stock networks owned by enterprises.

Incremental distribution networks largely refer to projects included in provincial plans but not yet approved or constructed. Private investors can apply to be project owners through a competitive mechanism and, once selected, they must follow approval and construction regulations.

Key steps include inclusion in power plans, preparation of project plans by local governments, and project approval by provincial or municipal governments. During construction, numerous permits and approvals must be secured, covering land use, environmental impact, safety standards, project planning, project construction, etc.

Upon completion, the project requires acceptance of construction works and facilities. For operation, an Electric Power Business Licence for Power Supply is mandatory, along with permits for installation, repair and testing of power facilities.

For connecting to public grids, professional design reports are needed and grid companies must provide connection services. Distribution operators charge fees based on government-approved tariffs, which are filed with the National Development and Reform Commission (NDRC).

Who is eligible to obtain access to the distribution network and what requirements must be met to obtain access?

Power distribution networks distribute power from supply sources to end users through local distribution facilities. These networks often connect to transmission grids constructed by grid companies and include distributed power sources.

Distributed energy sources, such as photovoltaic and wind power generation, are close to users and primarily serve local consumption. They include various renewable energies, energy storage facilities and microgrids.

Owners of distributed power sources can apply to connect to the distribution grids if they adhere to national industrial policies and approved power development plans. Applications must include a grid connection scheme and comply with the annual implementation plans of provincial energy authorities.

Upon approval, the distributed power source project owner signs a grid-connection dispatch agreement and power purchase and sale contract with the grid company. Once all qualifications are met, the source can be connected to the distribution grids for operation.

Are there any governmental measures to encourage or otherwise require the expansion of the distribution network?

China has implemented a unified plan for the constructions and layout of distribution networks from 2021 to 2025. The Chinese government’s layout direction and implementation measures for distribution networks constructions are mainly in the following areas:

• to implement unified and grid-based plan for distribution networks;
• to construct and transform urban and rural distribution networks;
• to encourage investment in incremental distribution networks; and
• to improve the power distribution tariff mechanism: improve the tariff formation mechanism for incremental distribution networks and accelerate the specification of the power transmission and distribution tariff structure.

In addition, China has lifted the restriction that the construction and operation of power grids projects must be controlled by Chinese parties since 2018. Currently, the investment, construction and operation of incremental distribution networks do not fall into the category of restricted or prohibited industries for foreign investments. From the current policies, encouraging private investors to invest in incremental distribution networks is still the direction of development of power distribution networks in China in the future.

Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?

According to PRC law, power transmission and distribution tariff is for services provided by grid companies, including accessing the power system, transmitting power, and selling power. End users pay this tariff as part of the power tariff.

Distribution service involves distributing power from grid companies to end users via distribution networks, excluding long-distance transmission. Power distribution tariffs are classified into provincial, local networks and incremental distribution network tariffs.

Provincial power transmission and distribution tariffs are approved by NDRC every three years and are based on voltage level and industry. Higher voltage levels result in lower tariffs. NDRC verifies the permissible revenue before approving the tariffs.

Local networks power distribution tariffs are for local grids operated by local grid companies or entities such as industrial parks. Incremental distribution network tariffs are for services provided through new distribution networks. Provincial Development and Reform Commissions (DRCs) approve these tariffs, which are then reported to NDRC. The tariffs consider current power tariffs, regional economic needs and subsidies.

Regulation of electricity utilities – sales of power

What authorisations are required for the sale of power to customers and which authorities grant such approvals?

Power sales to residential, agricultural and public welfare consumers are provided by Power Supply Enterprises, which need the Electric Power Business Licence for Power Supply from local National Energy Administration (NEA) agencies.

In the commercial market, power generation enterprises, power sales companies and power grid companies sell electricity to industrial and commercial consumers.

Power generation enterprises can sell directly to customers after registering with a power trading centre. They need project approvals and an electric power business licence for power generation from local NEA agencies.

Power sales companies can buy power from generation enterprises and sell to end users through the power trading centre. Those managing distribution networks need the electric power business licence for power supply; others are exempt. The power trading centre reviews and inspects these companies.

Power grid companies purchase power on behalf of industrial and commercial consumers who do not buy directly from generation enterprises or sales companies. They require the electric power business licence for power supply from local NEA agencies.

Is there any tariff or other regulation regarding power sales?

We understand that the tariff for power sales is related to the price charged to end users. In China, there are three types of tariffs:

• Tariff for residential living: this applies to power for residential use, public facilities, education, social welfare and religious institutions.
• Tariff for agricultural operation: this applies to power used for agriculture, forestry, animal husbandry, fishery and primary processing of agricultural products.
• Tariff for industrial and commercial use: this applies to power for all other purposes. Some areas have separate tariffs for large-scale industry and general industry and commerce.

Tariffs for residential living and agricultural operation are set by government pricing, with the National Development and Reform Commission (NDRC) creating the principles and provincial DRCs setting specific amounts. Subsidies help keep these tariffs low.

Before 2021, industrial and commercial tariffs were government-set. Since October 2021, these tariffs are partly market-determined. All industrial and commercial users are required to participate in the electricity trading market or entrust power grid companies for power purchases.

The formula for industrial and commercial tariffs is: Industrial and commercial tariff = on-grid power sales tariffs + transmission and distribution prices + line loss costs + system operation costs + government funds and surcharges.

On-grid power sales tariffs come from market transaction prices or power grid company purchase prices, while other costs are set by the government.

Who determines the rates for sales of wholesale power and what standard does that entity apply?

In China, wholesale power trading involves medium- and long-term transactions conducted through market-oriented methods. The wholesale price includes the electricity market transaction price, line loss charges, transmission and distribution prices, system operation costs, and government funds and surcharges.

The market transaction price for coal-fired power generation is agreed upon by transaction parties, with a ±20 per cent fluctuation range from the government-set benchmark. High-energy-consuming enterprises do not benefit from this limit. The benchmark prices are approved by provincial DRCs.

Green power transactions allow end users to purchase renewable energy. Prices are negotiated or follow trading mechanisms set by power trading centres. Some regions limit price fluctuations by referencing coal-fired power benchmarks. Green Certificates must be purchased alongside green power.

Other wholesale power tariff components, such as line loss charges and transmission and distribution prices, are set by NDRC. System operation costs include auxiliary services fees, set by NEA, and pumped storage capacity fees, determined by NDRC. Government funds and surcharges comply with national and local regulations.

To what extent are electricity utilities that sell power subject to public service obligations?

In China, power grid companies and licensed power distribution companies bear the responsibility of ensuring power supply to end users, adhering to the principle of ‘universal supply of power’.

Power supply enterprises must:

• ensure fair and non-discriminatory grid access and services;
• provide essential services like installation and maintenance without bias;
• guarantee continuous power supply, except under abnormal conditions;
• meet national power quality standards; and
• provide prompt emergency power for rescue and disaster relief.

Power supply enterprises are supervised by regulatory authorities. Failure to comply with universal supply obligations can result in fines, licence revocation and compensation for end user losses.