On February 9, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) jointly released a blockbuster notice that will shake up the new-energy sector — the “Notice on Deepening the Market-Based Reform of On-Grid Tariffs for New Energy and Promoting High-Quality Development of New Energy.” Like a stone thrown into a calm lake, this notice has sent ripples across the industry and marks a new stage in the development of China’s new-energy sector.

Market-based reform: a new journey for new-energy tariffs

Installed capacity of new-energy generation has been climbing steadily. By the end of 2024, China’s new-energy installed capacity reached about 1.41 billion kW, accounting for more than 40% of total power capacity nationwide—already exceeding coal-fired capacity. However, as new energy has scaled rapidly, the drawbacks of fixed on-grid tariffs have become evident: they neither reflect market supply and demand nor fairly allocate system balancing responsibilities. This reform arrives at precisely the right moment.

At its core, the reform shifts new-energy on-grid tariffs to be fully determined by the market. In principle, all on-grid electricity from new-energy projects will enter the power market, with prices formed through market transactions. This means new energy will compete on equal footing with coal power and others, further expanding market-based power trading and injecting strong momentum into the creation of a unified national power market.

Price-settlement mechanism: ensuring sustainable industry development

New-energy generation is random, volatile, and intermittent. PV output concentrates at midday, significantly boosting supply and depressing prices, while evening peak prices are high when PV contributes little. This leads to large revenue swings, which undermines sustainability. To address this, the notice proposes a price-settlement mechanism to support sustainable development.

For electricity volumes covered by the mechanism, a “pay-the-difference (settlement up/down)” approach will apply. When the market transaction price is below the mechanism price, the shortfall is compensated; when it is above, the excess is deducted. Grid companies will conduct monthly settlements at the mechanism price, and the difference between the average market transaction price and the mechanism price will be incorporated into local system operating costs.

The scope (volume), price, and term of the mechanism distinguish between existing (stock) and new (incremental) projects. For stock projects commissioned before June 1, 2025, the mechanism volume dovetails with current policy, and projects may decide each year what proportion of their electricity to place under the mechanism; the mechanism price follows current pricing policies and must not exceed the local coal-power benchmark price. For incremental projects commissioned on or after June 1, 2025, the annual additional volume admitted to the mechanism will be set with reference to factors such as progress toward national non-hydro renewable consumption targets, and the mechanism price will be formed through competitive bidding organized locally among willing projects.

Far-reaching impacts: change and opportunity side by side

PV power-plant revenue models will undergo major revisions—shifting from “volume and price guaranteed” to “neither guaranteed”—with revenues comprised of market-trading income plus difference-settlement compensation minus apportioned ancillary-services costs. Meanwhile, projects connected before June 1 will enjoy a price floor, which is expected to trigger a new wave of rush installations, including for distributed PV.

The advantages of energy storage will become more pronounced. Although the document stipulates that configuring storage must not be made a precondition for new-energy project approval, grid connection, or on-grid operation, in the long run new-energy projects will bear system balancing costs. Coordinated development with storage and flexible retrofits of coal plants is thus an inevitable trend. Based on project-return considerations, generators are likely to “add storage by choice.”

Regional characteristics will also strengthen. For both stock and incremental projects, each locality will set the mechanism volume, price, and term according to local circumstances. Given differences in resource endowments, development status, and power supply-demand across regions, the regional character of market-based new-energy transactions will become increasingly evident.