Following Liaoning Province’s cancellation of peak-valley time-of-use pricing and Sichuan Province’s public consultation on the same matter,
recently, Shaanxi Province also announced the cancellation of peak-valley time-of-use pricing, meaning that market-based users’ time-of-use prices will no longer be subject to peak-valley fluctuations.
Prices for users represented by electricity retailers will primarily be determined by the average wholesale price across all electricity retailers and power plants in the market.
More and more provinces are abolishing peak-valley time-of-use pricing. What is the intention behind this?
In the context of China’s power market reform, let’s explore the underlying logic and future impact of this policy change.
First, we need to avoid a common misconception.
Abolishing peak-valley time-of-use pricing does not mean that electricity prices will no longer be time-of-use and will revert to a flat price. What is truly being abolished is the “administratively mandated time-of-use pricing,” giving way to the “real-time price in the electricity spot market.”
This seemingly “abolition” is actually an “upgrade” of the electricity pricing mechanism—evolving from “fluctuations due to administrative directives” to “fluctuations due to market supply and demand.”
Secondly, why "cancel" administrative time-of-use pricing?
Because administrative time-of-use pricing is actually a transitional product of electricity market reform.
Previously, the spot market was not fully operational, so the government established fixed “peak-off-peak” periods and floating ratios (administrative time-of-use pricing) to guide users to smooth out peak and off-peak periods.
However, with the advancement of the electricity spot market, its limitations have gradually become apparent, even conflicting with market mechanisms:
1. Causing price signal disorder
In provinces where the spot market is officially operational, if administrative time-of-use pricing continues to be implemented, electricity users will face two sets of price signals.
Suppose that administrative regulations designate 12:00 noon as the “peak” time (high electricity price), but at this time, solar power generation is at its peak, and electricity is cheap in the spot market. If the administrative electricity price is applied, users will reduce electricity consumption, leading to solar curtailment; if the spot price is applied, users will increase electricity consumption to absorb solar power.
Since the spot price truly reflects supply and demand, in provinces with mature electricity markets, abolishing administrative time-of-use pricing can eliminate artificially created price distortions, allowing price signals to be uniformly generated by the market.
2. Inability to reflect real-time fluctuations in renewable energy sources.
Administrative time-of-use pricing is typically adjusted annually or semi-annually. Whether it’s based on seasonal peak-valley pricing throughout the year, or divided into more granular four-segment (peak, flat, and valley) or five-segment (peak, flat, and deep valley) pricing throughout the day, the time periods are relatively fixed and rigid (e.g., 8:00-11:00 is peak).
However, renewable energy output is greatly affected by weather. Yesterday’s “peak” may be today’s “valley.” Administrative directives cannot predict tomorrow’s cloud cover or wind speed changes.
Only real-time pricing (even accurate to 15 minutes) can precisely match the rapidly changing supply and demand relationship under the new power system.
Third, what are the far-reaching impacts of the policy changes?
The chain reaction resulting from the implementation of the policy is mainly reflected in the following three main groups:
1. Industrial and commercial users: Say goodbye to complacency, they must now be “careful in their calculations”.
Previously, users could simply adjust their electricity consumption according to fixed pricing periods (more electricity during off-peak hours and less during peak hours). Now, however, electricity prices can fluctuate frequently and in real-time, even drastically swinging between “floor prices” (negative electricity prices) and “ceiling prices.”
In this situation, industrial and commercial users need to establish professional energy management teams or purchase professional services from electricity retailers to predict next day’s electricity prices and plan their production accordingly.
2.Energy Storage Industry: Arbitrage Model Must Be Upgraded
Previously, energy storage power stations relied on fixed peak-valley price differences (e.g., peak-valley charging and peak-discharging) for arbitrage. The model was simple, and profits could be calculated with a calculator.
With the elimination of administrative time-of-use pricing, peak-valley price differences are no longer fixed. Energy storage companies must possess algorithmic capabilities to predict spot market price trends for charging and discharging.
It is foreseeable that in the future, energy storage companies capable of accurately predicting prices will earn excess profits, while low-tech energy storage projects that rely solely on policy-driven price differences will face the risk of losses.
3. Virtual Power Plants (VPPs) and Load Aggregators: Entering a Period of Rapid Growth
When electricity prices become extremely complex and unpredictable, the vast majority of small and medium-sized enterprises (SMEs) are powerless to cope due to a lack of talent and systems.
This has created a demand for load aggregators—who aggregate the loads of hundreds or thousands of small factories and shopping malls, representing them in spot market transactions, or helping users increase their electricity usage during low prices and decrease it during high prices through intelligent control. This may be the biggest opportunity for the power industry in the next few years.
Finally, a summary of the outlook for future energy storage:
The core goal of China’s power reform is to “control the middle and liberalize both ends.” Eliminating administrative intervention allows power generation (sellers) and power consumption (buyers) to directly compete in the market, resulting in a transaction price that reflects the true value of electricity as a commodity.
The abolition of peak-valley time-of-use pricing signifies that China’s electricity market is shedding its “nanny-style” administrative guidance. Through the “invisible hand” of price fluctuations, it forces the entire society to improve electricity efficiency and promote the consumption of renewable energy.
It is foreseeable that more provinces will abolish peak-valley time-of-use pricing by 2026 (especially those with developed renewable energy and well-established spot markets). In this new environment, electricity prices will no longer be a “policy,” but rather a “curve.”