Executive Summary

• On 30 January 2026, the National Development and Reform Commission (NDRC) together with the National Energy Administration (NEA) issued the Notice on Improving the Generation-Side Capacity Electricity Price Mechanism, fagai jiahe〔2026〕114号.  《关于完善发电侧容量电价机制的通知》. This notice took effect upon issuance.
• The policy aims to strengthen power system reliability, guide orderly construction of flexible generation assets, and support China’s energy transition towards lower carbon emissions.
• It calls for differentiated capacity pricing mechanisms across coal, gas, pumped hydro storage, and new energy storage, setting standards that reflect local conditions and peak contribution values.
• The notice introduces principles for a reliable capacity compensation mechanism linked to actual peak contribution and integrates capacity pricing within the evolving electricity market design.
• Local authorities are encouraged to implement the pricing reforms systematically, improve market participation of flexible resources, and ensure clear policy interpretation to support sector development.

Context: China’s Power Sector Transition

China’s electricity sector is undergoing a structural transformation driven by ambitious renewable energy deployment, market reform and energy security objectives. Flexible generation capacity, including coal, gas, pumped hydro and emerging energy storage, plays a critical role in balancing increasingly variable renewable generation. As renewable capacity grows, the traditional reliance on capacity availability as a buffer against intermittency becomes more pronounced, necessitating refined mechanisms to value and compensate diverse resources fairly.

This policy context underscores the Notice on Improving the Generation-Side Capacity Electricity Price Mechanism, which represents a strategic adjustment in how the contribution of generation resources is valued and remunerated in China’s evolving electricity market.

Ensuring System Security and Reliability

The core objective of the policy is to ensure stable and secure operation of the power grid amidst shifting generation patterns. China’s renewable power capacity has expanded significantly in recent years, increasing the need for flexible generation that can respond to demand peaks and variability in supply. The new mechanism seeks to ensure that capacity remuneration reflects reliability and contribution to peak system demand, rather than relying solely on traditional production-based compensation models.

The policy frames capacity pricing as integral to system reliability, linking compensation more explicitly to real peak contribution and supporting investments that improve grid stability. As stated in the notice, this alignment is crucial to balancing supply adequacy with the volatility inherent in large-scale renewable penetration.

Differentiated Pricing by Technology

The notice outlines a differentiated approach to capacity pricing based on the characteristics of generation technologies:

• Coal-Fired Capacity Pricing: Provincial authorities are encouraged to adjust coal capacity price standards to local economic and grid conditions.
• Gas-Fired Capacity: Gas power capacity pricing can be developed with reference to the coal capacity pricing framework, adapted to reflect variable cost structures.
• Pumped Hydro Storage: For recently commissioned pumped storage facilities, capacity price standards should be developed locally on the principle of covering average costs, supporting storage investment that contributes to grid flexibility.
• New Energy Storage: The policy establishes, for the first time at the national level, a capacity pricing mechanism for grid-connected new energy storage systems, with pricing standards based on factors such as discharge duration and contribution to peak demand.

This multifaceted approach reflects a strategic shift from a one-size-fits-all capacity pricing regime toward mechanisms that distinguish resources by their operational and reliability characteristics.

Reliable Capacity Compensation Linked to Market Operations

The notice emphasizes the establishment of a reliable capacity compensation mechanism as local electricity markets mature, particularly where power spot markets operate continuously. This mechanism is designed to compensate generation units not simply for installed capacity but for reliable peak capacity, thereby encouraging competition among diverse generation types.

Under this framework, the compensation reflects actual contributions to system peak demand, aligning financial incentives with system reliability goals. This feature is consistent with international practice in mature electricity markets, where capacity markets or capacity remuneration mechanisms serve to ensure adequacy of supply in peak periods.

Local Implementation and Industry Guidance

The notice requires provinces to organize implementation carefully and provide clear policy interpretation to market participants. This is crucial in an environment where local grid conditions, market maturity and generation mixes vary widely across regions.

By placing emphasis on local adaptation, authorities seek to avoid rigid national prescriptions that may not reflect regional operational realities. The approach also encourages local regulators to engage with industry stakeholders to facilitate smooth transition to the enhanced pricing regime.

Integration with Electricity Market Development

The capacity pricing reforms are part of broader efforts to develop China’s electricity market, including advances in spot market operations, ancillary services pricing and contractual flexibility between generators and consumers. Adjustments within the capacity mechanism are designed to complement market-based electricity pricing and support more efficient allocation of resources.

In practice, this means encouraging participation of flexible generation and storage resources in market transactions, ensuring that capacity payments work in concert with energy and ancillary service prices to reflect true system value and scarcity.

Balancing Incentives Across Technologies

One analytical challenge for stakeholders will be understanding how capacity price standards are calibrated and how these interact with energy and ancillary markets. Clarity in methodology and transparency in local implementation plans will be critical to avoid pricing distortions or unintended biases across technology types.

Additionally, new energy storage pricing introduces complexity given the dual role of storage in both energy arbitrage and capacity reliability, demanding robust modelling and data to support pricing decisions.

What This Means for Business

For power generators, the new mechanism reshapes revenue models by placing greater emphasis on capacity contribution and reliability. Firms investing in flexible generation, storage or technologies that enhance peak reliability may find improved revenue certainty under a well-designed capacity pricing regime.

Energy developers will need to monitor local implementation practices closely, as regional price standards and compensation details will influence project feasibility and investment returns. Clear understanding of pricing methodologies and market participation rules will be essential for business planning.

For industrial and commercial power users, especially those engaged in long-term power procurement contracts, the evolving capacity pricing regime is unlikely to directly affect residential tariffs but may influence wholesale and retail contract designs over time, particularly in markets where procurement strategies align with capacity market expectations.

Overall, the reforms represent a strategic step toward integrating market-based mechanisms with broader energy transition objectives, ensuring that reliability, sustainability and economic efficiency are jointly supported within China’s power system.

Sources

• Notice on Improving the Generation-Side Capacity Electricity Price Mechanism《关于完善发电侧容量电价机制的通知 (发改价格〔2026〕114号)》https://www.ndrc.gov.cn/xxgk/jd/jd/202601/t20260130_1403521.html