Chapter Two identifies the current legal and regulatory arrangements related to China’s electricity sector by examining the institutions and governing authority, pricing and tariff regulations, and investment approval. These regulatory aspects often determine the market features and characteristics of an electricity system. This chapter provides the foundation for understanding the design of critical supporting mechanisms adopted by the Renewable Energy Law and their implementation, which are discussed in the subsequent chapter.

In the era of climate change and sustainable development, the main task of China’s power sector is not to expand production, but to promote the transition to a low-carbon energy system. On the generation side, the power sector needs to reduce the share of thermal power, especially coal power, and increase that of nonfossil energy sources; on the demand side, the power sector needs to support electrification of residential and transportation sectors to achieve deep decarbonization and air quality goals. This will significantly increase the uncertainties on both the generation and consumption ends, since nonfossil energy sources, such as photovoltaics and wind power, are highly unpredictable, and large-scale electrification of heating and transportation can increase the volatility of power demand. Therefore, the future power system requires a high degree of technological and operational flexibility to cope with uncertain supply and demand. Our analysis suggests that market-oriented reforms in electricity dispatch and pricing are critical to provide the right incentives to electricity generators and consumers, as well as to promote the adoption of new technologies to facilitate China’s transition to low-carbon energy.