Electricity Price Formation Mechanism And Tariff Reform

Electricity has been traditionally regarded as a natural monopoly industry, so it has been controlled strictly by Government. Since mid-1980s, the British-led capitalist countries began to carry out market-oriented reform of the power industry. In 1998 China also introduced "Separate the generator from grid and bidding for grid" reform pilot.In the world-wide electricity market-oriented reform wave, the British, as a pioneer of reform, established the Power Pool of one-buyer, and then many countries (including China) began to follow it. The Power Pool (grid corporation), as total monopoly on electricity buyers and sellers, blocks the direct trading, so it is not a fully competitive market model. Why are many countries keen on the pattern in their initial reform? What about the efficiency compared with the pattern of bilateral transaction?This paper compares the efficiency of one-buyer pattern with bilateral transaction through the procurement vs. sale-right auction model and gives a close study of the efficiency loss of one-buyer pattern. It justifies the monopoly's preference to the procurement one-buyer pattern upon sale-right auction bilateral transaction mode-the former can squeeze more information rent from generators and give grid companies greater monopoly profits. It also explains why many countries choose one-buyer pattern in the early stage of electricity market reform. But in this pattern efficiency and social welfare will be scarified, so it is not a very satisfactory transaction pattern.Should we choose directly the bilateral transaction pattern in the early stage of electricity market reform? It is not so easy to make conclusion yet. Because the power, as special energy commodity, has its characteristic, its pricing mechanism is also unique. One-buyer pattern is not the most efficient choice, but in the early or not very mature stage of reform, this pattern is likely to be more rational choice. Of course, this deals with a question about how to definite and evaluate the scientific rationality of on-grid electricity pricing mechanism. So what is reasonable pricing mechanism and its evaluation criteria? How to establish a theoretical analysis framework of reasonable on-grid electricity pricing mechanism?This paper puts forward the concept of "reasonable on-grid electricity pricingmechanism", and establishs a corresponding theoretical analysis framework. It mainly concludes: pricing principle and objective, tariff form and system, trading pattern and mechanism, tariff level and structure, institutional environment and external condition, regulatory system and risk control, etc. Its basic requirements and evaluation criteria is efficiency, stability, equity and security. To achieve those criteria and requirements, such factors are key: mechanism and pattern, government regulation, institution and system, continuous supply. At the same time, electricity futures and forward contracts are very important for risk-control and price discovery. Furthermore, there must be correct roles and proper relations among government, generator and grid corporation.Now the electricity pricing mechanism of China is full of defects, so a reasonable pricing mechanism theoretical framework is needed urgently to guide our electricity reform. Then how to choose the pattern and mechanism and reform ideas of on-grid electricity rate according to the theory established in this paper? What are the practical problems during the reform transitional period and how to resolve them?This paper analyzes in detail the enlightenment and the inadaptability of foreign pricing mechanism pattern. It is suggested we should begin with the Power Pool according to the pricing mechanism theory established in this paper and gradually realize full competitive pricing mechanism by three steps. At last the practical problems during the reform transitional period are pointed out: history electricity contract, one price one generator, fair competition between the new and the old generators, contradictions between coal and electricity, etc. At the same time, resolving ideas and policy recommendations are given.This paper focuses on three issues above, so the three issues constitute the main framework and contents of the whole paper.This paper is divided into eight chapters. Chapter I, Introduction; Chapter II, The basic characteristics of electricity and its equilibrium price mechanisms; Chapter III, Ways and means of electricity rate; Chapter IV, Models of trading patterns and pricing mechanism; Chapter V, Content system and evaluation criteria of reasonable on-grid electricity pricing mechanism; Chapter VI, Analysis on on-grid electricity rate of China; Chapter VII, Reform of pricing mechanism and pattern of China; Chapter VIII, Conclusion and Outlook.