The Legal System Construction of Competitive Transformation in the Electricity Market under the "Dual Carbon" Goal

With the increase in greenhouse gas emissions, climate change has become a common challenge facing humanity. The secondary disasters caused by climate change such as forest fires, mudslides, and storm surges are continuously affecting social and economic development, human normal life, and ecosystem security. In order to curb the frequent occurrence of extreme weather and climate events, countries around the world have taken multiple measures. China also proposed the "dual carbon" goal in 2020, which means that China will achieve carbon peak and carbon neutrality before the two key nodes of 2030 and 2060, respectively.

The "dual carbon" goal is not only a major strategic decision for China to participate in building a global climate governance system, but also triggers a systemic economic and social transformation in the energy sector. The International Energy Agency (IEA) recently released the Global Energy Industry 2050 Net Zero Emission Roadmap, which predicts that some developed economies will achieve overall net zero emissions in electricity by 2035; Global net zero emissions from electricity will be achieved by 2040; By 2050, global wind and solar photovoltaic power generation will contribute nearly 70% of electricity generation. This means that the transformation path from high carbon to low-carbon or even zero carbon is a rational choice required by China's electricity market. Specifically, China's electricity market needs to break away from the production and consumption path of high carbon energy represented by coal and oil, and steadily transform into a green path dominated by renewable energy generation. The IEA report also pointed out that the power industry is expected to contribute nearly three-quarters of emissions reduction by 2025, indicating the need to accelerate the installation and grid connection process of low-carbon energy, mainly renewable energy, and weaken the proportion of traditional energy in the energy structure. At the same time, there is a need for large-scale transformation in electricity consumption and transmission and distribution, reducing the use of traditional fossil fuels and improving the transmission capacity of the power grid. 

How to deal with the construction of a low-carbon electricity market under the background of the "dual carbon" goal is a major issue before us. The power industry balances natural monopoly and competitiveness. Economist Coase believes that natural monopoly does not mean there is no competition, nor is it a direct confrontation between the two. It simply fosters another form of competition, and the competitive nature of the electricity sales side is the best proof. Competition is one of the most important forces driving social development, which can promote progress in many fields of society. Trust in the market is a prerequisite for our understanding of the concept of building a low-carbon electricity market to achieve the "dual carbon" goal. Once a monopoly arises, it will hinder the formation of an open economy. Therefore, building a competitive electricity market is the primary task of China's electricity market system reform. Only with a competitive market structure can various possible markets be constructed.

The current situation and problems of competition in China's electricity market

Under the policy background of the "dual carbon" goal, the consumption of electricity continues to increase, and the scale of the electricity market continues to expand. It has become a consensus that low-carbon energy represented by renewable energy sources such as hydropower, wind energy, and photovoltaics can promote the transformation of energy structure. Renewable energy should be included in a diversified competitive electricity market system, and the electricity sales market also needs to have sound legal regulations for competitive electricity markets, and the transmission and distribution links can enhance market competitiveness. From the current situation, the competition system in the three links of electricity supply, consumption, and transmission and distribution has not reached expectations and lacks a competitive culture.

(1) Electricity supply chain: Lack of competitive order in the integration of renewable energy into the grid. After the proposal of the "dual carbon" goal, the development trend of renewable energy is unstoppable. According to data from the National Energy Administration, the installed capacity of renewable energy in China exceeded 1 billion kW in 2021, and the power generation accounted for about one-third of the total social electricity consumption. The leading role of China's power system in decarbonization still relies on large-scale integration of renewable energy into the grid. From the current policy analysis, the guidance on establishing an electricity market system jointly issued by the National Development and Reform Commission and the Energy Bureau clearly stipulates the construction goals and macro development requirements, while the Energy Bureau places more emphasis on specific data such as installed capacity, electricity generation, and proportion in its annual report on renewable energy grid operation. It can be seen that the competitive order of renewable energy grid connection has not been recognized in the form of laws and lacks directional policy guidance, resulting in obstacles in the establishment of the competitive order. In the energy trading market, the outline of competitive order is not yet clear. Based on the dispersion and volatility of renewable energy, the competitiveness of renewable energy participating in the market is greatly weakened. Therefore, fixed grid electricity prices have become the current renewable energy pricing mechanism in China, and government incentives replace market incentives. From the perspectives of policy and practice, it can be concluded that there is a lack of competitive order in both the top-level design of renewable energy grid connection in the country and the specific energy trading process. Renewable energy is an important lever to achieve the "dual carbon" goal, and the low-carbon transformation of the power industry must rely on the high proportion of renewable energy coverage. If the lack of competitive order in the process of renewable energy grid connection is not resolved in a timely manner, it will affect the process of energy conservation and emission reduction in the power industry.

(2) Electricity consumption link: Insufficient competition in the electricity sales market. To achieve the "dual carbon" goal, it is necessary to accelerate the process of comprehensive electrification and energy substitution, and electricity consumption also needs to change from "high speed" to "high efficiency". The electricity sales market is a representative and competitive link in the electricity market, but the competition mechanism has not played its due role in this link. According to the "Electricity Reform Document No. 9" and relevant implementation opinions, power grid enterprises can participate in the competition on the power sales side by establishing power sales companies. These types of power sales companies have obvious state-owned capital attributes, such as the Southern Energy Company established by the Southern Power Grid Company, which has successfully entered the list of power sales companies in some provinces, and its business covers the whole country. The power sales companies composed of power grid enterprises, based on their special attributes, are far superior to other power sales companies with property rights structures in terms of sales channels, scale, and professionalism. Specific interest group behavior can lead to inappropriate resource allocation and interest competition. State owned enterprises have an inherent resource endowment, and the government also has a certain degree of resource tilt towards them. The experience, capabilities, and equipment of new electricity sales market enterprises are not yet mature, and they cannot break the dominant position of state-owned enterprises with their own capabilities. As a result, the fair competition order on the electricity sales side was disrupted, which dampened the enthusiasm of other property rights structure enterprises to participate in market competition.

Furthermore, there are implicit institutional barriers in market entry. The administrative approval system for electricity sales companies to enter the market was abolished in 2013, but the "Management Measures for the Access and Exit of Electricity Sales Companies" issued in 2018 put forward specific requirements for the financial scale, professionalism of employees, business premises and equipment of electricity sales companies, and the process must comply with the "registration → commitment → publicity → filing" process. The required materials to be submitted and the waiting period during the public announcement are a labor-intensive process for newly entered enterprises. The electricity sales companies established by the power grid pose a certain threat to newly entered enterprises in terms of market trading experience, market power, and competition for interests among all parties. If market competition on the electricity sales side cannot be truly achieved, it will hinder the establishment of a zero carbon electricity market.

(3) Power transmission and distribution link: The transmission and distribution network is not suitable under competitive transformation. The vast majority of ideas believe that the transmission and distribution grid represents a typical natural monopoly. Liu Zhenya, who previously served as the General Manager of State Grid Corporation of China, believes that "we should adhere to the existing pattern of integrated transmission and distribution, scheduling, and grid integration.". Traditional competition has almost no space in the transmission and distribution grid, and it is essentially monopolistic. The ownership of the transmission and distribution power grid generally belongs to the government, or is jointly owned by cooperatives (owned by members), or is regulated by public utilities. However, in the process of achieving carbon peak and carbon neutrality, the supply and consumption sides of the electricity market continue to promote marketization, and the power transmission and distribution sector is in the stage of connecting the upper and lower parts of the electricity market, which is bound to transform towards a competitive and friendly direction. This requires the use of legal and institutional measures to weaken the negative externalities caused by the power transmission and distribution sector's competitive activities in the power supply and consumption sectors.

Reasons for the lack of market competition mechanism in the electricity market

To analyze the reasons for the lack of market competition mechanism in the electricity market, the focus is on discussing the current competitive situation and actual difficulties in the three links of supply, consumption, and transmission and distribution in the electricity market. Overall, the competition in the current electricity market is not sufficient, and there is a lack of competitive order in some links. The lack of competitive culture leads to the inability to mobilize the enthusiasm of electricity market entities, thereby hindering the efficient operation of the market. In order to optimize the consumption of low-carbon energy and develop new low-carbon models for the power grid, it is undoubtedly necessary to further explore the reasons for insufficient competition in the electricity market during the process of improving the competition system in the electricity market.

(1) Identify the complexity of competitive attributes in different stages of the electricity market. The commodity and public product attributes of electricity will change with the transformation of the production relations in the power industry, and the electricity attribute has gone through a cycle of "commodity → public product → commodity". At present, even though the government appears to have withdrawn from the market, it has failed to return important operating factors to the market, resulting in a mixture of two attributes in the electricity market, making it both competitive and monopolistic. The competitive link in the electricity market mainly refers to the electricity distribution link, while the natural monopoly link is in the electricity transmission and distribution link. The institutional obstacle to the competitive transformation of the electricity market lies in identifying the competitive attributes, institutional value cores, and industrial order tendencies in the two links. Undoubtedly, the competitive model applicable to the electricity distribution market cannot be blindly applied to the competitive transformation of the transmission and distribution sector. The issue of market competition equality needs to be addressed in the electricity distribution process, regulating unfair competition behavior in the market, mobilizing the vitality of market entities, and striving to change the monopoly of market technology and institutional advantages left by state-owned enterprises in the early establishment of the electricity distribution market. The transmission and distribution process needs to achieve a balance of interests between regulatory and regulated parties, and the key point is to ensure that transmission and distribution grid enterprises can obtain expected benefits when fulfilling their obligations. The transmission and distribution grid is related to the power security of the country and society. Maintaining a stable market economy order for the transmission and distribution grid is the best choice, while also avoiding the problem of negative externalities spillover from natural monopolies. Therefore, based on the different attributes of the two links in the electricity market, the means to promote competitive transformation are also different. The focus of the competitive link is on establishing a competitive order, while the natural monopoly link of power transmission and distribution focuses on maintaining the order of the electricity industry and ensuring the development of upstream and downstream market competition.

(2) Lack of regulation on administrative monopoly in the electricity market in institutional design. In fact, the regulatory objects of the Anti Monopoly Law are not fully applicable to the electricity market. The current Anti Monopoly Law targets economic monopolies, while the electricity market needs to regulate administrative monopolies. Administrative monopoly generally refers to the abuse of administrative power and the restriction of competition by organizations with the function of managing public affairs due to the authorization of administrative agencies and laws and regulations. Economic monopoly refers to the behavior of business entities using their own economic strength or market advantages to restrict market administration in order to monopolize profits. Economic monopoly has always been the main part of the regulation object of the Anti Monopoly Law, and whether administrative monopoly belongs to the regulation scope of the Anti Monopoly Law has not yet escaped the awkward situation of numerous controversies. Therefore, the specific provisions in the Anti Monopoly Law are in a fragmented state and cannot provide categorized solutions to administrative monopoly issues in practice.

The spirit of the Anti Monopoly Law regulation is to maintain the market economy order in the process of property rights competition. In short, it is to reflect market performance. Looking at the overall operation process of the electricity market, the power generation market lacks a competitive order in the process of renewable energy grid connection. At the same time, Chinese companies have an advantage in the electricity sales market and there are implicit institutional barriers in market entry. The natural monopoly attribute of the transmission and distribution power grid goes without saying. These current situations can to some extent reflect the dominant position of administrative power in the electricity market, which leads to differences and imbalances in the competitive landscape of the electricity market. The law protects competition rather than competitors. Administrative monopoly can lead to low efficiency in the operation of the electricity market, affecting the fair distribution of resources and factors by power enterprises through market competition, and disrupting the normal market game order. Enterprises in the electricity market will lack the motivation to innovate technology and reform management models to reduce costs, and the efficiency of the electricity market is far inferior to social efficiency. In addition, administrative monopoly can also become a breeding ground for corruption, which may occur simultaneously with economic growth, but additional costs are inevitable products that alienate the actual value of goods or services. If the degree of corruption is high, the electricity market will fall into a "corruption trap", breeding more corruption, seriously inhibiting the rationality of resource allocation and the driving force of economic growth.

To shape the competitive advantage of the electricity market, ultimately it is necessary to cultivate institutional advantages. The electricity market is currently facing the problem of administrative monopoly, which hinders the realization of the competition mechanism in the electricity market. The electricity market needs to encourage entities with various property rights structures to participate in competition, and give certain resource preferences to newly entered enterprises. A specific entity cannot be allowed to become the "spokesperson" of the electricity market. The current Anti Monopoly Law cannot provide a good solution. The system design must be in line with practical needs in order to effectively solve the problems in the electricity market. The current Anti Monopoly Law should not be rashly applied.

(3) Market forces hinder the formation of market price mechanisms. Economist Aba Lerner was the first scholar to define market power, believing that market power is the ability of a company to maintain product prices above marginal costs. From this definition, it can be seen that there is a close connection between market forces and the control of prices by enterprises. If a company is not a price receiver or has a certain influence on market prices, then the company has market power. The essence of market power is the ability to hinder new competitors from entering and continuously raise prices above competitive levels.

Market forces will hinder the functioning of market price mechanisms. The price mechanism plays an irreplaceable role in the process of market competition and is the most effective resource regulation mechanism, fully reflecting the direction of market demand and cost changes. At the same time, the price mechanism also affects the market competition mechanism, and price is a tool for enterprises to participate in market competition. In the electricity market, unreasonable and extremely high market prices are a manifestation of the abuse of market power. Firstly, from the perspective of power generation, the construction of the power generation market requires a large amount of funds, time, and must meet certain environmental protection requirements, which are closely related to the geographical environment of the construction site. The natural barriers to entry in the power generation market may lead to the emergence of oligopoly market structures. The goal of a company is to maximize profits. For the long-term benefit of the company, oligopolists have the motivation to exercise market power, such as lowering electricity prices in the short term to discourage new companies from entering the market. Allowing such enterprises to use market power to prevent the emergence of new competitors will lead to the failure of the electricity market price mechanism and affect the process of competitive transformation in the electricity market. For achieving the "dual carbon" goal, it means affecting the competitive order of renewable energy grid connection and slowing down the speed of carbon reduction in the electricity market. Compared to the transmission and distribution sector, it is the emergence of market forces in another situation. Market forces and natural monopolies go hand in hand. The natural monopoly in the transmission and distribution sector endows natural monopoly enterprises with the ability to influence commodity prices, strengthens government intervention in the market, and pursues public welfare goals. Although market forces cannot be completely eradicated due to the special attributes of the electricity market, effective regulatory measures can be taken to alleviate the negative externalities brought about by market forces and alleviate the imbalance in the division of market competition entities.

Construction of Legal System for Competitive Electricity Market

Scholars have regarded the energy sector as the last bastion of planned economy. Energy is related to national security and people's livelihood, and the electricity market, as a part of the energy sector, is also closely related to economic development and social stability. However, the electricity market cannot become an extralegal ground for antitrust, and establishing an effective competitive electricity market remains our top priority. Based on the characteristics of both natural monopoly and competitiveness in the electricity market, while improving the top-level design, it is also necessary to provide legal incentives or regulations for different stages, and use legal means to connect the growth channels of the electricity market.

3.1 Reshaping the Value Objectives of the Electricity Law

China's Electricity Law was formulated in 1995 and has undergone three small-scale revisions。