While renewable energy exhibits inherent intermittency and temporal variability, coal-based thermal power operates consistently throughout the day, providing continuous, dispatchable output. Battery storage is the long-term solution by storing maximum solar energy of the day and using it during non-solar hours. The issue is common across jurisdictions, with India’s similar challenges detailed in another article here.
China’s response to this peak demand challenge is shaped by its provincial planning framework and the structural role coal continues to play in its economy. Provincial administrators approve plants to ensure they meet their respective peak power demand without having to import power from another province. Coal’s persistence in China is further explained by its dual structural role in the economy. Beyond electricity generation, coal remains critical for supplying energy to China’s vast industrial base and for combined heat-and-power (CHP) applications, particularly in northern provinces where coal-fired plants provide district heating during severe winter conditions.
Changing role of coal power in China
These structural factors have coincided with a broader transformation in how coal plants operate within the power system. As renewable capacity surpassed 1.5 TW in 2023, accounting for nearly 52 per cent of China’s total installed power capacity, the role of coal power has evolved, from providing inflexible baseload generation to serving as a source of ‘peaker’ and balancing energy. Although the country has continued to add new coal capacity, the utilisation factor of the coal fleet has declined, with average operations across the 1.18 TW capacity ranging between 45-50 per cent of their rated capacity. New coal additions are driven less by aggregate power shortages and more by fragmented, province-level planning aimed at meeting local peak demand and energy security objectives, rather than by sustained growth in coal generation.
The policy framework of coal flexibility reform increasingly emphasises deeper peak-shaving, lower minimum stable loads, and tighter performance standards. The policy emphasis is shifting from volume to quality, in high-renewables regions, coal units are being pushed toward deep peak-shaving, with minimum stable loads below 30 per cent of rated capacity. In this evolving context, coal flexibility is no longer framed as a transitional measure, but as a core enabler of reliability within China’s emerging “new-type power system.” With Minimum technical load currently at 40 per cent for each generation unit, the policy pivots to operations at lower than 30 per cent load. The 14th Five-Year Plan (2021-2025) established an initial target to retrofit 200 GW of coal-fired capacity for flexible operation, covering approximately 16.8 per cent of the total fleet. It is within this context of declining utilisation and shifting operational expectations that capacity payments emerged as a financial stabilisation tool.
Capacity payment mechanism
The expansion of the mechanism also reshapes the competitive landscape of grid reliability resources. As falling utilisation rates challenge the economic viability of coal units nationwide, China introduced a nationwide capacity payment mechanism to support coal-fired power plants. Effective since January 2024, the scheme provides a dedicated financial bridge for coal plants transitioning from baseload providers to flexible, system-balancing assets.
This policy, managed by the National Development and Reform Commission (NDRC), provides monthly standby payments to eligible public coal plants, designed to cover fixed costs during periods of low utilisation caused by high renewable output. The payments are calculated as a percentage, with 30 per cent being the minimum threshold and rising to a maximum of 50 per cent under the national fixed-cost benchmark of 330 yuan per kilowatt. Early analysis suggests that capacity payments reached over 100 billion yuan (≈ $15 billion) in the first year, with 70-100 per cent of coal plants receiving payments, depending on provincial implementation, boosting their annual revenues by an estimated 5-8 per cent.
The new policy raises the limit of payment to a minimum of 50 per cent and can rise further depending upon provincial market conditions. This will lead to additional payments to the coal fleet, as it had already been transitioned to supply for peak demand and cushion the coal fleet’s economic viability with breaking even becoming more challenging.
