China's renewable power expansion is reshaping the country's electricity system and raising a question: how can China maintain power supply security while reducing its reliance on coal?
Wind and solar power are variable by nature, and their rising share changes the role of conventional power plants. As noted in the paper, variable renewable energy reached 18.2% of China's power generation in 2024 and is expected to grow to 65%-70% by 2060. As this transition continues, coal plants may operate fewer hours and face weaker revenues, while the system requires more flexibility to balance fluctuating renewable output.
A research team led by Tsinghua University examined this challenge using causal loop diagrams to trace feedback mechanisms among renewable deployment, storage investment, market price signals, capacity remuneration, and coal retirement decisions.
The article was published in Energy and Climate Management on May 25, 2026.
According to the study, China's current coal capacity payment mechanism may help stabilize coal plant revenues, but it also has potential drawbacks. Because the mechanism mainly supports incumbent coal and gas capacity, it may exclude emerging flexible resources such as battery storage, demand-side response, distributed resources, and virtual power plants. The paper also points out that administratively determined payments may create risks of overpayment, weaker innovation incentives, and delayed retirement of inefficient coal assets.
The study contrasts this approach with the United Kingdom's capacity market, which uses competitive auctions to procure reliable capacity from multiple technologies. The UK experience suggests that market-based capacity mechanisms can help reveal capacity prices and support a more diverse resource mix. At the same time, the paper notes a design challenge: if capacity markets treat all resources similarly without considering duration, short-duration batteries may be favored even when longer-duration resources are needed during prolonged system stress events.
As noted in the paper, battery energy storage systems can absorb surplus renewable electricity and discharge it when demand rises, helping reduce curtailment and improve system flexibility. However, China's earlier energy storage mandates produced mixed effects. Although these policies encouraged physical deployment, the average utilization rate of covered storage capacity was only 9% in 2023. One reason highlighted by the study is that storage assets often lacked sufficient market access and revenue opportunities. In the first half of 2023, thermal generators received 91.4% of ancillary service market revenues.
The paper suggests that China could deepen spot market reforms, adjust overly restrictive price limits, and expand competitive ancillary service markets so storage can earn revenues from arbitrage, frequency regulation, capacity mechanisms, and other services. Rather than requiring each renewable project to self-balance with its own storage, the study points to the value of treating flexibility as a system-wide resource.
The paper also discusses long-duration energy storage as an important option for maintaining supply security. It notes that China may require more than 700 GW of long-duration storage capacity in a fully decarbonized power system. Strategic reserves are presented as another possible transitional tool, under which some retiring coal units could be kept outside the regular electricity market and called upon only during system stress events.
The study suggests piloting capacity markets, creating broader revenue channels for storage, supporting long-duration storage, strengthening carbon pricing through an emissions cap and price floor, and using strategic reserves where older coal fleets may still be relevant for reliability.
The research was primarily conducted by Ying Zhou (first author), Jian Han(corresponding author) and Da Zhang (corresponding author).
This work was supported by the National Natural Science Foundation of China (Nos. 72401160 and 72504282), the International Science and Technology Cooperation Project (No. 20253000014), the China Three Gorges Corporation Research Project (No. 202303160), and the Sichuan Province Science and Technology Innovation Cooperation Project for Hong Kong, Macao and Taiwan (No. 2025YFHZ0226).
DOI Link:
https://doi.org/10.26599/ECM.2026.9400033
About the Authors:
Ying Zhou conducted her postdoctoral research at the Institute of Energy, Environment and Economy, Tsinghua University, China. She is currently a faculty member in the School of Management, China University of Mining and Technology-Beijing. Her research focuses on energy and power system decarbonization, renewable electricity markets, electricity market design, and climate policy evaluation.
