China’s New Capacity Electricity Pricing Mechanism: What It Means for Energy Markets in 2026

• Establishment of distinct pricing for coal, gas, pumped hydro, and independent storage.
• Minimum 50% fixed cost recovery for coal and natural gas plants.
• Implementation of performance-based metrics for energy storage compensation.
• Creation of “Reliable Capacity” pools for local spot market stabilization.
• Standardization of provincial user affordability assessments.

In January 2026, China’s National Development and Reform Commission (Guojia Fazhan He Gaige Weiyuanhui 国家发展和改革委员会) and National Energy Administration (Guojia Nengyuan Ju 国家能源局) rolled out major updates to how power generation capacity gets priced across the country.

This isn’t just bureaucratic reshuffling—it’s a fundamental shift in how China’s energy system compensates power plants for keeping the grid stable while transitioning to cleaner energy.

Here’s what’s actually happening and why it matters if you’re tracking China’s energy transformation, investing in power infrastructure, or building in the renewable energy space.

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Why China Rewrote Its Capacity Electricity Pricing Rules

China faces a unique energy puzzle.

The country is rapidly scaling up renewable energy sources like solar and wind—which are intermittent by nature.

At the same time, it needs reliable, dispatchable power to keep the grid from crashing during peak demand periods.

The old pricing model wasn’t cutting it anymore.

Under the new framework, the government is doing something smart: creating distinct pricing mechanisms for different types of power plants based on what role they play in grid stability.

Think of it like this—a coal plant that runs 24/7 and keeps the lights on during winter mornings gets compensated differently than a battery storage system that discharges for a few hours during emergencies.

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The Four Major Changes to China’s Capacity Electricity Pricing

1. Coal and Natural Gas Plants: Higher Fixed Cost Recovery

Coal and natural gas power stations are getting a pricing boost.

The new rules require that at least 50% of fixed costs for coal plants must be recovered through capacity electricity prices (the price paid for available power capacity, separate from the energy price).

This is significant because:

• It gives coal and gas plants more revenue certainty
• It encourages operators to maintain equipment and keep plants operational even when wholesale energy prices are low
• Local authorities can push this percentage even higher based on their specific grid needs and market conditions
• For natural gas plants, provinces can establish their own capacity pricing formulas based on fixed cost recovery principles

The thinking here is straightforward: if you want reliable baseload power during crises, you need to pay for it—not just when you’re actually using it, but for the privilege of having it available.

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2. Pumped Storage Hydro: A Two-Tiered Pricing Approach

Pumped storage facilities (massive battery systems that use gravity and water) are getting split into two categories with different pricing structures.

Plants that started construction before 2021:

• Capacity prices remain government-determined
• This grandfather clause protects existing operators from sudden pricing changes

Plants that started after 2021:

• Provincial price departments set a unified capacity price
• The formula covers average costs over the facility’s operating lifetime
• Prices get reviewed and adjusted every 3-5 years
• These newer facilities can participate in energy markets and auxiliary service markets, keeping market profits to reduce overall system costs

This dual approach balances investor protection with market efficiency.

Newer pumped storage operators aren’t guaranteed massive returns, but they have a clear path to profitability through multiple revenue streams.

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3. Independent New Energy Storage: Capacity Pricing Based on Performance

This is where things get really interesting for battery and advanced storage startups.

Grid-side independent new energy storage (Xinxing Chuneng 新型储能) units—think lithium batteries, flow batteries, compressed air storage—can now receive capacity compensation if they contribute to grid safety and reliability.

The pricing formula is performance-based:

• Base rate: Local coal power capacity price
• Adjustment factor: Reflects the storage unit’s actual discharge capability
• Formula: Full-power continuous discharge duration ÷ annual maximum net load peak duration (capped at 1.0)

Translation: A battery that can discharge at full power for 4 hours during a 4-hour peak period gets the full capacity price.

One that can only discharge for 2 hours gets 50% of the capacity price.

This incentivizes storage operators to build systems that actually match grid needs—not just install whatever hardware is cheapest.

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4. Reliable Capacity Compensation: The New Safety Net

Once regional spot markets reach continuous operation, provinces will establish what’s called “reliable capacity compensation”.

This is a pool of money specifically designed to pay for capacity that can’t be fully recovered through energy market sales alone.

Here’s how it works:

• Plant operators sell energy into the spot market at market prices
• If those market revenues don’t cover their fixed costs, they receive compensation from the reliable capacity pool
• This prevents plants from going bankrupt during low-price periods while keeping energy prices competitive
• Regions heavy in renewables (Xin Nengyuan 新新能源) and facing grid reliability challenges get priority to implement this system

The net effect: Stability and market efficiency coexist instead of fighting each other.

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How Settlement and Costs Actually Work

The new mechanism isn’t free—someone has to pay for it.

Cost allocation:

• Capacity fees and compensation costs flow into system operation expenses
• These costs ultimately get passed to end users through their electricity bills
• Provincial authorities can adjust the floor prices for medium and long-term energy contracts to manage affordability

For storage facilities specifically:

• When pumping or charging (consuming electricity), storage units are treated as regular users
• They must pay for network losses and system operation costs (current rates are ¥0.00 RMB ($0.00 USD) for specific transmission adjustments depending on technical routes)
• When discharging (supplying electricity), they’re exempt from certain transmission charges
• This asymmetry encourages storage operators to charge during low-price periods and discharge during high-price periods

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The Affordability Check: Making Sure Users Don’t Get Crushed

Here’s where the government shows it’s actually thinking about real people and businesses.

Provincial authorities must establish user affordability assessment systems before approving new capacity compensation mechanisms or new regulatory power projects.

This acts as a circuit breaker:

• If a region’s grid is already reliable and stable, new power plants get blocked—no need to add costs
• If users can’t afford higher electricity prices, new project approvals get scrutinized heavily
• Performance assessments determine whether plants actually deliver what they promised—underperformers face deductions in capacity payments

Translation: China isn’t just throwing money at power plants hoping they’ll keep the lights on.

It’s building accountability mechanisms into the system.

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What This Means for Different Players in China’s Energy Market

For Coal and Gas Plant Operators

You’re getting more stable revenue, but with caveats.

The good news: Capacity pricing guarantees cover at least 50% of your fixed costs regardless of energy prices.

The challenge: You still need to compete in the energy market for the remaining 50%, and performance requirements are getting tighter.

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For Storage Companies and Battery Makers

This is a major unlock.

Battery storage projects now have a legitimate revenue stream beyond just arbitrage (buying low, selling high).

By offering grid services and receiving capacity compensation, storage becomes a core infrastructure play rather than a speculative bet.

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For Renewable Energy Developers

The new pricing mechanism indirectly helps you.

Reliable baseload and storage capacity keeps the grid stable, which means utilities are more willing to accept high percentages of renewable energy.

You can now build more solar and wind farms without causing grid instability.

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For Investors

Power infrastructure assets just became more predictable and less risky.

Capacity compensation provides a floor on revenues, making long-term infrastructure investments more viable.

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The Bottom Line: Capacity Electricity Pricing Is Evolving

China’s new capacity electricity pricing mechanism reflects a mature approach to grid management in an energy transition era.

Instead of paying everyone the same way, it’s matching compensation to actual grid contribution.

Coal and gas plants get paid for reliability.

Storage gets paid for performance.

Users get protected through affordability checks.

The real innovation here isn’t the pricing itself—it’s the flexibility and differentiation.

China is essentially saying: we need a diverse energy portfolio, and we’re willing to pay for it in a way that makes economic sense for investors while keeping the system stable and affordable.

For anyone building in China’s energy space, this framework provides the certainty you need to plan long-term projects around capacity electricity pricing and grid reliability compensation.

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References

• Notice on Improving the Capacity Electricity Pricing Mechanism for the Power Generation Side (Fagai Jiage [2026] No. 114) – National Development and Reform Commission (NDRC)
• National Energy Administration (NEA) Official Website – National Energy Administration
• Overview of China’s Energy Market Reform – State Power Investment Corporation (Guojia Dianli Touzi Jituan 国家电力投资集团)
• Grid-side Storage and Market Integration – State Grid Corporation of China (Guojia Dianwang 国家电网)