Subsidizing stranded costs in high-renewables electricity markets: A case study

Abstract

Managing stranded costs of power plants has become a challenging issue facing the electric power industry since the new power sector reform in China. To this end, this paper presents a subsidy mechanism for stranded costs incurred on incumbent coal-fired power plants due to electricity restructuring and competitive markets, building on international lessons. Based on the definition and classification of stranded costs, this paper lays out the methodologies for auditing and recovering stranded costs induced by transitioning from regulated to competitive markets. Then a subsidy design consisting of cost audit and recovery is proposed, in particular for electricity markets with high-share renewables. Furthermore, a numerical case study is presented to discuss the efficacy of the proposed subsidy. With elaborate discussions on subsidizing share, transitioning setup, and calculating method, as well as cost allocating, this paper suggests that subsidizing stranded costs in high-renewables electricity markets is a productive instrument in promoting reliable power supply, better renewable integration, and sustainable market development.