China’s National Development and Reform Commission (NDRC) updated its 2023 policy by issuing a new version in 2026 under Notice on Improving the Generation-side Capacity Pricing Mechanism. Under the new mechanism, the capacity payments are now referred to as “Reliable capacity compensation mechanism.” This underscores the primary intent of the payment mechanism is to reward power utilities that support grid stability while meeting the challenge of peak power falling outside the solar generation hours.
China’s power system transition is being shaped by the New State Council Action Plan (2025-2027)’s vision for building a “new-type power system”. The transition is seen as an economic bulwark, having fueled almost 1.5 per cent of the past year’s growth. The power sector has undergone a visible transition with coal’s share in power generation mix continuously falling, from 73 per cent in 2016 to approximately 51 per cent by June 2025.
The policy will allow provincial governments to pay out units that provide “Reliable Capacity” i.e. provide stable electricity during peak periods. The 2023 policy only covered coal-based thermal power but the new policy is now being extended to battery storage units, gas-based thermal units. It is planned to be expanded to pumped storage units going ahead.
As solar generation fades at sunset, power demand spikes, creating a critical supply gap. Dispatchable coal plants currently bridge this void to ensure grid stability.
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.
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.
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.
The policy extends the capacity payment mechanism to independent new storage units that support grid stability. The payout is anchored to the price of local coal power and scaled via a ratio. The payments allow assets such as battery storage to earn revenue based on their available capacity, bringing revenue certainty for investments rather than tying earnings solely to whether they are dispatched. Currently, national installations of energy storage systems have reached 183 GWh in 2025.
By expanding subsidies beyond coal to storage technologies and eventually tying payments to reliability rather than capacity, the policy introduces competition that could challenge coal’s position while incentivising investment from smaller, fast-growing storage providers.
These incentives do not come without system-wide cost consequences. While costs will be borne by industry, i.e. largely responsible for power demand, end users are likely to foot the bill for the rising subsidy eventually.
Despite the move toward competition, the near-term effects remain supportive of the existing coal fleet. An increase in embedded fossil fuel subsidy will signal to the state-sponsored expansion of coal fleet across provinces in China that their investments are being taken care of via market costs and consumer payouts. Thus, the coal fleet, while being asked to operate flexibly will be cushioned further in its operational role by state support.
India’s power sector requires a strategic policy clarity, the need to meet surging demand economically while providing transitional support across the energy mix. Currently, high renewable penetration during daytime and unpredictable demand patterns have strained grid operations, triggering an unprecedented push for coal-based thermal expansion. However, China’s 2026 policy pivot suggests that ‘capacity’ alone is not the solution. For India, the lesson lies in moving beyond a simple volume-based expansion towards a targeted ecosystem.
While India’s coal fleet struggles through pilot-stage flexibilisation to reach 40 per cent minimum technical load, China has already moved towards an aggressive nationwide mandate for its coal fleet to serve as a critical peaking resource, backed by a fixed-cost recovery mechanism that ensures plants remain economically viable while operating at lower, more flexible loads.
If India is to meet its dual challenges of growth and greening, we must move beyond reactive coal expansion. We need a structured mechanism that provides economic certainty for the transition. Incentivising the right levers, flexibility in coal, dependable storage, and reliability in markets, while maintaining a level playing field across power sources. This is the learning and the probable way to ensure that when the sun sets, the grid remains as resilient as the economy it fuels.