China's expanding cross-provincial electricity trading networks have created an unintended problem: capacity adequacy benefits now extend across regional boundaries, yet the costs funding those mechanisms remain concentrated in originating provinces. This mismatch between who benefits and who pays is distorting critical market signals and threatening power supply reliability across interconnected grids.
Capacity mechanisms—designed to ensure adequate generation reserves—traditionally operated within single provincial jurisdictions. Under localized markets, beneficiaries and cost-bearers aligned naturally. But as trading opens corridors between provinces, generation capacity built in one region now supports demand in neighboring regions without corresponding cost-sharing. This creates what researchers term "cross-provincial cost leakage."
The problem runs deeper than simple fairness. When external beneficiaries avoid capacity payments, local operators receive weakened investment signals for new generation. Simultaneously, provinces bearing full costs face distorted incentives to trade, as they subsidize capacity adequacy for neighbors. These warped signals delay necessary generation investment and can compromise supply security during peak demand or scarcity events.
The research proposes a solution: implement cost allocation mechanisms that follow electricity flows across provincial borders. Under this approach, capacity charges would be partially shifted to beneficiary provinces based on the proportion of cross-provincial transactions actually utilizing the capacity. This maintains cost recovery while aligning costs with benefits.
Simulation results show the proposed method improves fairness significantly and restores more accurate trading incentives. Provinces receiving external adequacy support pay proportional shares, while investing provinces recover appropriate revenue. The mechanism remains operationally compatible with existing market structures, avoiding wholesale redesign.
This framework addresses a critical gap in China's wholesale market development. As cross-provincial trading volumes grow—driven by renewable energy resource distribution and demand patterns—establishing fair capacity allocation becomes essential. The study provides actionable guidance for regulators designing markets where adequacy benefits transcend administrative boundaries, ensuring both efficient investment and reliable power supplies across interconnected regions.
