Sustaining rapid growth of renewable power in the context of market liberalization

Achieving carbon neutrality necessitates uninterrupted renewable investment, yet market liberalization introduces systemic risks. Using causal loop mapping, we identify three key dampening feedback about sustaining variable renewable energy (VRE) investment, including merit order reduction, price volatility, and volume risk. Provincial empirical data in China was used to validate these challenges. Subsequently, we reviewed the historical evolution of policies in the UK that incentivize VRE investment, with a particular focus on the role of the Contracts for Difference (CfD) mechanism in breaking these dampening feedback loops. Finally, we compared the policies of China and the United Kingdom, and put forward optimization directions for the sustainable development price settlement mechanism proposed in China’s Document 136. Main results indicate that the conventional CfD mechanism effectively mitigates electricity price-related revenue risks but fails to address volume risks. Our analysis suggests volume risks may grow significant in China over the next five years, potentially discouraging investments. We recommend addressing volume risk both by accelerating development of flexible demand sources to encourage offtake for VRE that would otherwise be curtailed; and piloting different CfD designs across provinces, with the results monitored and compared to inform future policy decisions.