In recent years, China and India have greatly expanded renewable energy capacity. Installed wind capacity in China reached 129 GW at the end of 2015, up 23% over six months earlier and now the highest in the world. Solar PV generation capacity has also grown quickly, reaching 43 GW in December 2015, up from 28 GW a year earlier.

India’s totals are smaller, but its growth is also strong, with wind increasing from about 13 GW to 25 GW between 2010 and 2015, and solar growing from 0.04 GW to 5 GW.

India’s target for 2022 is 100 GW of solar and 60 GW of wind. China is aiming for 150 GW of solar and 200 GW of wind by 2020.

However, despite this surging investment in renewables, both countries face major difficulties in integrating these new resources into the grid. Wind energy curtailment in China averaged averaged 15% in 2015, with rates surpassing 30% in regions rich in wind resources. Detailed estimates of curtailment in India are more difficult to come by, but wind generators in Tamil Nadu, the state with the highest share of wind energy, have complained to regulators about curtailment despite the regulatory provision of mandatory dispatch.

Around the world, every country seeking to boost renewable energy is facing the challenge of finding ways to increase system flexibility. However, China and India are struggling with some particularly deeply entrenched rigidities and inefficiencies – including their approaches to system operations.

Although these two countries are very different, some common threads run through their power sectors. In both countries, even when grid conditions and weather would allow use of additional renewable energy — typically at near-zero marginal cost — relatively expensive and polluting coal-fired power plants are often operated instead. Meanwhile, within each country’s fleet of coal-fired power plants, grid operators often dispatch relatively inefficient power plants over more efficient counterparts.

In short, the "merit order" ranking of available resources according to marginal cost is largely absent in both countries. Unclear rules and compensation for ancillary services also hamper flexibility in both countries. The upshot is that system operators in both countries are missing opportunities to take advantage of available renewable resources to reduce system costs and emissions.

China: Widespread overcapacity and battles over generator operating hours

In China, the problems stem, in part, from an official annual planning process that assigns generators a targeted number of operating hours for the year. The system operators within the grid companies tend to manage generator unit commitment and dispatch to enable each coal-fired generator to reach its targeted hours. In the context of overall generation overcapacity, system operators often curtail renewables in order to give operating hours to coal-fired generators.

There have been several provincial-level attempts at reform in recent years, but the way generators are compensated has been a major obstacle to change. Most generators earn a set per kWh price, and are only paid when feeding energy into the grid. There is no peak pricing for these generators and no capacity payment. Coal-fired generators — which still account for more than 60% of total installed capacity and constitute a powerful interest group — are resistant to any reform perceived as threatening allocated operating hours.

The all-in kWh price has also acted as a barrier to investment in gas-fired generation, which should otherwise have an economic role as peaking capacity and for providing additional flexibility to the system in support of renewables. In other words, a gas-fired generator operating in a limited number of hours would not earn enough to cover capital costs. (In 2015, the government launched provincial pilots to address the problem by offering gas-fired generators capacity payments in addition to a per-kWh price.)

Compensation issues also complicate the provision of ancillary services. In China, generators are typically required to provide ancillary services, but these services are not well defined and generators are only partially remunerated for them, if at all.

India: As millions lack access to electricity, inflexible operations a stumbling block

Unlike China, where investment floods into new power system resources, India has long suffered from an overall shortage of generation capacity. The official peak demand (approximately 145 GW) and installed capacity (around 290 GW) create an opposite impression — i.e. that of a surplus — but coal-based thermal generation capacity operates at remarkably low capacity utilization factors of approximately 60%.

As a result of that and inflexible system operations, 300 million to 400 million people still don’t have access to electricity, and those who do often receive unreliable service. These seemingly contradictory sets of facts are a result of the dysfunctional operations of the distribution companies.

Most Indian distribution companies are wholly-owned by the respective state governments and prefer not to increase electricity access or improve reliability as their ability to increase tariffs to recover the incremental costs is limited. In addition, limited inter-state trading of generation resources — a legacy of the vertically-integrated state-government utilities — has created a major barrier to the growth renewable energy. Some regions regularly experience strong surges of wind or solar output, but then curtail that clean, low-cost energy due to a lack of inter-state trading and the flexibility that trading enables.

Like China, one source of inflexibility is insufficient emphasis on a merit-order approach to system operations.

Generators declare their availability to their buyers and the relevant system operators (intra-state or inter-state). Buyers — typically, state government-owned distribution companies — provide the “merit order” to system operators. The system operator acts as a kind of “traffic cop” and, typically, complies with distribution company instructions.

The basis for establishing this “merit order” varies from state-to-state. Sometimes it is based on the long-term, all-in power purchase agreement cost, and other times it is on the latest variable cost. Although there are not much data available in the public domain, there is indirect evidence that the merit order does not reflect short-term marginal costs.

Another parallel with China is the treatment of ancillary services. In India, there is no formal recognition of “ancillary services” as a distinct service to be provided. “Flexibility” attributes are neither recognized nor valued appropriately. Maintaining the stability of the grid is achieved in a completely decentralized manner. Generators adjust their production in response to the frequency of the grid (stable frequency is 50 Hz in India) and the administratively set incentives and penalties linked to the deviation from the frequency—the “deviation settlement mechanism.” This approach is inefficient and unnecessarily costly.

Windows for reform

Over the past twelve months, Chinese policymakers have signaled their intent to grapple with dispatch reform. In September of last year, China’s President Xi, in a joint statement with U.S. President Obama, made a commitment to “green dispatch” as a headline reform pledge ahead of the Paris talks. (The two presidents reaffirmed these commitments in their March 2016 meeting.)

This, together with the announcement from China’s State Council and Communist Party Central Committee of a new round of power sector reform, indicates the dramatic elevation of a once-obscure issue to the top level of Chinese policymaking. Now, however, the challenge is to break through opposition and translate the concept of green dispatch into a concrete — and politically workable — set of practices on the ground.

In India, the 2003 Electricity Act established — for the first time — the principles of more efficient grid operation in law. Since then, several reforms have been implemented to promote inter-state grid operation. However, the unexpectedly rapid growth of renewable energy has highlighted the fundamental limitations of these reforms. Consequently, in 2015, the central government’s NITI Aayog issued the “Report on India’s Renewable Electricity Roadmap 2030,” which discusses a broad set of opportunities for improving system flexibility and integrating renewables—including improved regional and inter-regional dispatch, ancillary services, faster markets, etc. Policymakers are studying several of these recommendations.

It is important not to overstate the parallels between the two countries. But despite their vast differences, the they are similar in their need to increase flexibility in their power systems in order to integrate high penetration rates of renewable energy. In both countries, reform of system operational practices will be an important part of the picture, but because of political considerations and the power of special interests, achieving it will be difficult. Until now, these issues have had low profiles in both places, but they will become increasingly important as installed renewable energy capacity continues to grow.