China's thermal power sector is facing mounting pressure from tightening carbon constraints and rising renewable energy penetration, with carbon market prices climbing and environmental compliance costs surging.

The sector's environmental facility operating costs rose to 11.3% of total power generation costs in 2025, up 3.7 percentage points from 2020, according to industry data.

The country's latest Nationally Determined Contribution framework requires emissions to fall 7-10% from peak levels by 2035 with no plateau period after peaking, implying a steep reduction trajectory during the transition from carbon peak to carbon neutrality. This places carbon-intensive thermal power under particular strain.

Carbon allowance prices on the national carbon market have been rising sharply. Prices traded in a wide range of 96.5-100 yuan/t in August 2026, compared with a daily average closing price of 63.27 yuan/t in December 2025. Rising carbon prices, combined with peak-shaving pressure from large-scale renewable grid integration, are fundamentally challenging the traditional "heat-determined power" operating model.

The sector must confront three core challenges: supply-side uncertainty from rising renewable shares, spatial and temporal mismatches between heat sources and power sources, and the difficulty of meeting large-scale centralized heating demand due to short traditional heating radii.

Policy measures are opening a path for thermal power transformation. A 2023 notice by the National Development and Reform Commission and the National Energy Administration established a capacity pricing mechanism for coal-fired power, setting a national uniform fixed cost standard of 330 yuan/kW per year.

Most regions covered about 30% of fixed costs in 2024-2025, with faster-transitioning regions reaching about 50%, and all regions required to reach at least 50% from 2026. The mechanism provides thermal power companies with a stable fixed-cost recovery channel, enabling them to maintain basic operations even as utilization hours decline, creating conditions for energy-saving, carbon-reduction and flexible peak-shaving upgrades.

Heat-power decoupling has emerged as a widely recognized technological breakthrough. A three-year action plan for energy-saving and carbon-reduction upgrades in key industries, jointly issued by five government departments in 2026, requires combined heat and power units in winter centralized heating areas to implement heat-power decoupling upgrades tailored to local conditions, with peak-shaving depth targeted at below 40% after retrofitting.

China Energy Investment Corp (CHN Energy) has deployed molten salt heat storage coupled with coal-fired power technology, allowing a 600 MW unit to flexibly reduce output to 50 MW, effectively supporting renewable energy consumption.

On the intelligent operations front, domestically developed systems have reduced plant operational workload by over 90%. Datun Heilongjiang Power Generation Co., Ltd. has also actively transformed its traditional power generation and heating model, focusing on heat-power decoupling, precision control, smart operations and market adaptation. These technological explorations demonstrate that the thermal power sector can substantially enhance peak-shaving flexibility while ensuring heating supply.

Looking further ahead, the role of thermal power companies is shifting from sole providers of electricity and heat to integrated energy service providers. Companies are actively expanding diversified public services including combined cooling, heating and power supply and compressed air supply to build integrated energy service systems.

The industry transformation is advancing along three main lines: energy-saving and carbon-reduction technology upgrades, heat-power decoupling innovation, and integrated energy service model transformation. CHN Energy's thermal power installed capacity has reached 130 GW, with heating coverage across 26 provincial-level regions, accounting for about one-eighth of the country's total centralized heating supply. Its Shandong subsidiary has achieved combined heat and power generation across its entire fleet.

The key to breaking through for the thermal power sector lies in redefining its role in the new power system. Capacity pricing provides baseline support, heat-power decoupling opens technological space, and carbon market mechanisms and electricity spot markets are pushing companies to enhance market adaptability. Current CCUS costs of above 300 yuan/t remain a key bottleneck for commercial deployment, requiring joint breakthroughs through technological innovation and carbon market mechanisms.