China’s power system is transitioning from fossil fuels to high-penetration variable renewable energy (VRE), challenging traditional models of electricity supply security. This challenge stems from two interconnected issues: the economic viability of coal plants under declining utilization rates, and the system’s escalating flexibility requirements. This study applies the Causal Loop Diagram (CLD) method to unravel dynamic feedback mechanisms between VRE deployment, storage utilization, and capacity remuneration, identifying leverage points for policy intervention. By contrasting China’s coal capacity payments with the UK’s technology-neutral capacity market, we derive profound insights for coordinating flexibility incentives and decarbonization goals. This study focuses on how to maintain electricity supply security while managing the orderly phase-out of coal power. Analysis reveals that the current capacity compensation mechanism has potential drawbacks, including the exclusion of emerging flexible resources, the risk of overinvestment. Based on this, we propose that China implement coordinated reforms across following domains: First, establish competitive, technology-neutral capacity markets to incentivize investments in flexible resources like energy storage and demand-side response. Second, deepen electricity market reforms to create diversified revenue streams for energy storage through energy trading, ancillary services, and capacity mechanisms. Third, implementing a fixed cap on emissions and introducing a carbon price floor to accelerate the phase-out of inefficient coal power. Finally, create strategic reserves to ensure grid reliability during extreme events, thereby strengthening system resilience throughout the energy transition.