China Energy Industry

Coal price crisis stems from economic shift

China Daily
November 5, 2001

‘Both the coal mining and power generating sectors are facing possible overcapacity this year, which offers a golden opportunity for promoting market-orientated reforms,’ a commentator writes.

The long-standing feud between mining and power generating enterprises over the price of coal threatens to affect electricity output, which could hold up economic growth.

The dispute has culminated this year with major power plants and mines failing to sign 2006 coal supply agreements.

It is against this backdrop that the State Development and Reform Commission, the railway and communications ministries have jointly issued a circular making it compulsory for all coal supply agreements to be signed by the end of this month.

The crisis is especially serious considering industrial enterprises are resuming production after Spring Festival and the agricultural sector will demand a lot more electricity with the spring sowing season approaching.

Coal mines and power plants get their capital from banks in the form of loans. The banks will not be able to recover their money if the price-centred coal supply problem remains unresolved.

Some coal mining companies have agreed to sign the supply agreements based on a lower price. But the majority are still holding out. The State does not control coal prices any longer.

But power companies are owned by the State, which holds them responsible for maintaining and increasing the value of State assets. They will be held accountable for operating at a loss.

In the final analysis, the feuds between the coal suppliers and power generating firms have their roots in the clashes between the old planned economy set-up and the market economy.

To be more specific, the reforms in the power generation and transmission sector have been held back from the very beginning, on the grounds that it is a unique and extremely important sector. Electricity generation has therefore remained under State control.

Furthermore, power grid companies have stepped between consumers and suppliers of electricity as the government has transferred the power to distribute resources to them.

This separation between power plants and power grids means the network is not responsible for guaranteeing the electricity supply.

An approach known as “bidding for supplying electricity through the grid” was introduced, which has brought the power grids fat profits because under the scheme the power generating firms have to make their prices competitive.

The blame for electricity supply failure, strangely enough, is laid at the doors of power plants. As a result, power grids have become choosey.

This kind of serious disarray in the power generation and transmission sector, which is of vital importance to the country’s economy, has inevitably led to disorder in the national energy resources system.

Industrial enterprises and public facilities, which are big consumers of electricity, are simply unable to bargain directly with power plants over electricity prices, but have to get what they need via the grids.

The power plants, while being forced to slash the price of their electricity in order to be competitive, are kept in the dark as to how much electricity the grids will buy and at what price.

All they can do is bargain with the mines, trying their best to keep the price down.

In view of all this, market-orientated reform is urgently called for.

The crux of the matter lies in establishing a mechanism of long-term deals between users and suppliers.

Electricity distributing enterprises should come under the jurisdiction of local governments so that they can be held directly accountable by consumers.

In order to implement long-term electricity supply agreements, the power generating companies have to forge stable alliances with mining enterprises, transferring both profits and risks to relevant partners along the supply-demand chain.

Through securing long-standing purchasing agreements, the coal mining enterprises will be more responsible for their own conduct, meeting obligations, controlling overproduction and tightening safety measures, in order to guarantee their interests in the long run.

As part of this framework, electricity users are likely to tighten their grip on consumption, hoping to save money, which will automatically help reduce power consumption.

Both the coal mining and power generating sectors are facing possible overcapacity this year, which offers a golden opportunity for promoting market-orientated reforms.

In addition, local governments and industrial enterprises, which have often fallen victim to blackouts in recent years, are highly enthusiastic about the reforms.

Taking into consideration China’s huge population and relatively scarce resources, it is likely that energy prices will increase considerably in the future.

Only on condition that the electricity price is maintained at a reasonably high level can the country’s energy-saving drive be effectively carried forward.

The author is the information director of the China Energy Net (www.china5e.com). The article was originally published in Beijing News

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