China Energy Industry

Electricity price reform: still putting the cart before the horse

(September 4, 2009) In early August, a briefing on recent progress toward price reform of electricity occupied the primary spot on the National Development and Reform Commission’s website.

The commission said in the statement that reforms of on-grid as well as distribution prices of electricity have been pushed forward effectively over the first half this year, and further efforts including direct power purchase scheme are underway.

“Surprisingly, reform on electricity transmission and distribution, which has received considerable attention within the industry, was not included in the recent reform agenda,” Han Xiaoping, chief executive of an industry Web portal, told Caijing.

“Electricity transmission and distribution reform” is a general term referring to the restructuring of power providers’ grid access, networking, and power transmission, as well as sales and services — originally scheduled to begin this year. But on July 1, the State Electricity Regulatory Commission and NDRC announced that the reform was being temporarily shelved.

Calls for Rising Electricity Prices

In 2004, China began to develop a “Coal-Electricity Tariff linkage Mechanism.” Under this protocol, if the average price of coal increases by five percent within six months, electricity prices should be adjusted accordingly.

In July 2008, the NDRC implemented this mechanism, but only increased on-grid power prices, leaving retail electricity prices unchanged. Zhang Guobao, NDRC deputy director and head of the National Energy Administration, explained at a June 1 press conference that “as a result of strong electricity demand last summer, the price of coal also rose. In order to avoid increasing China’s high inflation rate at the time, power companies had to swallow a portion of the rising costs.”

After increases in on-grid electricity prices and a period of declining sales, losses for Chinese power companies widened to 6 billion yuan in 2008. The top five domestic electricity groups and the CEC repeatedly submitted reports to the State Council announcing that policy-based losses were leading to operational difficulties. They called on the government to raise electricity prices again.

Caijing learned that under the new Coal-Electricity Tariff Linkage Mechanism being developed by the NDRC’s Pricing Department, retail electricity price increases would be higher than those of on-grid electricity. Moreover, the new plan would implement timed adjustments to the prices of on-grid power, transmission, distribution, and terminal-end sales.

As for the amount and timing of price bumps, officials say the economy’s ability to deal with the increase will be a key consideration – and one that is still being evaluated.

Upward Spiral

Price rationalization is the core task in the restructuring of China’s electricity industry. But electricity price reform has long been stalled, and electricity and coal prices fall into a “vicious cycle” of increases that is difficult to escape.

Because coal pricing has already been liberalized and electricity pricing has not, the government has had no option. It must use a “coal-linked” mechanism, constantly seeking to balance the two industries. This forces the government to make the price of electricity follow the price of coal year after year. No matter how high the price of coal, electricity will follow on the principle of cost-based pricing, which has created a pattern of alternating coal and electricity price increases.

This year the link to coal was complex. In the first half of 2009, electricity production fell nationwide. One of the major reasons is that the price linkage mechanism failed to pass the increasing coal costs to downstream suppliers. Data from the National Bureau of Statistics shows that full-year 2008 losses for coal-fired power producers nationwide reached 70 billion yuan. Combined losses for five major state-owned power generation companies alone reached 32.3 billion yuan.

But, the price of coal has since dropped, and the profitability of power generation companies has improved during the first half of 2009. From January to May of 2009, despite a large drop in hourly usage, and after two adjustments to electricity prices last year, the industry has swung from a huge loss to a profit of 11.4 billion yuan.

Due to the disagreement between coal miners and power producers, key contract talks on thermal coal prices have yet to conclude.

Caijing Magazine, September 4, 2009

Read the original story here.

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