China Raises Electricity Prices, Caps Coal Costs

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Dec. 6 – Faced with the threat of a significant power shortage this coming winter, China has announced an increase in its electricity prices for the first time in six months. The move – which aims at boosting power generation during peak season – will likely reduce the losses power plants have been suffering, but at the same time will add more cost pressure to industrial electricity users.

Since December 1, wholesale rates charged by thermal power plants, or the on-grid tariff, have risen by RMB0.026 per kilowatt hour, and surcharges on power users – which are collected to subsidize the country’s renewable energy projects – have doubled to RMB0.008 per kilowatt hour from the original RMB0.004 per kilowatt hour, according to the National Development and Reform Commission (NDRC). The rate hikes therefore have led to an average increase of RMB0.03 per kilowatt hour in retail power prices for non-residential users.

Residential power users will also be affected during this wave of electricity price lifts, but only mildly. According to a recent NDRC “Guidance (fagaijiage [2011] No.2617),” a progressive power pricing system will be implemented, where electricity charges for 80 percent of households will remain stable, but the top 20 percent of power consumers will likely face a price hike ranging between RMB0.05 and RMB0.30 per kilowatt hour.

While boosting power prices, the NDRC is also taking measures to restrict coal prices after seeing the benchmark coal cost reach a three-year high in November. In an announcement released on November 30 (fagaidian [2011] No.299), the NDRC said it will limit the price gains on contract thermal coal to 5 percent next year, from this year’s price set at RMB570. It will also control FOB prices under the level of RMB800 per ton at the country’s coal benchmarks with a heating value of 5,500 kcal/kg.

The NDRC hopes these policies combined will create greater profit margins at China’s power plants and motivate them to boost generation, which is essential for filling an estimated supply-demand gap of 40 gigawatts this coming winter and spring. Lin Boqiang, professor at China Energy Economics Research Center of Xiamen University, has estimated that every RMB0.01 per kilowatt hour increase in on-grid tariffs will bring power enterprises additional revenues of RMB42 billion.

The surge in coal prices has become one of the most important reasons behind the power price adjustment this time around, according to a report by China’s major information portal Tencent. As mounting coal costs continue to eat away at the profits of power plants, many local power stations have intentionally curbed their generation to prevent larger losses.

However, experts point out the new policy may only lead to a short-term fall in coal prices. In the medium and longer-term, the policy will drive coal prices up, according to Henry Liu, head of commodities research at Mirae Assets.

“The price hike will be good for both coal demand and prices. From past experiences, government interventions on spot prices are ineffective and are often a lip service too because it is not possible to enforce,” Liu said. “[Longer term spot coal prices] will be due to the hand of the market rather than by government tinkering…but in the medium term, prices could rise fairly strong on the back of increased demand.”

The temporary effect of NDRC’s price measures has also been questioned by Lang Xianping, professor at the Chinese University of Hong Kong, who recently indicated the excess earnings of China’s power grid companies is the real culprit behind the narrow profit margins of power plants.

“Not only do I firmly believe electricity rates should not go up, I think there is a space for prices to go down if grid companies earn less profit.” Lang said in his micro-blog.

Related statistics reveal that, while power plants had to leave some generation capacity unused last year to prevent further losses, the highly-monopolized power grid sector still continued harvesting huge profits. State Grid, China’s largest grid company, reported a stunning 1,828 percent increase in profits during the first 11 months of 2010, and its revenue was estimated to have taken up 65 percent of the whole power sector’s proceeds.

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