State Grid urges retail price rise in tandem with producers

PUBLISHED : Thursday, 21 August, 2008, 12:00am
UPDATED : Thursday, 21 August, 2008, 12:00am

Power distributor seeks buffer from severe cost pressures

State Grid Corp of China, the larger of the mainland's two regional power distribution monopolies, called for an increase in retail prices in tandem with yesterday's tariff rise by electricity producers to help buffer it from severe cost pressures.

The state-owned operator of power grids in 26 provinces and regions said it had been saddled with hefty interest expenses from its 1.2 trillion yuan (HK$1.37 trillion) investment in grid expansion between 2006 and 2010.

It is spending a further 73.6 billion yuan on post-winter storm and earthquake grid reconstruction.

'Both power generators and distributors are facing severe operating difficulties given price controls,' State Grid said.

'[The government] should establish a scientific and sound power pricing system and let tariffs charged to distributors and end-users move together to ensure a healthy industry development.'

The National Development and Reform Commission yesterday raised tariffs that power generators charge distributors by an average of 2 fen per kilowatt-hour or 5.3 per cent.

The highest benchmark tariff rise of 2.5 fen was allowed in coastal provinces and regions such as Shandong, Shanghai, Zhejiang and Guangdong where coal prices are the highest because of costly seaborne transport of the fuel from northern regions. Other, mostly interior regions were given tariff rises of 1 to 2 fen.

Since the NDRC held retail tariffs steady, State Grid and fellow state-owned China Southern Power Grid, which operates grids in five southern provinces, had to absorb all tariff rises, eroding their low margins. In the July 1 tariff rise, retail and generator-to-distributor tariffs were raised about 5 per cent.

A Credit Suisse research report said mainland power grids' return on equity averaged 4.67 per cent in 2006, lower than the 14 to 16 per cent in India, 6.5 per cent in Germany and 10.57 per cent in the United States.

State Grid and Southern Power want to issue shares to help fund their massive investment programmes to upgrade the nation's underdeveloped distribution networks, but poor returns have been the main barrier.

As for power generators, the second tariff rise in two months has not brought them out of the woods.

Li Xiaolin, a vice-chairman of listed China Power International Development, said the tariff rise was insufficient to return loss-making power generators to the black.

'As of last month, the industry consensus was that power tariffs need to be raised by 7 fen per kWh to offset the accumulative coal price rises, but the two recent rises only amounted to 3.9 fen,' Ms Li said.

She was speaking after sister renewable-energy firm China Power New Energy Development, of which she is chairman, signed a deal to invest 482 million yuan in a waste-to-power plant in Hainan province.

Meanwhile, Huadian Power International Corp said its tariffs were raised a weighted average of 5.78 per cent to 413.25 yuan per kWh.

Locally listed mainland power shares had outperformed the market in the past two weeks on speculation of a post-Olympic tariff rise. But the shares fell 0.2 to 9.8 per cent yesterday as the power tariff increases were deemed insufficient to compensate generators' losses, analysts said.