China's power companies were prevented from passing on higher coal costs though Beijing approved tariff increases on July1 and August20. Coal production is unable to keep up with the mainland's insatiable demand for energy.

So why have coal prices become so expensive? Ghee Peh, head of Asian mining research at UBS, said fuel prices have also played a part in driving up the cost of mining.

'When you build a mine, you need diesel and electricity to support operations, and with higher prices for both it's made a difference,' said Mr Peh. 'And when you have more coal mines opening you have a limited number of engineers with the relevant experience and mine workers, therefore, the wage levels have gone up, too. And then you have government taxes on top of that.'

Last week, Datang International Power Generation, one of the country's five national power producing groups, posted a 75.4 per cent year-on-year decline in first-half net profit.

Huaneng Power International, the mainland's largest power producer, reported a first-half loss of 543.81 million yuan compared with a profit of 2.88 billion yuan last year.

While Huaneng warned that the losses would persist, Datang said the operating environment of the second half of the year would remain difficult.

Ms Tan said Datang had been able to stay profitable due to its access to coal, transport and given income from its own investments in coal mines. 'But the rise in debt level was greater than expected,' she said.

Yanzhou Coal, the listed flagship of the mainland's fourth-largest coal producer Yankuang Group, said that it had to pay an extra 35 yuan per tonne of coal in the first half of this year due to the introduction of a government resource tax which is intended to encourage conservation and cut waste.

As the mainland wants to meet its 2010 target of reducing the amount of energy used in each unit of GDP by one-fifth, the resource tax is imposed on coal producers on the volume of coal extracted. There might be further increases when the government next meets to review the rates.

An ABN Amro report last week said that further changes in policy could add to the uncertainty in the coal mining sector.

The resource tax is also a factor in the rise in coal price. Analysts believe that the tax reduces the cashflow that can be re-invested and adds pressure on coal producers to pass it on to consumers which include power companies. This is why power companies such as Datang have been investing in coal mines and other sources of energy.

But the investment in coal mines and alternative energy resources takes time to translate into profits. 'China's energy needs are too great for renewable fuel to be a viable replacement of hydrocarbons,' said Ms Tan. 'Given substantial power shortages, hydrocarbon energy sources will still be the most efficient means to meet the shortfall.'

Paris-based Emmanuel Fages, a corporate and investment banking's energy commodities analyst at Societe Generale, expects some of those investments started in 2005 and 2006 would mature in 2009 and 2010.

'These investments, more than the effects of economic slowdown, will help mitigate the pressure on prices going forward,' said Mr Fages. However, he said given that the cost of tapping coal as a resource is likely to increase, prices of coal will remain high.