Beijing revives power price reforms

PUBLISHED : Saturday, 17 October, 2009, 12:00am
UPDATED : Saturday, 17 October, 2009, 12:00am

The central government has renewed initiatives to reform power tariffs, but industry executives and analysts say fears that any liberalisation can result in higher prices and stoke social unrest will restrict their significance.

The National Development and Reform Commission (NDRC), the power price-setter, and the State Electricity Regulatory Commission (SERC) have circulated their proposals among industry leaders.

A senior SERC official responsible for power market regulations said the reforms included the launch of regional power price competition and the introduction of a mechanism to link retail and on-grid tariffs, the prices charged by power plants to grid operators.

The proposals will theoretically allow changes in coal prices, which are already determined by market forces, to be passed on to consumers. However, the amount will be limited as the proposals include unspecified price caps on power.

Still, it will help ease conflicts between the coal and power sectors arising from power tariff controls at times of high coal prices, which led to industrywide losses last year.

Mainland power prices are set by the government, both at the on-grid and retail levels. Reforming energy prices is highly political as it affects the entire population and particularly power-hungry industries such as metal smelting and cement.

The idea of setting up a power market where producers and distributors compete to sell their output has been around since the last major industry overhaul in 2002.

At the time, Beijing broke former behemoth State Power Corp into two regional grid operators - State Grid Corp and China Southern Power Grid - and five generation groups - China Huaneng, China Datang, China Huadian, China Power Investment and China Guodian.

It also laid out a blueprint to create regional power markets for price competition at the on-grid level, followed by competition among distributors at the retail level.

The idea was to force the state-run sector to improve operating efficiency and lower power tariffs in the long run, since more efficient operators would take market share away from the weaker ones.

Seven years on, other than limited on-and-off pilot power competition schemes in eastern and northeast regions, power price reform has not inched forward. This is mainly because of power shortages and soaring coal prices stirring fears that liberalisation will result in higher prices.

Analysts and industry executives are not optimistic the latest reform plans will yield much success either.

Citigroup regional head of utilities research Pierre Lau wrote in a research note that it is highly questionable whether the NDRC will give up its power price-setting authority.

'To appreciate the difficulty of implementing power price reform, one only needs to look at the proposal a few months ago to allow power producers to directly sell to large industrial users and set their own prices,' he said. 'There is not much progress despite all the talk.'

However, he said now was a good time to reinitiate the reforms as coal prices were lower and the economic slowdown had led to a generating capacity surplus, which meant power prices were likely to fall after competition was introduced, making the reforms more palatable politically.

But there was always the risk that power supply could be tight again by the time the reforms were rolled out.

A Huadian official said the biggest barrier to reform was the fact that implementing power competition required co-operation from the two grid monopolies since they owned the power dispatch infrastructure.

'Beijing needs to coax them into co-operating on the reform, which will essentially break their monopolistic power,' he said. 'A lot of political will is required to do that.'

Premier Wen Jiabao has vowed to push ahead with energy price reform in his recent National People's Congress annual work reports. This year, Beijing introduced a policy to link domestic and global fuel prices, albeit in a highly controlled way with caps retained when crude oil prices are high.