Power companies turn to coal to stem losses
The mainland's five big state-owned electricity generators have been battered by losses in the past four years as Beijing keeps a tight control over power prices.
Now the companies are going 'upstream' to almost double their coal output by 2015 in an attempt to improve profits, according to Liu Xiangdong of the China Electricity Council, which represents power generators.
Liu, deputy director of the department of planning, research and statistics at the council, said the strategy was encouraged by the central government. It should help offset so called policy induced losses at the five majors - China Huaneng Group, China Datang Group, China Guodian Group, China Huadian Group and China Power Investment Corp.
The big five together produced 227 million tonnes of coal last year, a third more than in 2010 and amounting to 29 per cent of their consumption. Liu said they planned to raise that to over 400 million tones by 2015.
Because the coal mines and power plants are not always near each other, part of their coal output is not used internally but sold to third parties.
'Most of their coal mines are new projects that will mine brown coal with relatively low heating value,' Liu told the Coaltrans China conference in Beijing.
'They are also located in remote regions like Xinjiang, Inner Mongolia, Ningxia and northern Shaanxi, with poor transport links.'
Because of these factors, much of this coal will be burnt locally to generate power. The electricity will be transmitted via ultra-high-voltage (UHV) power lines to the central and coastal provinces, where most of China's power demand comes from. UHV lines are more efficient than conventional lines, which helps reduce the power loss from long-distance transmission.
Mainland power prices are set by the National Development and Reform Commission (NDRC), while coal prices have been largely deregulated, though they are still subject to some intervention in the pricing of annual contracts.
Coal prices surged in the past decade on the back of rising operating costs and government levies. But Beijing has raised power prices by too little, too late as part of its efforts to contain inflation, industry representatives say. The result has been squeezed profit margins and losses for power generators.
Under a power-price-setting mechanism the NDRC devised in 2005, power prices will be raised if coal costs rise by over 5 per cent in a six-month period. That way 70 per cent of the increased costs would be passed on to power distributors and consumers, while generators would bear only a 30 per cent burden. But the pricing mechanism has rarely been implemented properly.
coal producers' combined profits tripled to almost 300 billion yuan between 2007 and 2010. But the profits of power companies fell from around 200 billion yuan in 2007 to between 50 billion and 80 billion yuan in the subsequent three years, Liu said. Power firms were only profitable because of their non-coal-fired operations.
China Huaneng Group chief economist Wu Dawei said the two power price increases last year only reduced losses at the company's coal-fired power generation operations by 40 per cent.
A further hike of 5 fen per kilo-watt-hour - roughly 11.5 per cent of the nation's average power price charged by generators - is needed if a small profit is to be achieved, Wu said.
Liu warned that if Beijing does not address the issue, widespread power shortages could return because generators have cut back on investment on coal-fired power plants, which generate 80 per cent of the nation's electricity.
The council projected this year's power shortages will amount to 30 to 40 gigawatts, up from 30GW last year and roughly 3 per cent of the national power generation capacity. But Wei Jianguo, deputy general manager of State Grid Energy Development, the power generation unit of distribution giant State Grid Corp of China, said the shortage was caused by a mismatch between the location of excess generating capacity and the users short of energy, not because of a lack of generating capacity.
The shortage may also be partially relieved by weaker-than-expected power demand.
Liu said power demand will grow this year by 7 to 8 per cent, compared with 11.7 per cent last year.