National Development and Reform Commission

Beijing steps back from coal pricing

Governmentto take hands-off approach to contracts on power-station fuel but reserves right to step in to exert control, report says

PUBLISHED : Tuesday, 27 November, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

Beijing plans to stop its annual meddling in the pricing of power-station coal for the first time since 2008 following a 25 per cent drop in the fuel's price in the past year.

In the annual contract negotiation due to begin next month, the National Development and Reform Commission, the mainland's peak economic planning body, would no longer force electricity suppliers and coal producers to fix the price and volume on some their annual dealings along government lines, the official Shanghai Securities News reported, without citing sources.

But in "extraordinary situations", Beijing would still step in on a temporary basis to control prices, it added.

The commission has submitted the proposal to the State Council, the country's cabinet, together with a plan to "improve" a mechanism launched in 2005 to link coal and power prices, but which was never properly implemented due to inflation concerns, the report said.

A directive is expected soon.

Under the 2005 "coal cost pass-through" mechanism, the commission would raise power prices if coal costs rose by more than 5 per cent in a six-month period, allowing 70 per cent of the increased costs to be passed on to power distributors and electricity consumers.

The authorities have intervened in pricing every year since at least 2003, when coal prices began to soar on the back of strong economic growth and years of under-investment in new mines.

Between 2003 and 2007, Beijing let coal buyers and sellers wrangle over prices for a few months before stepping in at the last minute to resolve their differences, usually by capping coal price increases, complemented sometimes with a delayed power price rise.

But since 2008, due to high inflation, Beijing has taken a more proactive role in freezing or capping coal prices, often ahead of the beginning of the annual price negotiations.

Even so, power producers recorded widespread losses in 2008, 2010 and the first half of last year, as Beijing was reluctant to raise power prices to help efforts to tame consumer price increases. Most producers returned to the black this year after a power price rise in December and sharp falls in coal prices.

Daiwa Securities head of Asia new energy and utilities research Dave Dai said it was too early for Beijing to consider complete liberalisation of coal and power prices.

"A hands-off approach this year is feasible given the market conditions, but what if inflation creeps up again next year when the economy improves?" he said. Consumer price inflation was 1.7 per cent last month, the lowest in 33 months.

Share prices of Hong Kong-listed mainland power and coal producers were mostly flat yesterday.