• Thu
  • Jul 31, 2014
  • Updated: 11:58am
BusinessCommodities
ENERGY

China's State Grid readies for possible power deregulation

Power firm's purchases of stakes in overseas distribution assets prepare it for liberalisation of mainland market

PUBLISHED : Friday, 14 June, 2013, 12:00am
UPDATED : Friday, 14 June, 2013, 3:49am

State Grid Corp of China's acquisition of power distribution assets in Australia made headlines last month because of the deal's size, but the strategic value of the transaction to the mainland's monopoly power distributor is the chance it gives the firm to gain first-hand knowledge of how deregulated power markets function, analysts say.

In 2005, the mainland conducted trials in deregulation of power prices by having generators compete to sell their output to regional power grid operators. The experiment lasted until only the end of that year, and was not rolled out beyond the northeast and eastern regional power grids, after they racked up huge losses as power generation capacity shortages resulted in sharply higher selling prices.

But now, power demand and supply has returned to a balanced or surplus situation nationwide, amid the economic slowdown and sharply lower coal prices that have returned to profitability over the past year the mostly state-owned power producers. That means pricing reform can once again be put on the regulator's agenda.

State Grid, which owns and operates all high-voltage power transmission and lower-voltage distribution assets in all but five southern provinces and administration regions, said on May 17 that it had agreed to buy 60 per cent of SPI (Australia) Assets and a 19.9 per cent stake in Australia-listed SP AusNet from state-owned utility Singapore Power. It did not say how much it paid.

AusNet said it sold the 19.9 per cent stake for A$824 million, and according to financial markets data provider Dealogic, the two deals amounted to US$7.5 billion in total. State Grid's spokesman did not respond to questions about the purchases.

SPI distributes power in the State of Victoria and the Australian Capital Territory. AusNet runs Victoria's state-wide power transmission network. Victoria is among the most deregulated and privatised regional power markets in the world.

In a statement on its website, State Grid said SPI and AusNet were quality assets with stable profitability that would help "enhance the quality of State Grid's overseas asset portfolio, and raise [the firm's] international influence and competitiveness".

Before the purchases, State Grid had spent US$5.2 billion since 2009 buying power transmission and distribution assets in the Philippines, Portugal, Brazil, and Australia.

One of the deals was the A$500 million (HK$3.7 billion) purchase of a 41 per cent stake in power transmission network operator ElectraNet, which operates in the Australian state of South Australia.

For State Grid, the latest deal marked a stride toward its goal to own overseas assets worth US$30 billion to US$50 billion by 2020. The Australian purchases equated to 1.4 per cent of State Grid's total assets of 2.35 trillion yuan (HK$2.95 trillion).

On the mainland, State Grid owns and operates all power transmission and distribution assets in its jurisdiction. Swot In contrast with that, deregulated markets overseas typically have separate transmission and distribution networks that are run by multiple operators, both public and private.

In the highly deregulated markets of Australia, Britain, and parts of the United States, multiple operators compete to sell power to consumers and large users like factories negotiate supply deals with generators.

On the mainland, power prices are set by the state, although State Grid and its counterpart, China Southern Power Grid, have created non-price competition among generators by giving priority in their power purchases to generators that are efficient and reduce pollution.

In 2009, Beijing conducted another trial reform: it allowed large industrial users, mainly aluminium smelters, to negotiate power purchases with generators. Authorities cancelled the scheme after local governments were found to have used it to allow energy-intensive industries, suffering in the aftermath of the global economic crisis, to pay low electricity prices without approval from Beijing.

Robert Blohm, a Beijing-based adviser to State Grid and a member of the US power system reliability regulator, North American Electric Reliability Council, said buying stakes in transmission and distribution firms in Australia would help State Grid gain experience in the workings of deregulated markets.

He said State Grid was eager to learn how power deregulation and trading was done in North America. He noted that the firm had experienced difficulties participating in US power system operations due to security reasons. Power networks are run by information technology systems. Blohm has advised State Grid on potential deals in North America.

"Before it was difficult. Now it is impossible," he said, referring to the recent accusations that mainland entities were behind a wave of hacking attacks on US government and corporate computer networks.

"This investment in Australia gives State Grid the opportunity to learn system and market operations in an advanced power market of multiple distribution companies and end-users, who buy power in a competitive market," he said. "This prepares State Grid for the next phase of power sector reform in China."

According to a 2002 circular on power pricing reform approved by the State Council, Beijing has the long-term objective of having on-grid tariffs charged by generators and end-user tariffs determined by market forces. Transmission and distribution tariffs, however, should continue to be set by the state, it said.

But no indication of timing has been given by the National Energy Administration. A round of government restructuring in March saw the National Energy Administration absorb the State Electricity Regulatory Commission, which was behind the 2005 price reform trial.

Gary Chiu, head of energy research at CCB International Securities, said he believed the biggest benefit to be gained by State Grid from 0 its purchases in Australia was the chance to learn about the functioning of a deregulated power market.

He said the underdeveloped interconnections between State Grid's five regional grids - northern, eastern, central, northeast and northwest - and the fact that surplus generation capacity was only found in some regions meant it would be many years before a fully fledged national power trading system could be established.

Blohm said there were political and economic reasons for interconnections to remain limited. He explained that local governments in energy-rich western provinces preferred to keep their surplus electricity for the development of energy-intensive manufacturing industries, rather than sell it to central and coastal regions.

Beijing and local governments want pollution-heavy and energy-intensive industries to be gradually moved from coastal regions to the west, so that the poorer provinces can become richer and pollution in developed regions can be cut, he added.

Another reason for a measured pace of national interconnection is that with interconnection comes the risk that one regional grid's failure could spread to the others. Widespread blackouts in eight American states and Ontario in Canada in 2003 alerted the entire global power industry to that risk.

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

 
 
 
 
 

Login

SCMP.com Account

or