The central government has ordered the closure of smaller power plants and given priority to energy-efficient and less-polluting plants in selling their output.
The measures would help reduce the industry overcapacity that was expected in the next few years and bolster the competitiveness of locally listed power producers in the long term, analysts said.
The National Development and Reform Commission said the government planned to close coal-fired plants with 50 megawatts or less of capacity, or a total of 15,000MW by 2010. It is also seeking the closure of older oil-fired plants with a capacity of 7,000MW. Most new power plants boast capacity of at least 300MW.
The 22,000MW to be shuttered accounted for 4.3 per cent of the nation's total installed generating capacity of 512,000MW at the end of last year.
As part of its effort to reduce by 20 per cent the amount of energy consumed to produce each unit of gross domestic product by 2010, the commission said renewable energy power plants and those that were energy-efficient and cleaner would be given preferential access to the national grid.
Previously, power sales were distributed equally among power plants within a distribution network regardless of their cost-competitiveness and pollution record.
Analysts said the moves would have a relatively limited effect in reducing the risk of a generating capacity glut in the short term given the small size of the plants to be closed relative to the massive new capacity coming on stream.
'At the end of the day, the impact depends on the final realised capacity addition,' UBS head of Asian utilities research Alice Hui Suk-fong said. 'I have seen forecasts of this year's new capacity by various institutes ranging from 73,000MW to 81,000MW.'
The fact that provincial and local governments controlled more than 66 per cent of the nation's generating capacity, up from 50 per cent before an industry restructuring in 2003, also made it harder for Beijing to exert control, she said.
After two years of rapid capacity expansion driven by chronic electricity shortages in many parts of the country, the power market is now largely in balance. However, the prospect that new capacity will exceed demand growth in the next few years remains high despite the central government's decision to halt or defer 80,000MW of unauthorised projects last year.
According to a forecast of the State Grid Corp of China, the sole power distributor in all but five southern provinces, the nation's power generation capacity will grow 9.8 per cent annually until 2010, while demand will expand by only 8 per cent.
Although this will cut plant utilisation and erode profit margins, analysts said moderate oversupply would make it easier for the government to reform electricity pricing and take inefficient plants off the market.
In the long run, listed power firms, which tend to have larger and more fuel-efficient generators equipped with pollution control equipment, would have an edge in a more competitive environment, said Pierre Lau, Citigroup's head of regional utilities research.