The earnings potential of independent power producers (IPP) in China is in doubt following a decision by Beijing to consider streamlining tariffs in the sector. Although there are no concrete plans yet, analysts are divided over the long-term effects a re-balancing act will have on the industry. Together with overall sector reform, bringing tariffs across the industry in line with one another would exert downward pressure on IPPs' tariffs and capacity utilisation over the next few years, according to a research report by Merrill Lynch. Analyst Wang Guohua said imbalances existed in China's power-generation tariffs compared to transmission and distribution tariffs, as well as between tariffs charged by state-owned State Power Corp's power plants compared to those of the IPPs. Transmission and distribution tariffs account for about 27 per cent of the average end-user's electricity bill - much lower than the 45 per cent to 50 per cent charged abroad. Tariffs charged by IPPs, which are supported by private-sector capital, are 30 per cent to 40 per cent higher than those levied by State Power. Mr Wang estimated that IPP tariffs would have to come down by 21 per cent to remove the imbalances. An industry tariff re-alignment is widely expected ahead of the privatisation of State Power. State Power controls about 46 per cent of China's total electricity-generation capacity, while the IPPs account for 42 per cent and in-house corporate facilities 12 per cent. 'The benefit of lowering the IPPs' tariffs should go to the transmission and distribution companies and operators of generation assets that are owned by [State Power],' Mr Wang said. Other analysts acknowledged the tariff risks facing the IPPs, but said the concerns might not be as great as they seem. Lehman Brothers utilities analyst Angello Chan wrote in a research report: 'We think it would be counter-productive for the government to lower the returns of the listed IPPs.' He quoted State Power vice-chairman Xie Songlin as having said that Beijing had a vested interest in supporting listed IPPs - a channel for the future privatisation of state assets - and would not be inclined to lower their rate of return to shareholders. Part of any tariff reduction stemming from the reform towards a unified and clearer tariff structure could also come via the elimination of surcharges by provincial bodies without hurting the IPPs' profits, he added, citing a tariff cut by Guangdong province last May. 'We have been informed that in certain areas, rural electricity consumers pay as much as a 100 per cent surcharge,' he said. In a research report, BOCI Research analyst Viola Yip unveiled a tariff structure proposed in Beijing. Ms Yip said Beijing was considering a nationwide implementation of power pooling - the delivery of electricity using a common platform that allows competitive bidding - in each province under a proposed two-tiered tariff system. The two tiers are expected to include a capacity payment - to cover 80 to 90 per cent of a power plant's fixed cost - and an energy payment, or revenue earned from competitive bidding which would cover variable costs and generate a profit. 'A key risk is that total tariffs realised by IPPs are expected to be lower in most locations,' Ms Yip said. However, she added it was possible the IPPs would be exempted from the new tariffs in order to protect their returns. 'We cannot entirely rule out this possibility. However, no exemptions are granted to listed IPPs under the current power-pooling arrangements [in pilot areas],' she said. BOCI estimated that for every 1 per cent decline in tariffs, the profitability of listed IPP Huaneng Power International would fall by 4.3 per cent, Beijing Datang Power Generation 2.9 per cent and Shandong International Power Development 3.3 per cent.