Datang International Power Generation, whose profits have been squeezed by Beijing's freeze on power prices to combat inflation, says it needs an average 6.8 per cent price increase to offset higher coal costs this year. A vice-director of the company's finance department, Ma Guangcheng, told reporters yesterday the company needed the increase to make up for an estimated 3.6 billion yuan (HK$4.12 billion) rise in coal costs this year. In 2005, Beijing approved a mechanism under which power prices would be allowed to increase if coal costs rose more than 5 per cent in a six-month period, passing on 70 per cent of the increase to power distributors and consumers, with 30 per cent absorbed by the producers. However, in reality, power prices have sometimes been frozen even when they were due to be lifted to combat inflation. At other times, the increases have often come too late and been too little to protect producers' returns. Beijing last introduced an industrywide power price rise - 2 fen per kilowatt-hour - in August 2008. Together with a collapse in coal prices in the fourth quarter of 2008, it helped return the industry to the black last year. But with prices of one-year coal contracts - which account for most of power firms' purchases - rising 8 to 10 per cent this year, the lack of a power price increase has meant producers have once again been struggling to make a reasonable profit. Datang Power, the listed unit of state-owned China Datang Group, posted a 27.8 per cent rise in first-half net profit to 911.9 million yuan after a 31.7 per cent jump in output helped offset higher fuel costs. But the increase was largely boosted by a revision in depreciation policy in April, through which the company extended the useful life of its assets, thereby cutting annual depreciation costs. The move, which an analyst said resulted in less prudent accounting, steadied Datang Power's depreciation expense at 3.57 billion yuan despite an 11 per cent new capacity addition in the first half. Vice-president Zhou Gang said because of the unfriendly regulatory environment, the company was looking to produce half of its earnings from non-power generation in five years. To do this it will raise output at its coal mines to supply 40 per cent of its power plants' needs by 2015 from 20 per cent this year. The company is also engaged in a 16 billion yuan project in Inner Mongolia to turn coal into chemicals, which are currently derived from crude oil, and two projects - costing 25 billion yuan each - to produce natural gas from coal in Inner Mongolia and Liaoning province. BOC International analyst Peter Yao Sheng estimated the coal-to-chemicals project would produce a profit in 2013. The project was originally slated for commercial operation in late 2008, but since prolonged trial operations had to be conducted on its complicated production processes, mass production is not expected to start until next year, Zhou said. The coal-to-gas projects are scheduled to start commercial operation in 2012 and 2013.