NewBeijing sets tariff mechanism for gas-fired power plants

The central government has for the first time set up an electricity tariff setting mechanism for natural-gas-fired power plants, which would enhance transparency of price setting and stability of returns for power producers using the cleaner-burning fuel.

Energy industry regulator National Development and Reform Commission has issued a circular announcing the system, which was posted on a website run by the China Electric Power Promotion Council, which is backed by the nation’s largest power generators and distributors.

The circular, which took effect on January 1, said a mechanism will be set up to link gas-fired power prices and natural gas costs, and provincial-level governments will be in charge of its implementation.

Previously, prices were set based on negotiation with local governments on a plant-by-plant basis.

As gas prices fluctuate significantly, the on-grid power price charged by generators needs to be adjusted accordingly. But the maximum power price cannot be more than 0.35 yuan per kilo-watt-hour (kWh) higher than the local benchmark coal-fired power tariffs or the average local on-grid power price, it added.

The new mechanism would “promote healthy and orderly development” of the gas-fired power generation industry, the circular said.

“The aim is to promote more gas-fired power generation,” said Pierre Lau, Citi’s head of Asia utilities research in a research note, adding it would improve profit predictability of the sector that at times is hurt by lagging power price increases after gas prices are raised.