China considers new round of power tariff reform
By Terry Wang
Shanghai. October 19. INTERFAX-CHINA - The Chinese government is on the cusp of releasing its plan for sweeping changes to the country's power tariff system, which includes easing government control over on-grid power tariffs and linking retail and on-grid power tariffs, state media reported on Oct. 16.
China's National Development and Reform Commission (NDRC) and State Electricity Regulatory Commission (SERC) propose adjusting retail power tariffs for industry and commercial consumers every six months and adjusting tariffs for residential and rural consumers up to once a year, Shanghai Securities News reported.
Sun Yaowei, head of SERC's Policy and Regulation Department, told Interfax that SERC is working on power tariff reforms with the NDRC, but he did not specify when the plan would be released.
Over the long term, the proposed reforms will benefit power generators because it will allow them to pass down the cost of coal and other expenses to consumers, Wang Shuang, a power industry analyst with United Securities, wrote in a research note on Oct. 16.
However, Wang believes that an oversupply of electricity output may bring down on-grid power tariffs, and power companies may at first choose to lower their prices to stay competitive, which will hurt their profitability in the short term.
The NDRC attempted to revamp its power tariff system earlier in the decade. In late 2004, it announced that it would adjust power tariffs when the average coal price fluctuated by more than 5 percent over a six-month period. However, the policy was not firmly implemented as the government remained concerned that higher electricity prices would overburden consumers.
The central government has remained cautious about easing its control over domestic electricity prices, said Li Jianwei, head of Shanxi Electricity Power Association (SEPA). However, he added that the government's hand wringing is unnecessary as it will retain ultimate control over the country's power tariffs.
Although the government intends to let retail power tariffs float with on-grid power tariffs, it also plans to put a cap on retail electricity prices, according to the report.
Quite a few power plants in Shanxi Province have taken losses over the last two years as government-controlled power tariffs were not high enough to offset the rising cost of coal. Li said that on-grid power tariffs need to rise by about RMB 0.05 ($0.0073) per kilowatt hour (kWh) to ensure the profitability of power plants in the province.
The NDRC and SERC also propose allowing power tariffs of new power plants to be set through negotiations between power generators and consumers after 2010.
In addition, the proposal may require the State Grid Corp. of China (SGCC) and China Southern Power Grid Corp. (CSG) to reset transmission fees at cost plus a reasonable profit margin in a specific province as part of a trial to clearly determine the companies' true costs.
Li remains concerned that the proposal will have difficulty spurring changes in the power system.
"This year's reform proposal, including the direct electricity purchasing, was not carried out very well. And the power grid companies do not support the proposal as it will just deprive them of profit," Li said.
This year, the central government allowed 15 heavy power consuming companies to buy electricity directly from power plants, effectively circumventing the grid companies.
About 70 percent the power grid companies' customers are heavy power consumers," Li said. "If all of them are allowed direct electricity purchasing, it will ravage the power grid companies' bottom lines."
In addition, the plan may also include a proposal to increase on-grid power tariffs for old hydropower plants in an effort to compensate residents who were forced off their land when the plant was built, as well as to support local ecological protection.
Li said that power grid companies insist that their profits would shrink further if the hydropower tariffs are hiked.