China liberalises electricity pricing to ease pressure on power generators, tackle power shortage

China is liberalising electricity pricing in an effort to address the ongoing power shortage across more than half the country and threatens to weigh on economic growth.

Industrial and commercial users will buy electricity at market prices and a direct power purchasing scheme that keeps costs artificially low for big users will be abolished, the National Development and Reform Commission (NDRC), the country’s top economic planner, said on Tuesday.

The direct power purchasing scheme allows local governments to force power generators into selling electricity to commercial users at prices cheaper than the fixed on-grid and retail prices set by the central government. The lower prices make power companies unprofitable amid rising costs for raw materials like thermal coal, therefore discouraging them from producing more electricity.

The NDRC said all electricity produced by coal-fired power will be sold via the market, compared to 70 per cent previously, without specifying when the changes would take effect.

Local governments will be also encouraged to introduce preferential policies to help micro and small businesses as well as individual-run businesses to ease the impact of higher electricity costs.

The reforms come as part of Beijing’s efforts to tackle widespread power shortages that have crippled industrial output and sparked debate about the effectiveness of the nation’s centrally-controlled electricity sector.

The power pricing reform will push up electricity bills for companies, in particular firms in the upstream industries, and drive higher the Producer Price Index (PPI), but it will have limited impact on the Consumer Price Index as power prices for residential and agricultural users will be maintained stable., Peng Shaozong, deputy director of the NDRC’s prices department, at a press conference.

These measures are conducive to improving the balance between supply and demand, will ease the operating difficulties of power generators and encourage them to increase supply, while also curbing excessive power consumption, Peng said.

The NDRC announcement came after Premier Li Keqiang said at a State Council meeting last week that electricity prices will be allowed to rise or drop by as much as 20 per cent against government benchmarks, compared with the current cap of 10 per cent and floor of 15 per cent, noting that energy-intensive companies are not subject to the 20 per cent cap.

Skyrocketing coal prices have hit the country’s power generators hard, triggering energy rationing in at least 20 out of China’s 31 provincial-level jurisdictions.

China’s power production rose by 11 per cent year on year in the first eight months of the year, but its coal production grew by only 4 per cent over the same period, according to research by Macquarie Capital.

The NDRC said it hoped the higher costs for energy-intensive industries would push them to reduce “unreasonable energy consumption” and consider investments in efficiency.

Li Chengren, deputy director of the Institute of finance and audit at the State Grid Energy Research Institute, said floating the electricity price as much as 20 per cent would be enough to cover power companies’ surging coal costs.

Qin Yan, lead carbon analyst at financial data provider Refinitiv, said it could take some time before caps on electricity prices can be completely removed.

“The 20 per cent range is really just a start, since this is tiny compared to the 300 per cent rise in coal prices this year,” he said. “The main message is that power price shall fluctuate, this fundamentally shifts the mindset of generators and consumers.”