Some Chinese regions adjust electricity pricing rules to boost power production

Some Chinese regions are relaxing controls on power prices to allow coal-fired power plants to charge higher prices when coal prices surge, in a move to boost electricity production and ease the ongoing power crunch.

Southern China’s Hunan province said it will make power plants’ coal purchase prices as a parameter for deciding base power prices and it will regularly adjust the cap for power prices according to changes in coal prices, according to a notice issued by the local government on Monday. The new measures become effective from October and will not affect residential power users.

Under China’s current power pricing system, power prices are set as base price plus float which can deviate up to 10 per cent higher or 15 per cent lower. Due to runaway coal prices so far this year, the current pricing can no longer cover power plants’ production costs.

Hunan authority said it aimed to set up a mechanism linking changes in coal prices and the cap of power prices to reasonably reflect the cost of electricity production and consumption as well as lower risks, according to the notice.

“When power plants’ average coal purchase prices exceed 1,300 yuan per tonne, transaction price of coal-fired power will rise by 1.5 cents per kWh for each 50 yuan/tonne rise in coal prices, ” it said.

On Thursday, southern China’s Guangdong province said it will improve peak-valley price mechanism, adjust the peak-normal-valley power price ratio to 1.7 : 1 : 0.38 from 1.65 : 1 : 0.5 and float peak-hour power prices up by 25% from previous peak-hour level, effective from October 1, according to a notice released by the Guangdong provincial economic planner.

The peak-valley price mechanism and peak-hour power price don’t apply to residential power users, it said.

The National Development and Reform Commission (NDRC), China’s top economic planner, said on Wednesday that the government would not stop electricity prices from floating within a reasonable range and would let them reflect market fundamentals and changes in cost.

On the same day, Bloomberg News reported that China is considering hiking industrial power prices to ease the supply crunch. The rate hikes for factories could come in the form of higher flat fees, or in rates that are linked to the price of coal, it said. 

The government has also discussed raising rates for residential users if the industrial increases aren’t enough to solve the crisis, said the report.

The new measures come as several regions in China are suffering a severe power crunch, with many factories and households experiencing power cuts. It’s believed that the shortfall was due to a shortage in coal supply as well as surging coal prices which brought losses to coal-fired power plants and dampened their production.

Spot thermal coal prices in north China jumped by 75.2 per cent to 1,630 yuan per tonne on September 28 from 930 yuan per tonne on June 4, according to data from 100ppi, a Chinese commodity information provider. In particular, the prices surged by nearly 500 yuan per tonne in the period of September 3 – 28.

Official data showed that Chinese power suppliers’ profits dropped by 15.3 per cent in the first eight months of the year from a year earlier, despite a double-digit growth in electricity consumption in the period.

In early September, several state-owned power suppliers in the capital of Beijing asked the municipal government to renew electricity purchase contracts for the fourth quarter, saying they were unlikely to fulfil the original contracts due to surging costs and requesting for higher power purchase prices in the renewed purchase contracts.

“Coal-fired power plants are suffering sector-wide losses as costs are higher than power prices, which has severely disrupted power market transactions and brings major risks to safe operation of the local power grids and power supply,” said the local industry authority and economic planner in Inner Mongolia.

“Coal prices are significantly higher than power prices. The more you produce, the more you lose,” aid Han Xiaoping, chief analyst with China Energy Net Consulting.

“Previously, China were reluctant to raise power price because that would increase pressure on households and businesses and state-owned power companies had been bearing the pressure of higher costs. But now they are no longer able to do that because they are all operating in losses,” said Han.

Before the latest developments, several southern China provinces including Guangdong, Guangxi and Guizhou had raised electricity rates for peak hours to ease pressure on generators.