Solving the Power Puzzle

By LAN XINZHEN

Solving the Power Puzzle

By LAN XINZHEN

China’s power supply and consumption system needs market-oriented reform

Under constant pressure from power companies, the National Development and Reform Commission (NDRC) has agreed to raise electricity prices. The move comes despite the fact that price hikes could have a negative trickle down effect hindering the Central Government’s efforts to rein in inflation.

Starting from December 1, 2011, the on-grid power price (power sold by power plants to grid companies) will be raised by 0.026 yuan ($0.004) per kilowatt hour (kwh); the retail electricity prices for nonresidential users will go up 0.03 yuan ($0.0047) per kwh, a 3.3-percent increase. The price hikes won’t affect household electric bills, said the NDRC, since a ladder pricing system will be put in place to monitor residential electricity use.

The NDRC also said next year thermal coal prices for contracts signed between suppliers and power plants should not increase by more than 5 percent from the previous year’s agreements. Meanwhile, from January 1, 2012, the thermal coal price traded in the market will be capped.

According to the Bohai Rim Steam Coal Price Index, in the first 11 months of this year, average prices for steam coal with heating value of 5,500 kilocalories per kg remained above 800 yuan ($125), reaching a high of 850 yuan ($137). The new policy is meant to bring the thermal coal price lower.

The NDRC’s plan has been anything but welcomed by the market, as analysts claim the moves will only address the symptoms but not the root causes of fuctuating electricity and thermal coal prices.

Big losses

The current price hike was the result of huge losses incurred by thermal power plants. Figures from the China Electricity Council (CEC) showed that 236 of the 436 thermal power plants owned by China’s major power producers suffered losses in the past few years. The fve major companies—China Huaneng Group, China Datang Corp., China Huadian Corp., China Guodian Corp. and China Power Investment Corp.—lost 78.35 billion yuan ($12.32 billion) from 2008 to July 2011. Worse still, the more electricity they generate, the more losses they incur.

Figures from the CEC showed the cost of generating electricity in thermal power plants was about 0.5 yuan ($0.08) per kwh, while the on-grid power price was 0.42 yuan ($0.07), meaning the plants lost 0.07 yuan ($0.01) for each kwh of electricity generated. With production enthusiasm at a low, power plants chose to turn off their machines to cut losses. Figures also showed in the frst half of 2011, each thermal power generating unit only operated 5,200 hours per year, 300 hours less than the designed capacity. Since September, more than 10 million kwh of capacity has been left idle.

About 75 percent of China’s electricity is supplied by thermal power plants. Turning off generators causes electricity to be in short supply. The CEC forecast a 30-40 million kwh supply gap from this winter to next spring, and that central and south China will suffer most from power shortages.

Power shortages hit a larger part of China in the first three quarters this year, forcing 17 provinces to take power rationing measures. In the past, electricity shortages were caused by insuffcient capacity, but this year the problem is a reluctance to produce on the part of power companies.

The reason

In the years leading up to 2002, China’s thermal power plants were huge proft makers. At that time, the Central Government controlled the prices of coal and electricity and the supply of coal was much larger than demand. The government held a coal fair each year where coal prices were set and the power plants could get as much coal as possible. Under this model, the coal industry ran at a loss, while the power industry reaped handsome profts.

The situation changed in 2002 when the Chinese Government started marketoriented reforms. Coal price surged as the production and price were decided by the market. Due to the rapid economic development that followed, a large number of high energy consuming and high polluting companies mushroomed, leading to the quick establishment of thermal power plants. Meanwhile, the rapid rise of international coal prices led to a new hike in domestic coal price. The coal industry quickly turned loss into gain, and became the new proft maker.

But electricity prices were still controlled by the government, or specifically the NDRC. Since electricity price fluctuation will not only affect the commercial use of electricity, but also people’s livelihood, NDRC has been cautious about the electricity price adjustment.

Figures showed that from 2008 to October 2011, standard coal price rose an average 130 percent at each thermal power plant, while the cost of electricity only rose 37.5 percent.

Coal makes up 60-65 percent of the cost of generating electricity. Therefore, the coal price surge has squeezed the profts of thermal power plants, thus leading to a largescale industrial loss.

XU YU

In December 2004, government departments led by the NDRC announced a coalelectricity price linkage mechanism, which said that in one linkage period of no less than six months, if the average coal price fuctuated more than 5 percent from the last period, the on-grid and retail electricity prices should be readjusted. However, the mechanism was left almost unused.

The NDRC raised the electricity price twice this year. It raised the on-grid and non-resident electricity prices in 15 provinces, which temporarily eased the tension of coal and power companies. But the electricity price was still too low for the power companies to make a profit. The rise was immediately devoured by a new round of coal price hikes. Losses at thermal power plants continued and some plants were not able to buy coal due to shortage of money.

Shanxi Province is the major coal production region in China, and is a cluster area for thermal power plants. In November, altogether 17 power plants jointly appealed to the NDRC for electricity price rises, as they suffered from huge losses.

Turning a profit

Wu Zhonghu, Secretary General of the Energy Economy Professional Committee with China Energy Research Society, said the electricity price hike was just an expedient measure. The key to resolve the power crunch and power plants’ losses is to push forward electricity pricing reform.

The coal-electricity linkage mechanism was the most suitable policy that accords to the market economy. However, whenever the electricity price was raised, the coal price would surge a second time, which gave rise to new electricity price hike appeals from power plants. The price hikes added more pressure for the downstream commercial and industrial enterprises which passed the cost increases on to consumers. Therefore, judging by the current power consumption situation, the coalelectricity linkage mechanism may ease the power plants’ pains, but could not pull them out in the long run.

“Independent electricity pricing mechanism should be the future reform target,”said Shan Baoguo, President of State Grid Energy Research Institute.

Now, grid enterprises buy the electricity produced by power plants and then sell it to consumers. Grid enterprises’ income mainly comes from the difference between the purchase and sale prices. The on-grid power price is 0.3-0.49 yuan ($0.05-0.08), while the electricity price for industrial companies is set at 0.7-0.9 yuan ($0.11-0.14) per kwh, and the electricity price for commercial companies is as high as 1 yuan ($0.16) per kwh. As a result, the price of electricity does not fully refect the market supply and demand relations.

Shan said the disclosure and auditing of electricity transmission cost would be the key to resolving the long-standing problem.

Li Junfeng, Vice President of the Energy Research Institute (ERI) of NDRC, said electricity pricing reform is an important link in the whole energy system reform. He said since the goal is to realize the marketization of electricity prices, the four links—electricity production, transmission, allocation and consumption—should be left to the market to decide.

Li said the government could continue the coal-electricity linkage mechanism. Instead of raising electricity prices, the government could raise on-grid power prices, and the price gap could be reimbursed by the government. Second, the government could control the coal price surge, and may levy special yield tax on coal producers and use the tax to subside grid companies. In the meantime, the government shall differentiate the electricity uses, promote the development of a more intelligent grid and raise the effciency of electricity production and consumption.

The ERI calculated that in order to strike a balance of thermal power plants, the government should raise the on-grid electricity price further by 0.0122 yuan ($0.0019) per kwh. It also suggested building a trade market between power producers and consumers.

“In the long run, to resolve the problems of coal and electricity, a marketoriented reform will be carried out in all links from power production to consumption,” said Yu Yanshan, Deputy Secretary General of China Energy Research Society.