China to liberalize coal-fired power pricing to tackle energy crisis

The National Development and Reform Commission said in a statement on Tuesday, that effective on Oct. 15, all electricity generated from coal-fired power will be priced via market trading, and that commercial users will have to buy direct from the market or via agents over the grid "as soon as possible."

A widening power crunch in China has forced production curbs across industries such as cement, steel and aluminium as power producers, unable to pay sky-rocketing prices for coal, cut back on output. The utilities have been unable to keep up with post-pandemic power demand, dampening China's outlook for economic growth.

Pushing all industrial and commercial users to the power exchanges and allowing prices to be set by the market is expected to encourage generators to increase output.

"(The pricing reform) is designed to reflect power demand and consumption, and to some extent to ease operation difficulties of power firms and encourage plants to increase power supply," said Peng Shaozong, an official with the NDRC, at a press briefing on Tuesday.

The reform, one of the boldest in a liberalising effort that has lasted decades, would allow coal-fired power plants to pass more of the cost of generating fuels on to end-users via market-driven prices for electricity.

About 44 percent of China's industrial and commercial firms are currently trading in power markets, buying electricity over exchanges in cities such as Beijing and Guangzhou, while other such customers buy electricity at fixed prices directly from the state-owned grid companies.

China's State Council on Friday said it would allow coal-fired power prices to fluctuate by up to 20 percent from base levels, an increase on previous limits, to help preventing high energy consumption.

The NDRC said that the high-energy consumption firms would not be bound by the 20 percent upper limit in order to curb "irrational power consumption" and to encourage firms to improve energy efficiency.

"If power prices rise, it will to some extent increase power cost at upstream firm," said Peng.

While the reforms would push up the producer price index (PPI), Peng said, it would help ensure electricity supply and stabilize production at industrial firms.

The NDRC also said residential and agriculture users, as well as public welfare initiatives, will continue following fixed power prices, which are often set too low to cover the generating fuel costs of the utility companies.

Local governments are encouraged to offer support to small- and medium-sized and individual business users on power prices to reduce the financial burden of potential power price hikes.

Analysts and traders have been forecasting a 12 percent cut in industrial power consumption in the fourth quarter as coal supply is expected to fall short this winter while prices are unlikely to drop.

The most-active China thermal coal futures contract soared 11 percent to a record high 1,505.6 yuan ($233.33) a tonne on Tuesday. ($1 = 6.4526 yuan)