Energy & Resources

A powerful problem

China’s electricity prices pose a conundrum for reformers

A powerful problem

As far as backfiring sound bites go, Pete Wilson can lay claim to one of the greatest. The former governor of California passed legislation in 1996 that introduced competition into the state’s electricity sector. He said the legislation would “offer reliable service, so no one literally is left in the dark.”

Fast forward to the summer of 2000, and television crews beaming news around the world that the Golden State was experiencing power blackouts. These would persist for almost a year, ensuring Californians were ‘literally left in the dark’ after all.

It is with California in mind that Woo Chi-Keung, an energy expert and the author of the study ‘Electricity market reform failures’, notes: “Electricity market reform is highly risky and irreversible”.

Chinese policymakers are keen, regardless, on reforms, but are heeding the words of China’s former leader, Deng Xiaoping to ‘cross the river by feeling the stones’.

This, at least, would seem to be the message conveyed by a pilot scheme allowing big industrial users to make direct purchases from power generators. The move seems to be ‘feeling’ its way towards introducing wider market reforms, but – as can be gauged in the current implementation – in the slowly-slowliest of manners.

For a start the pilot is focused on just one user: Jilin Carbon. The state-owned firm is the world’s fourth largest maker of carbon products (such as graphite electrodes and carbon fibre) and has been lossmaking for three years. Electricity makes up around 20% of its total costs, which makes it an interesting test case.

It first applied to buy electricity directly in 2003, and thanks to the pilot is now able to purchase from Guodian Jilin Longhua Thermal Power at a tariff rate agreed between the two. Before the agreement it paid Rmb0.45 per kwh; it now pays 0.41 per kwh. Of that sum, Rmb0.127 goes to the grid company delivering the power.

The savings are considerable. Jilin Carbon uses 500 million kwh of power per year, meaning the lower price saves it Rmb20 million ($2.9 million). Analysts reckon that could help the firm swing to a small profit of Rmb9-11 million.

According to the China Economic Times the policy move – should it be extended – will allow big industrial users to negotiate lower electricity bills. And taken to its logical conclusion it would create an electricity ‘market’ in which users and not the government set prices.

But not so fast. Li Jun, the director of planning and marketing for Guodian Jilin Longhua Thermal Power notes that the pilot has been “unable to resolve many problems”. The chief issue is that industrial users currently pay higher prices in order to subsidise lower prices for farmers and citizens. The government knows that the elimination of that cross-subsidy will create a social outcry. And this isn’t the year for social outcries. So expect the pilot to be ‘tested’ for quite a while longer.

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