Energy & Resources

Electric shock

The price of electricity is increased to avert a power shortage

Electric shock

It just got more expensive

Vladimir Lenin understood the importance of electricity in building a modern industrial state, going so far as to claim that “Communism is Soviet power plus the electrification of the whole country.”

So he might have been a little disappointed in how the Communist Party in China has been managing its energy needs.

The China Electricity Council predicts that the country will have a major power shortage this winter and spring, with a 40 million kilowatt deficit that will hit central and southern parts of the country hardest. The impending shortage recently led the nation’s economic planning agency, the NDRC, to raise electricity prices, as well as cap coal input costs in an attempt to encourage producers to generate more power.

On-grid electricity rates were increased by Rmb0.025 per kilowatt hour, while the cost of power for industrial users also went up by Rmb0.03 per kilowatt hour. “Despite persistent high inflation, China [has decided to] bite the bullet in raising electricity tariffs, which in our view foreshadows domestic price hikes for gasoline and diesel in the not-too-distant future,” Gordon Kwan, head of energy research at Mirae Asset Securities, told the Wall Street Journal.

The government also unveiled plans to abandon the existing pricing of electricity for households, with an amendment in which users who consume more than a specified amount of power will start to pay a higher price. More detailed regulations are to follow.

The spot price for benchmark coal was also capped at Rmb800 a tonne, while increases in the contract price of thermal coal for 2012 will be restricted to less than 5%. The NDRC has said that the coal mining sector can remain profitable despite the price caps, and that market supply will not be affected (see WiC3 for our earliest reference to the regular tussle between coal miners and electricity utilities over prices).

All of this is welcome news for power plants, which have long complained of being unable to pass on more of the rising cost of electricity generation to the end user. Since 2003, power prices have risen by just 32%, compared to a 150% increase in the cost of coal, according to the China Electricity Council, an industry association.

In fact, the power plants havebeen losing money. Take Huaneng Huangtai Power Plant in Shandong which has been running at a loss since 2006, with this year’s deficit expected to be Rmb400 million ($62.8 million), reports the Beijing News.

The same newspaper also highlights the situation at Datang Group, another major power company that produces around 10% of China’s electricity. Datang chairman Liu Shunda has said that 62 of its 88 coal-powered plants are making a loss.

The latest price increases are generally considered more as a quick-fix since the fundamental problem remains – state control of electricity prices.

As a column in the Economic Observer suggested, the government is constantly trying to balance the needs of competing parties, including the coal miners, the power producers and the NDRC. Historically this situation has benefited the final consumer of power, who has long been protected from fluctuating market prices for coal and got relatively ‘cheap’ electricity.

In the short term, the price hike will see the power producers as the happier party, with the prospects of higher revenues than before. But an industry insider told the China Daily that the benefits of the price hike will soon start to be offset by new emission policies that take effect next year.

Procedures designed to combat acid rain formation will add costs of Rmb0.02 per kilowatt hour, according to the source.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.