Central planning takes a black eye

24 Janurary, 2011 by J.M. BEIJING

IN CHINA’s power industry, government planners still hold sway. While coal prices have been largely freed, electricity prices are fixed by the state. The mismatch is a bane to power companies, which often complain of having to produce at a loss. Recent attempts by the government to reassert control over coal prices have not been helping.

The government and state-owned energy companies have become increasingly alarmed in recent months by rising inflation. The price of coal used for power generation and heating supplies rose by about 20% in 2010, even as that of electricity remained flat. Fearing that electricity producers would try to cut their losses by reducing output, on December 10th the government ordered that coal contracted for delivery to energy companies in 2011 must not be sold at a higher price than last year. The government fixes a quota of coal to be delivered under contract to power companies, which supplement their needs on the open market.

The price-taming effort backfired. To avoid having to buy coal at high market prices, many generating plants allowed their stocks to run down to critically low levels. Transport bottlenecks exacerbated by wintry weather made it difficult in some places to replenish them. In central and northern provinces, where electricity prices are set lower than on the coast, power rationing and outages have become common in recent weeks. In Henan, about 40% of power plants were reported last month to have no more than three days-worth of coal stocks. The recommended minimum is usually two to three weeks.

For all its frantic building of power plants in recent years, China is no stranger to such disruptions. Last year several cities ordered cuts in power deliveries in order to help the government meet year-end targets for conserving energy use. The government’s interference in the coal market complicated matters. In December, coal suppliers, reluctant to see the energy industry’s losses transferred to the mines, dragged their heels in the signing of delivery contracts for the coming year. And even though they eventually complied, few people seem inclined to believe that the coal industry has surrendered.

Coal companies are past masters of evading commitments to sell at the prices they have promised. They add fees, substitute lower-quality coal or simply fail to deliver, thus forcing the power companies to buy at spot prices. These are about 250 yuan ($38) per tonne higher than the 2010 contract price of 570 yuan. In 2009, according to reports in the state-run media, only half the amount of coal due to be delivered under contract actually reached the utility firms.

The government is unlikely to help out the power companies by raising electricity prices, at least not by much or any time soon. The last such hike was November 2009. Expectations of another increase ebbed last year as the government became preoccupied with taming inflation. Xinhua, a government news agency, quoted “insiders” as saying that efforts launched in 2002 to make electricity prices more market-driven would only “shamble ahead” in the coming five years, with no breakthrough expected.

In order to cajole the power and coal companies into sorting out delivery arrangements, the government’s economic planning agency organised a meeting of the main players this month in the southern city of Nanning. Reports in the Chinese media suggest the meeting only papered over their differences, with price disputes remaining unresolved. Central planners are losing their clout. (Picture credit: AFP, sourced:www.economist.com)