China to raise electricity prices for some users

Friday, 03 Jun 2011

Reuters reported that China would raise electricity prices for some users by about 3%, the first increase since 2009 as it tackles its worst power shortage in seven years.

The power price rise affects industrial, commercial and agricultural users in 15 provinces, state media said after a briefing by the National Development and Reform Commission, China's top economic planning agency.

But authorities in the world's second biggest economy may have already played one of their strongest cards to combat the shortages as the NDRC revealed power companies in 13 of the 15 provinces have been paid higher prices for their electricity since April 10th 2011.

China's electricity demand is running so far ahead of supply that it is expected to be short of 30 gigawatts to 40 gigawatts of power capacity this summer, twice the deficit caused in Japan by the earthquake and tsunami on March 11th 2011.

Economists said that China has created the shortage by foisting low prices on power companies, who have little incentive to produce electricity because of high coal costs.

It will avoid a big inflationary effect, economists said, because it excludes residential users but it may also have little impact on the power shortages as it means any fill up power supplies in those 13 provinces already happened almost two months ago. The other two will follow on June 1st 2011, along with the end user prices in all the provinces.

Mr Wang Wei, senior analyst at Guotai Junan Securities, said that "If you take a look at the power shortages over the past month, you can see that the hike had no significant impact on the current power shortages. Actually, it didn't have the impact it should have because after the on grid power price hike in April, coal prices rose again, eroding the power price hike. Coal imports could rise after the power rise hike as coal producers and trading companies are likely to raise coal prices, triggering more coal imports. Every CNY 0.01 rise in power price could offset an increase of CNY 50 in coal prices."

At an average of CNY 0.02 per kilowatt hour, that would add CNY 100 to a tonne of coal, which was trading around CNY 850 per tonne on May 20th 2011.

Chinese coal imports rose in April after a slow start to the year, and analysts at Commonwealth Bank of Australia said that rising prices suggested further Chinese buying.

Mr Jianguang Shen, chief economist at Mizuho in Hong Kong, said the government would try to support power producers by ordering big state owned coal miners not to increase their prices, but it would be difficult to stop prices rising.

While higher coal costs may swamp the effect of the price rise on the supply side of the market, power consumers may not flinch at their own increase, which averages CNY 0.0167 per kilowatt hour.

An official at a Chinese steel mill said that "Steel mills aren't too concerned with power price increases because most of the costs come from raw materials like iron ore, coal. We're not asking for power price increases but they are better than being cut off."

Still, analysts say the government's efforts to raise prices, both those the electricity grid pays to producers and those it charges consumers, are a step in the right direction, with little adverse impact on the overall economy.

Mr Liu Shujie, a senior NDRC economic researcher, told state television that it would raise consumer price inflation by only 0.05 percentage points, while Mr Lin Boqiang, director of the Center for Chinese Energy Economics Research, said the price rises would raise industrial prices by 0.5 percentage points.

Mr Lin told Reuters that "But look what will happen if electricity shortages aren't solved: the inflationary pressures will be even larger because the price of raw materials will continue to surge because of heavy demand. In the end, looking at the power shortages, there is simply no choice but to raise prices."

China has already cut power supplies to some industrial users in eastern, southern and central regions as pent up demand rebounded after local governments ordered power cuts in late 2010 for the purpose of achieving energy saving goals. The State Grid of China, the country's dominant power distributor, has said it will cut supplies to more industrial users in summer, when the shortfalls are expected to worsen.

Mr Shen at Mizuho said that "Price rise was definitely not the last one. But it depends on the coal price and on a lot of things, like CPI inflation and the power shortage situation."

According to the State Electricity Regulatory Commission, China's five state owned power generating groups lost more than CNY 10 billion on their thermal power operations in the first four months of the year. The five groups, including the parents of listed firms China Power International Development Limited, Datang International Power Generation Co Limited, Huadian Power International Corp Limited and Huaneng Power International Inc, had racked up more than 60 billion yuan in losses in past three years.

The end user price increase ranged from CNY 0.004 per kWh to CNY 0.024 per kwh in 15 provinces: Shanxi, Qinghai, Gansu, Henan, Jiangxi, Hainan, Shaanxi, Shandong, Hunan, Chongqing, Anhui, Hubei, Sichuan, Hebei and Guizhou. (Sourced from Reuters)