China Raises Power Prices as Shortages Loom; Coal Imports to resume

Published: Monday, 30 May 2011

China said on Monday it would raise electricity prices for some users by about 3 percent, 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 (NDRC), 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 10.

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

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

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 filip for power supplies in those 13 provinces already happened almost two months ago.

The other two will follow on June 1, along with the end-user prices in all the provinces.

"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," said Wang Wei, senior analyst at Guotai Junan Securities. "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 0.01 yuan rise in power price could offset an increase of 50 yuan in coal prices," he said.

At an average of 0.02 yuan per kilowatt hour, that would add 100 yuan ($15.43) to a tonne of coal, which was trading around 850 yuan per tonne on May 20.

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

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 0.0167 yuan per kilowatt hour.

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

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

"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," Lin told Reuters.

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.

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

China's five state-owned power generating groups lost more than 10 billion yuan ($1.5 billion) on their thermal power operations in the first four months of the year, an official with the council said on Tuesday.

The five groups, including the parents of listed firms China Power International Development, Datang International Power Generation, Huadian Power International and Huaneng Power International, had racked up more than 60 billion yuan in losses in past three years, according to the State Electricity Regulatory Commission.

The end-user price increase ranged from 0.004 yuan/kWh to 0.024 yuan/kwh in 15 provinces: Shanxi, Qinghai, Gansu, Henan, Jiangxi, Hainan, Shaanxi, Shandong, Hunan, Chongqing, Anhui, Hubei, Sichuan, Hebei and Guizhou.