Although Chinese Premier Wen Jiabao affirmed last week that reform of electricity tariffs is a government priority this year, there was no encouraging news for Chinese thermal power producers.
The coal-fired sector, the main source of the nation's electricity in China, seems to be stuck in the doghouse because of environmental concerns surrounding the industry and because its highly fragmented structure makes reform more complicated.
In his opening speech to the annual session of the National People's Congress, Wen stressed that power tariff reform would gear the government's rate-setting mechanism toward renewable, cleaner sources of energy, such as nuclear and hydro. At the same time, the government signaled plans to leave room for the National Development and Reform Commission, China's top planning agency, to direct the market by ad hoc adjustments.
Steven Cox, Beijing-based energy and utilities analyst with Fitch Ratings, said Wen's speech means the government will still favor two state-owned power grid companies and nuclear firms over the coal power sector, represented by Huadian Power, Huaneng Power International and three other listed independent power producers.
Chinese thermal power plants have been grappling for a long time with higher free-market coal prices and capped tariffs. In other words, they are paying more for raw materials but can't recoup the added cost from users. The government only occasionally adjusts power tariffs. The last increase in residential bills was in mid-2008, while rates for commercial users were allowed to rise last December.
The state parents of the five listed power producers posted a combined loss of 18.1 billion yuan (US$2.87 billion) in the first seven months of last year in their thermal businesses and 13.7 billion yuan in 2010, according to the latest available official data.
Tighter Control
Cox said that coal, which will remain the backbone of Chinese power generation for the foreseeable future, will be relegated to the sidelines as China seeks cleaner sources of energy. Thermal generators also face tighter emission controls that will translate to higher capital expenditure requirements.
The fate of the thermal power sector could be worse than that of the oil refining industry. Reform in the latter sector is presumably easier because there are only two dominant players: Sinopec and PetroChina. The government is introducing a more market-oriented pricing system for gasoline station rates to improve margins for fuel refiners, though it's unlikely to lift controls on gasoline and diesel prices immediately.
Refiners are generally enjoying better times because the industry is fully integrated. That means the margin lost in refining can be partially recouped both upstream and downstream. Such is not the case in the coal-burning sector.
Meanwhile, the government has set a 4 percent inflation target for 2012, higher than some economists forecast. That figure is believed to leave room for an increase in energy and utility prices.
Analysts, however, doubt that power tariffs will benefit much. Cox said the CPI target isn't likely to translate into on-grid price rises in provinces where thermal generators operate at a loss. Power producers charge power distributors so-called "on-grid prices," and grid companies then sell electricity on to end users.
Wen's remarks were nothing new on the surface of them, but analysts like to pick between the lines for signs of subtle policy shifts.
One analyst said Wen's "tone" this year indicates a stronger determination to resolve the coal price-tariff gap choking thermal power producers. "Straightening out the relationship between coal and power" was spelled out again after no mention of the issue in 2010 and 2011 speeches, when inflation was the key concern for the government, Deutsche Bank's Michael Tong said.
In 2009, when the issue was mentioned for the first time, it was attached with the wording "at appropriate time," which sounded more like a long-term directive.
This year's speech also failed to mention "balancing the interests of various parties, especially the low-income working class" - wording that was contained in both 2010 and 2011 speeches, Tong said.
Still, the Germany-based bank said it doesn't expect a nationwide tariff hike in 2012, though it doesn't rule out the possibility of selective price rises in some provinces where profit margins are particularly low.
Graduated Tariffs
The government has pledged to expand a graduated power tariff system for residential users, which is now being trialed in several provinces. It is expected to be rolled out nationwide in the first half of this year. The new system uses a three-tier structure for setting electricity prices, with higher rates for heavier users. That is a shift away from uniform rates across regions.
The idea of graduated tariffs was mooted long ago, but, like many other price reforms in China, has been delayed by inflationary concerns. Still, it marks a step forward in reforming the power industry, though the impact and significance may be limited because residential users make up only about a 10th of China's power use.
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