China Bolsters Wholesale Electricity Prices
Increase of About 5%
Is Second Since July;
Squeezing Grid Firms
By ANDREW BATSON
August 20, 2008
BEIJING -- China raised electricity prices for the second time in two months, an unexpectedly quick move that underscores the problems the nation is facing in keeping its booming economy supplied with energy.
The National Development and Reform Commission, which oversees electricity and other commodities with state-controlled prices, said wholesale prices will rise by an average of 0.02 yuan per kilowatt-hour, or roughly 5%, from Wednesday. The commission didn't raise retail prices, keeping the higher costs from hitting consumers and business but pressuring grid operators in the middle.
The increase is on top of a 4.7% rise implemented last month. That rise wasn't enough to cover costs for coal used to generate electricity, leading to mounting losses for utilities. But most analysts hadn't expected another increase until after the Beijing Olympics end this weekend.
The price increase "is very good news as it will help to reduce our losses," said Chen Feihu, vice president of China Huadian Corp., a major power producer. The company's arm listed in Hong Kong, Huadian Power International Corp., said last month it expects to report a net loss for the first half of 2008. Electricity-industry groups also have recently asked the government for subsidies to cover their losses.
The crux of the problem: While market prices for coal in China have nearly doubled over the past year, government-set tariffs for power have barely budged. Those price controls have helped keep China's inflation lower than it would be otherwise. But without higher prices, consumers have little incentive to rein in power consumption. And the controls kept power producers from passing on higher costs, giving them little incentive to keep up with the nation's strong demand.
Growth in electricity generation has thus slowed sharply in recent months, from 16.6% year-to-year in March to 8.3% in June and 8.1% in July -- the lowest for a nonholiday month in three years. Several provinces are rationing electricity to industrial users, forcing factories and mines to run at less than full capacity. Power-hungry businesses such as aluminum smelting have had to scale back output plans for the summer. Such power-supply limits have constrained China's manufacturing sector at a time when the weakening global economy already has crimped demand for its exports.
"To mitigate the magnitude of power shortages, the government needed to increase power tariffs," said Pierre Lau, head of Asian utility research for Citigroup. "After this hike, most power companies will have positive cash flow, and find it affordable to buy coal, but the profitability will still be low."
With utilities having been unwilling or unable to buy more coal at current prices, their stockpiles of fuel have fallen to unusually low levels. The government also has set up a high-level task force to tackle the coal shortage. Special measures have been taken to ensure that Beijing doesn't run short of electricity during the Olympics, though those mean that other places are doing without power instead.
While the government's latest move eases the burden on power producers, it will put stress on another part of the energy system: the grid. The government increased wholesale tariffs -- what the grid pays to buy electricity from plants -- but said it wouldn't allow a move in retail tariffs, or what the grid charges end-users. That likely reflects officials' continued concern over inflation, which while moderating in recent months has averaged close to 8% this year.
But it means margins for State Grid Corp., which distributes most of the nation's power, will be squeezed. That will keep the pressure on the government to come up with a longer-term system for linking the cost of energy supply with the prices consumers pay. Economists say China will eventually have to allow electricity prices to fluctuate more to reflect changes in fuel costs.
--David Winning and Shai Oster contributed to this article.
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