China troubled by thorny issue of electricity price hikes

Tuesday, 23 January 2007 10:26:13 (GMT+3)   |  
       

The Chinese government, and indeed all walks of Chinese society, are much concerned at the present time by the prospect of rising electricity prices and by the possible negative impact these may have. From the 1 January, 2007, the state will no longer avail of its pricing right for the coal used in generating electricity, i.e., for the coal known as “steam coal” in China, which accounts for nearly 18-25 percent of the domestic coal supply.. Since the price fixed by the state in the past was lower than the market coal price by almost 21 percent, it is widely believed that the average coal price will now increase, given that the state will no longer intervene in the market. Indeed, reports from the coal mining companies predict a hike of 30 percent in the price of steam coal. Unlike the coal price, the price of electrical power all over China still remains under state control. Although the state has started to research ways of handing over its pricing rights to the market in a smooth manner, it will also require a certain period of time in order to achieve such a transition. As the situation currently stands, the state's special role and privileges have placed it in a very difficult position. Whether the state chooses to allow price hikes or not, the likely attendant results do not make for very pleasant speculation. A hike in electricity prices would inevitably lead to negative effects on the national economy, such as inflation. China is a country still undergoing strong growth, and it requires rapid economic development to feed its 1.3 billion plus population and to ensure a continuation of its impressive performance. While the state contemplates the negative effects of a price hike with great reluctance, a number of factors make increased electricity prices seem inevitable. The major factors in question are as follows: First of all, most Chinese power plants regularly record financial losses or else just about manage to break even. It will be impossible for them to bear the cost increase for coal supplies. Once faced with this cost pressure, the power plants will inevitably be compelled to ask the state to increase the sales price of electricity. Due to the serious electricity shortages of recent years, China decided to allow private investment in power plants. As a result, so far many similar power plants have been established all over the country. Fierce competition has given ries to the bad operating situations of these plants, at the same time as the gap has disappeared between electricity demand and supply. In early 2005, the number of provinces experiencing shortages of electricity totaled 25. This figure had dropped to just two provinces by March 2006. According to the latest data up to the end of October 2006, China's total electricity-generating capacity exceeded 580 million kilo-watts, which effectively means that China's electricity shortage problem has been resolved. Secondly, the serious inadequacies of China's transportation system will also contribute to pushing up electricity prices. Currently, China's transportation of coal mainly depends on the country's rail system. However, the total railway length under operation is less than 100,000 kilometers, and currently only 35 percent of the demand for rail transport can be met. Due to the expectation that the state will also give up its right to decide rail freight charges, an increase in transportation costs in the future seems inevitable. This will have a knock-on effect on the cost of steam coal, which in turn will have an impact on electricity prices. At present, due to the strong level of demand, the local coal mining companies have not been able to provide adequate supplies to meet the market's needs. This is in spite of the fact that they have been making great efforts to expand their output. It will be well nigh impossible to maintain coal prices at their current levels. Whether it decides against an electricity price hike or opts for an increase by just a small margin, either way the state will have to face into a tough mission.

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