BEIJING: After two tariff increases in as many months totalling 10%, China may have set itself on a fast track to reform the world’s second-largest electricity market and end the worst supply crunch in four years.
Within this year and maybe within weeks, the government may announce another hike either on wholesale or retail prices, or both, to lift its generators into the black and curb consumption by power-hungry sectors, analysts said.
Having exhausted almost all its policy tools to ease coal shortage — the main culprit for this summer’s power crisis which has forced rationing in nearly half the country — tariff hikes were left as the last effective solutions.
And action is needed soon to pre-empt a worsening power crunch ahead of another peak consumption period the in winter and to boost thin coal inventories essential for higher productions.
“It’s Beijing’s goal to correct market distortion and push forward economic reforms. Beijing will raise power rates and fuel prices again this year,” Merrill Lynch said in a client note on Tuesday.
The two tariff rises were to thermal generators. Some analysts bet the next one will be a retail hike.
“Policy-wise the government has mostly exhausted its tools * from urging the restart of small coal mines, freezing coal prices, and raising on-grid prices twice. The only other tool left is raising the retail,” said Chen Liang, power analyst with Ping An Securities.
“We expect such a hike will come after the Paralymics in late September.”
For now, Beijing is taking a breather on retail tariffs by keeping them unchanged in Tuesday’s 5% hike that were only on wholesale rates charged by generators.
China last raised retail power prices by 4.7% in July that only targeted non-residential and non-agricultural users.
But in a follow-up document published on its website www.ndrc.gov.cn on Wednesday, the National Development & Reform Commission hinted at a retail price move.
“The on-grid tariff hike will be compensated next time when Beijing raises retail power prices,” the NDRC said, without saying when the next retail hike will be.
Others speculate that more on-grid hikes are on the way to further boost margins at generators such as Datang International Power Co
“This (10% increase in on-grid tariffs) can only offset 50-60% of thermal cost of listed power producers...We expect more hikes this year, each around similar rate,” said Daisy Zhang of BNP Paribas.
China is battling a most severe power shortage since 2004, as loss-making generators refused to stock up coal, which fires more than 80% of the country’s power, at market prices that have more than doubled in the past year. SUBSIDY
A retail price hike could, however, be tricky.
China’s easing consumer inflation, down for three straight months to an annual rate of 6.3% in July, seems to provide a window for more energy price hikes that may also include another increase in state-controlled fuel prices after an up to 18% rise in June.
The government, however, has to weigh in another inflation index, factory-gate prices that rose the fastest in 12 years in July at 10%, suggesting inflation pressure remains.
In the absence of price hikes, Beijing may be forced to resort to a safer move—a handout to state-run, unlisted grid operators which are now bearing the brunt of revenue loss due to the on-grid rate hikes, similar to what it did to oil firms to help them recoup refining losses.
Instead of another on-grid increase, it could opt for a cut in value-added tax to return some revenues to power generators.
“Beijing will definitely go and compensate grid firms, like what it did to oil companies,” said a grid executive who asked not to be named. - Reuters |
