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Pricing reform liberalizes power sector
( 2001-07-09 16:58 ) (9 )

Recent reform of the electricity pricing system marks China's first endeavor to retreat the firmly-gripped power sector to the market force, but analysts said there would be a long journey to liberalize the industry.

A circular issued by the State Development and Planning Commission late last month indicated that it would no longer guarantee profit returns for newly built power plants.

The electricity price of newly built coal-fired power plants would be determined by the average production cost of "competitive plants.'' The price also includes the amortization of investment in the power plant based on an operation period of 20 years, which actually lowers the price by prolonging the period from 10 years in the past.

China used to set the electricity price for every single plant, promising their profit return of 10-15 per cent, in a bid to encourage investment in the power sector to ease the electricity shortage.

The circular said the pricing reform, aimed to lower the electricity price, is expected to lay a solid foundation for power plants to bid for electricity supply to grids in the future.

It said the price of hydropower plants would be based on an operation period of 30 years.

Liu Jipeng, a leading expert in the sector, said the move is expected to spur power plants to lower the production cost, ``but the reform is only a small step forward, rather than a breakthrough to a competitive market.''

``The price is still subject to the ratification from the commission, not determined by the demand and supply in the market,'' said Liu.

``In the framework of current pricing system, the long-proposed bidding system can not be implemented,'' he added.

China is widely believed to require a certain proportion of its electricity to bid for supply to power grids in its on-drafting power reform package, hoping to boost the competition in power plants.

It also aims to separate the power plants from the State Power Corp, a virtual monopoly that controls half of the nation's power plants and almost all the power grids.

An official from the commission admitted that the pricing amendment is ``only a temporary approach before the overall reform package is launched.''

``Anyway, the reform is a step-by-step procedure, not an overnight strike,'' said the official.

Liu said it would take China at least 3 years to set up the bidding system across the country.

Liu said it would take time for consumers to benefit from the price-cut, because the commission said it would use the money to subsidize those newly-built plants with modern technology and environment-protection facilities, to upgrade urban and rural grids, and to lower electricity price in remote rural areas.

In the past, China combined the price for electricity generation and transmission. Only 15 per cent of the price go back to power grids, compared with 60-65 per cent in developed nations.

``If the grids can only get that much, it would be hard for them to cover their costs, after the plants are separated from grids,'' said Liu.

Huo Ji'an from the State Power Corp said the separated pricing will help power grids to get stable revenues of their own.

Huo admitted little profit can power grids achieve under the combined pricing system, hindering the development of the grids.

The official from the commission said existing power plants should also revise their pricing as required by the circular, but ``the existing contracts between foreign investors and local government will be respected. Foreign investors can also negotiate with governments to revise the terms according to the circular.''

The official said it will ``strictly prevent price rise as a result of acquisition or sale of power assets.''

But an official from the State Power Corp said the move would hurt the enthusiasm of foreign investors to take over power plants

``If they are not allowed to increase the price, how would foreign investors cover the cost of acquisition of old power plants,'' said the official.