Govt gets hands out of coal market

In what an expert called Tuesday "the most significant reform yet in the energy sector," China's cabinet announced Tuesday it would cancel government intervention in coal prices for power generation, in a bid to further drive coal and power market reform necessary to ensure stable power generation and supply in the country.

Starting January 1 2013, the National Development and Reform Commission (NDRC), the country's economic planner, will no longer impose prices on coal and power producers, according to a statement posted on NDRC's official website Tuesday.

Lin Boqiang, director of the Center for Energy Economic Research of China in Xiamen University, emphasized the scale of the reform to the Global Times Tuesday, citing the important status of coal in energy production.

Coal accounts for about 70 percent of power production and consumption.

These new measures will help solve the confrontation between coal supplier and power producers and ensure a stable supply of power, he said.

Coal price contracts are currently signed at an annual meeting organized by the NDRC and the industry associations. Coal suppliers have to sell a certain quantity to power companies at government-guided prices which are sometimes far below or above the market price. If the market price is higher than the contract price, coal suppliers are reluctant to sign the contract, leading to shortfalls in the coal supply.

"The oversupply of coal will not change after the reform, and competition will lead to lower price," said Li Chaolin, a senior coal market expert.

The measures also encourage private investors to invest in power generation as they will be allowed to pass rising costs onto downstream power transmission companies, Lin said.

If the price of thermal coal, the raw material for electricity generation, changes more than 5 percent in a year, the on-grid power price will be adjusted accordingly, the cabinet's statement said.

"The key is that this mechanism is implemented," Lin said.

China adopted the so-called coal and power price linkage mechanism as early as 2004 and adjusted power prices twice in 2005 and 2006. However, the NDRC did not adjust power prices in 2008 due to high inflation, which led to heavy losses of many power producers.

Even if the power price rises, it does not necessarily mean that consumers and industrial users will be faced with costly bills, Lin said.

Government subsidies in this case are needed to ensure rising costs will not hit end users, he noted.

The government took this occasion to deepen the reform because the current coal contract price is about 800 yuan ($129), far above the 500 to 600 yuan market price, which places power producers at a disadvantage.

The majority of the coal and power generation companies saw their share prices surged Tuesday. The share price of Huaneng Power International rose 3.62 percent and China Huadian Corporation's share price climbed 4.58 percent.