18 April 2019

Power sector reform back on agenda?

A reform proposal paper published by the Development Research Centre of the State Council has grabbed a lot of attention recently as one of its co-editors, Liu He {劉鶴}, is widely considered to be the right-hand man of Chinese President Xi Jinping {習近平} in economic policy formulation.

Investors may now derive some food for thought from the so-called “383″ report about the reforms that will be discussed at the plenary session of the Chinese Communist Party elites next month. Apart from the hot topics like income redistribution and collective land transfer, the report also reignited a call to push forward reform in the power industry.

Talk about an overhaul of the electric power industry has been going on intermittently for more than a decade. But due to the intricate vested interests and huge stakes involved, limited progress has been made on the ultimate goals set by the State Council in 2002 — separation of transmission and distribution of power and the establishment of a public power pooling for end-users to choose the lowest bidding power supply.

Instead, both on-grid tariff and off-grid rate remain strictly determined by the National Development and Reform Commission. But government guidance has often lagged behind the fast changing market environment and resulted in wild fluctuation in the financial performance of utilities firms over the last few years, a phenomenon that seldom happens to peers in developed economies.

It appears that the major hurdle in pressing ahead with the reform lies in the power transmission and distribution duopoly of the State Grid and Southern Power Grid, as the two state entities currently earn easy money by acting as the designated intermediaries between power producers and end-users.

If the upcoming ruling party plenum decides to give a go-ahead for breaking the duopoly, the impact is bound to be far-reaching as separation of transmission and distribution of power will pave way for direct transactions between electricity producers and end-users, with the grid operators only securing standardized toll on the power that is transmitted through the networks.

While the reform will give the power utilities greater say in pricing to better reflect the genuine demand and variation in input cost such as coal price, it will also intensify the competition in the sector and, in turn, keep the margins on power supply more in check than now.

– Contact the writer at [email protected]



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