One number released late last month was enough to signal that China’s natural gas pricing reforms still have some way to go. In the third quarter, energy major PetroChina Co. Ltd. (00857.HK) reported a net loss of 31.7 billion yuan (US$5.21 billion) from the sale of imported natural gas on the domestic market.
That number stood out in what was otherwise a series of positive earnings results for the company. It indicated that PetroChina sold imported gas at a loss even though the price of gas is supposed to be deregulated, a sure sign that Beijing is still to give a free hand to the market.
China’s gradual but concerted mission is to liberalize prices for energy and resources to better reflect supply and demand, the scarcity of resources, the cost to the environment and other related conditions. The ultimate goal is to transform the economy into one that is higher up in the value chain and sustainable.
To that end, the state has edged away this year from intervention in gasoline, electricity and water prices. For example, in March Beijing introduced a pricing mechanism that allowed more frequent adjustments to domestic pump prices, shortening the review period from 22 working days to 10.
But some reforms such as those intended for natural gas are still behind the initial schedule. The PetroChina loss shows that local prices of natural gas have not kept up with international levels and that the central government is still trying to balance the need for market-based pricing – which could mean higher prices – and affordability.
China is accelerating its switch to natural gas in large part to cope with its notorious pollution problems but letting the price of gas float in accord with the market could have serious impacts on household budgets and industrial competitiveness of sectors such as power generation and manufacturing.
The price of electricity has the biggest impact on livelihoods and most of the power in China is generated by coal-fired plants. Power producers are heavily exposed to coal prices and to keep electricity tariffs stable, the government has for years asked coal suppliers to sell to power firms at annually contracted prices that are well below market rates. The system put China’s coal suppliers and power suppliers at loggerheads.
Again, the authorities have been trying to walk a fine line between affordability and profitability as they head in the direction of price liberalization. Since the beginning of this year, the government has scrapped the “dual price mechanism” between coal and electricity, allowing all purchases of coal to be determined at the market rate rather than insisting that a substantial part be set in annual contracts. The authorities have also raised the still-regulated price that power companies can charge industrial users.
These are essential advances but as PetroChina’s gas division shows, the mainland authorities are still reluctant to take their hands off price controls and leave it all to the market to determine who should pay and how much.
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