15 January 2019

Tariff cut unlikely but power firms face other pressure

Having ushered in a new year, China’s electricity producers are grappling with the prospect of an adjustment in power tariffs. The State Council had earlier laid out a coal-electricity price linkage mechanism under which on-grid power tariffs have to be adjusted annually if thermal coal prices fluctuate by more than 5 percent a year. 

Coal prices have gone through a volatile year in 2013. But it is not clear if the 5 percent price change condition will be met as it not clear how the figure is exactly calculated.

Let’s take a look at the Bohai Rim Steam Coal Price Index, a gauge of steam coal prices at six ports in China, to understand the problem. The index closed at 631 yuan (US$104) per metric ton at the year end, which represents just a 0.3 percent fall from the beginning of 2013. Based on that, the condition for power tariff adjustment is not met, the China Securities Journal noted.

However, the coal price index had tumbled as much as 16 percent to 530 yuan at one point during the last quarter, and the average price last year was dragged down to 589 yuan, representing a 7 percent drop from the start of the year.

Power plants have surely benefited from the coal price decline, and the criteria triggering a tariff cut is fulfilled already from this perspective, the Journal noted. If the tariffs are cut, power producers could see their earnings getting a dent. 

But even if the tariffs are not lowered in the near term, electricity producers still face other pressure.

As the economy has slowed, the capacity utilization rate has fallen. This has already exerted a heavy burden on power stations.

Pollution control expenses are another issue. Mainland authorities are encouraging power stations to adopt denitration in coal-fired power plants in order to cut emission of harmful particles. But the cost of building denitration facilities for the entire industry is estimated at as much as 250 billion yuan.

In fact, on-grid tariffs in several regions were lowered in the fourth quarter last year, but it was nothing related to the coal price linkage mechanism. The adjustment made was actually to indirectly subsidize the alternative energy sectors. Similar arrangements this year, of taking away profit from coal-fired power plants to finance policy incentives for use of clean energy, can’t be ruled out.

– Contact the writer at [email protected]



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