Policy body overrides power-tariff rise trigger

The National Development and Reform Commission (NDRC) has held off raising power tariffs despite the rise in coal prices exceeding the threshold for triggering an adjustment under the "cost pass-through mechanism".

The top economic policy body is inclined to wait until early next year before deciding whether to raise tariffs on expectation of stable coal prices next year, a government source said.

"Coal supply is expected to be ample next year and prices should be relatively stable and may even fall, so there is no urgent need to decide on an adjustment until early next year," he said.

The commission would also like to wait until the annual coal sales and purchase negotiations between coal and power firms have been completed, he added.

The central government has been struggling to balance the need to control inflation and safeguard profitability of energy producers to ensure sufficient supply and long-term investment. In the past two years, it has suppressed increases in petroleum fuel and electricity prices amid surging crude oil and coal prices.

The latest development is a disappointment for power generators which were counting on the tariff adjustment mechanism to help them plug profit gaps eaten away by coal cost increases this year.

The cost pass-through mechanism was implemented on May 1, allowing power producers to pass on 70 per cent of cost increases if coal prices jumped more than 5 per cent year on year over a six-month period.

After power tariffs were raised 2.54 fen per kilowatt-hour to partly compensate for last year's coal cost increase, tariffs were due for review on November 1.

Data on national power industry coal costs are not available. Judging from China's largest power producer Huaneng Power International's coal cost increase of 15.6 per cent year on year in the first nine months this year, the national increase most likely exceeded the 5 per cent threshold, analysts said.

"My understanding from the NDRC is that the likelihood of a tariff hike is slim given next year's spot coal price is expected to fall," said ABN Amro analyst Pierre Lau.

"The other reason is that pass-through mechanism is only a temporary administrative measure, the NDRC hopes to cut down on administrative meddling and rely more on market forces in determining tariffs."

The source said the commission had proposed speeding up the implementation of power pooling and tariff competition via the introduction of a two-tier tariff system.

NDRC will set the fixed component - "capacity tariff" - and leave the State Electricity Regulatory Commission (SERC) to oversee the establishment of "volume tariff", the variable portion that is subject to market competition.

But the SERC is not keen to accelerate implementation of the new system, as many problems related to the competition mechanism have not been totally resolved, the source said.

The SERC hopes to see all six regional power grids implement tariff competition next year.

More than 40 per cent of the northeast grid's plants have all of their output subject to competition while eastern grid plants have only 15 per cent of output subject to bidding.