China's Coal-Heavy Power Sector Inches Toward Market Prices

(Bloomberg) -- China will let the market set a portion of the nation’s coal-fired power tariffs, which may lead to more flexible prices but lower profits for power generators.

The existing benchmark coal-power tariffs will be replaced by a new “base price-plus-floating” mechanism from Jan. 1, the State Council said in a statement Thursday.

President Xi Jinping’s government has been slowly introducing market-based mechanisms into the nation’s state-managed energy sector, the world’s biggest consumer of coal and power, which has been slow to react to changes in fuel supplies or demand from consumers.

“We believe the government intends to let the market have a more flexible power tariff with the new tariff system, which can be changed more frequently (half yearly, quarterly or even monthly) with upstream coal prices or downstream power users’ product prices,” analysts at Daiwa Capital Markets Hong Kong Ltd., including Dennis Ip, said in a note late Thursday.

Floating Mechanism

The floating mechanism refers to a possible upward price revision of 10% and downward of 15%, which will be determined by generators, electricity sales companies and users through negotiations or bidding, according to the statement. A higher float will only be allowed from 2021 to ensure prices for industrial and commercial users won’t rise during the first year of the policy change, it said.

The change could mean potential downside for coal-power tariffs next year, and may also erode any benefit generators could gain from a longer-term slide in coal prices, Daiwa said.

Chinese power companies have slumped this week amid reports of the change in local media. Huaneng Power International Inc., the nation’s biggest listed coal-fired power producer, extended declines Friday to take this week’s losses to 11%, the most since 2016. Huadian Power International Corp. fell 2% this week, while Datang International Power Generation Co. declined 5.9%.

Citigroup Inc. said in a Sept. 24 note that the floating adjustment may be decided based on price changes of coal, steel, electrolytic aluminum and cement. The key purpose of the new system is to link it with commodity prices as the sector is the biggest electricity end-user in China, accounting for more than 35% of national power consumption, according to the bank.

To contact Bloomberg News staff for this story: Feifei Shen in Beijing at fshen11@bloomberg.net

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Jasmine Ng

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With assistance from Bloomberg