Energy Price Hikes Planned

China's electricity rates may rise as inflation falls.
An analysis by Michael Lelyveld
fuel-305.jpg Trucks wait to fill their tanks with diesel at a gas station in Anhui province, Nov. 23, 2011.

A moderate decline in China's inflation has sparked speculation that the government will launch long-delayed energy pricing reforms.

In October, China's consumer price inflation (CPI) fell to 5.5 percent from an annualized 6.1 percent in September, allowing the government to consider raising fixed energy costs.

Providers of power, fuel and natural gas have all complained that rigid price controls have distorted the energy market and forced them to sell at a loss.

On Nov. 10, the National Development and Reform Commission (NDRC) suggested the drop in inflation could give the government leeway to allow energy price hikes.

"During a period of retreating general prices, some pricing contradictions likely need to be addressed at an appropriate time, such as heating in northern China, household gas prices and power," said Zhou Wangjun, deputy head of the NDRC pricing department, according to Reuters.

On Nov. 15, Interfax cited an "industry insider" as saying the NDRC plans to raise domestic power prices "within the next few weeks."

Public concern over inflation is competing with pressure from power companies for higher rates following industry warnings that the top five thermal generators could lose 35 billion yuan (U.S. $5.5 billion) this year, the official English-language China Daily said.

But the dip in inflation is unlikely to be deep enough for the government to allow major price rises that could restore profits or reduce China's nagging energy waste.

"My guess is that, as we've seen over the last 10 years or so, there will just be minor adjustments at the margins to alleviate the pain slightly on some players," said Philip Andrews-Speed, a China energy expert at the German Marshall Fund of the United States.

NDRC officials have previously raised expectations for a five-year plan to deal with its policy patchwork and subsidized energy costs.

'Overhaul' unlikely

Analysts have argued for years that market pricing of power is the only way to improve energy efficiency and cut pollution from China's boundless consumption of coal.

But the slight easing of monthly inflation is seen as too small for the government to take a chance on reforms this year.

"I can't see, building up to a change in government and still with serious economic challenges, that the NDRC is about to radically overhaul the whole pricing system," Andrews-Speed told RFA.

In a lengthy white paper on climate change policies released on Nov. 22, the State Council hailed a host of steps and new measures, including pilot programs for trading carbon credits in seven provinces.

While the government claimed it has "quickened the reform of the energy pricing mechanism," it announced no plans for ending price controls.

On the surface, reluctance to allow major rate hikes might sound like good news for consumers, who have been pounded by higher food and housing costs.

Even with recent slowdowns in property markets, CPI growth has climbed beyond the government's 4-percent target in every month so far this year, hitting a high of 6.5 percent in July.

But fixed power prices have been bad news for consumers because they have produced growing shortages. Power companies have been unwilling to generate more electricity at a loss with high-cost coal, while industries have lacked incentives to conserve when rates are kept low.

Electricity prices have grown by less than one-third while coal costs have soared 150 percent since 2003, the China Electricity Council complained.

The NDRC last raised power prices on businesses by a paltry 0.02 yuan (0.003 cents) per kilowatt hour on June 1, leaving household rates unchanged.

In the first 10 months of the year, power use rose nearly 12 percent from the year-earlier period, the National Energy Agency (NEA) reported.

Meanwhile, estimates of winter and spring power shortages have jumped to 40 megawatts, up nearly one-fourth in the past month.

Fuel issues

Similar problems plague fuel suppliers, leading to a cycle of shortages and subsidies to cover losses under fixed retail rates. Refiners lost 1.84 billion yuan (U.S. $289 million) in the first eight months of the year, the NDRC said.

As with power companies, the easing of inflation has raised refiners' hopes that the government will fix its broken price-setting rules.

Under the current system, the NDRC only allows fuel price adjustments if international crude costs change by more than 4 percent over 22 working days.

In practice, the government has often delayed price hikes for longer periods due to inflation and social concerns, forcing state-owned refiners to absorb higher costs.

Fuel shortages have resulted when suppliers try to limit their losses and dealers hoard fuel anticipating a price rise.

The government is considering plans to narrow the timeframes and ease the conditions for increases at the pump, the China Securities Journal reported.

But it seems unlikely that the government will permit a big price rise for power and fuel at the same time, fearing an inflationary spike.

Andrews-Speed expects more compromising and tinkering with price controls, leading to more problems with losses, subsidy demands and shortages down the road.

"Behind all this lies the fundamental question that the Chinese government chooses not to address. Are the state- owned energy companies meant to be commercial enterprises or are they meant to be instruments of government policy?" he said.

There are also signs that the lack of conservation incentives have kept the government from meeting its energy efficiency goals.

In October, the NDRC released its efficiency estimate for the first half of the year after an apparent delay of over two months, reporting a drop in energy use per unit of GDP of just 0.8 percent.

The result left a "big gap" to meet the official goal of a 3.5-percent improvement in the efficiency index this year, said Xie Ji, deputy director of the NDRC environmental protection department, in a single-line statement reported by Xinhua.

The government has targeted a five-year savings in energy use per unit of GDP by 2015, but this year's slow progress means tougher measures will be needed for the next four years.

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