China Pushes Power Plan

New pricing system targets high household use.
An analysis by Michael Lelyveld
air-conditioners-305.jpg A customer shops for air conditioners at an electric appliances store in Shanghai, Dec. 9, 2011.

After years of debate, China's government has announced it will start charging higher electricity rates to households that use more power.

The move could help to reduce energy waste, but it could also face a backlash from heavy consumers of electricity and the urban middle-class.

On June 12, the National Development and Reform Commission (NDRC) said it would implement a three-tiered pricing system for households on a "trial basis" across the country on July 1. A statement on the NDRC website indicated that rates would remain unchanged for Tibet and Xinjiang.

Under the plan, prices would stay the same for some 80 percent of households in the first tier that use 240 kilowatt hours (kWh) of electricity or less per month in Beijing, for example, the official Xinhua news agency said.

A second tier using up to 400 kWh would pay an additional 0.05 yuan (0.7 cents) per kWh, while the third tier for higher consumption will be charged 0.3 yuan more per kWh.

Analysts do not expect a major or immediate effect on China's consumption, since residences account for only about 13 percent of power use, according to Reuters estimates for the first five months of this year.

But the new charges mark a change from previous policies that have exempted households from rate hikes while industrial prices have grown. Until now, residential users have paid fixed rates, regardless of income or volume consumed.

Trevor Houser, a partner and China energy expert at the Rhodium Group consulting firm in New York, said the government has subsidized consumers by charging higher rates to industry for years, although the rise of coal costs has made the practice unprofitable.

"Over time residential power demand is going to increase its share of the national basket and that will make cross-subsidization unsustainable," Houser said in an interview.

"This is a pretty logical way to start changing that formula where you expose households with a greater ability to pay the full cost of the power they consume," he said.

Heavy industry claims the largest share of China's power, accounting for over 60 percent of electricity use.

Direction of change

The new pricing system is seen as a small step in the right direction after years of continuing power shortages, despite China's huge expansion of generating capacity.

"Its direct impact is going to be modest, but from what I'm reading, it's significant in terms of the direction of change and what it says about the willingness of the NDRC to reform the power pricing system," Houser said.

The announcement came shortly before the State Electricity Regulatory Commission issued guidelines to encourage private investment in the power sector on June 19.

The changes for power are part of larger plans to reform pricing mechanisms for water, fuel, and natural gas, the NDRC said, according to Xinhua.

But even tentative steps have proved controversial. The NDRC has been discussing the three-tiered pricing plan since at least 2009.

When it was opened for public comment in 2010, the proposed thresholds for additional charges were much lower with the second tier starting at just 110 kWh per month and the third tier for usage above 210 kWh.

But a People's Daily survey found only 10 percent of consumers supported the plan, while 87.3 percent were "worried" it would drive up living costs.

Public hearings in May still found opinions were "mixed," Xinhua reported, apparently delaying implementation by a month beyond its June 1 target date.

One elderly Beijing resident reportedly complained he would have to pay 30 yuan (U.S. $4.70) more per month because of the large family in his household.

The NDRC said the rules would be implemented flexibly to take factors like regional differences and family size into account, but it seemed to be on the defensive about raising charges at all.

"It's a difficult issue to balance the interests of the public, electricity producers, and society when carrying out price reforms," the NDRC statement said.

Last month, the China Electricity Council said the country's five major state-owned power companies lost 31.2 billion yuan (U.S. $4.9 billion) on thermal power generation last year.

China's power consumption climbed 11.7 percent last year, outpacing the country's 9.2-percent GDP growth.

No 'bold step'

Philip Andrews-Speed, a China energy expert and associate fellow of the London-based policy institute Chatham House, said the weakening of the price plan under pressure is typical for energy-saving policies after long debates.

"The political pressure is to allow most people to pay the lowest price," said Andrews-Speed. "The government in China has not taken a bold step on that, and that's disappointing."

The origin of the three-tiered system was based on the concept of "lifeline pricing" for developing countries, which reserves the lowest rate for the poorest in society, not the majority who can afford to pay the real cost of power, Andrews-Speed said.

"Here, it looks like only the big, intensive, rich energy users are going to pay the real cost and everybody else will be subsidized," he said.

The doubling of the tier thresholds would exempt most consumers from any added cost or conservation incentive.

"It doesn't seem to me terribly useful," Andrews-Speed told RFA. "I think in the short term, it's going to have very little effect."

"All it is doing is providing some kind of incentive for the wealthier middle-class not to run their air conditioners and their heaters all at the same time and to turn some of them off," he said.

In the longer term, the policy could help to curb energy waste by discouraging even more use of air conditioners and appliances, but the savings will be hard to estimate, Andrews-Speed said.

The fact that China's current government has introduced the policy so late in its term also remains a matter of curiosity.

With new leaders scheduled to take the helm at the Communist Party Congress next March, Premier Wen Jiabao has been pushing a series of measures aimed at putting China on a more sustainable growth path.

Aside from electricity pricing and promises of similar reforms for water and fuel, Wen has tried to slam the brakes on runaway construction and housing prices, which have driven much of the country's double-digit growth.

It is unclear whether the policy changes have simply taken a long time to develop or whether the leadership is trying to leave its successors with fewer problems and a cleaner slate.

Whatever the interpretation, Andrews-Speed doubts that a transformative energy policy will emerge either before or soon after the transition.

"It's too late for bold measures before the government changes," he said. "My guess is that they will find more pressing things to spend their political capital on," he added, speaking of the new government.


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