There has been long-term tension between coal and electricity prices, but now it is multiplied by the constant increase in coal prices in 2021.
Coal accounts for about 60 to 70 percent of overall costs for a power station. In the first seven months of 2021, the price of coal surged. Jinglong Power bought coal at 825 yuan (US$128) a ton in July, double the price of 411 yuan (US$64) a ton in the same period of 2020. The BEPIA said the price of coal purchased by four other plants under the association also rose by 45 percent in July year-on-year.
Lin Boqiang, director of China Institute for Studies in Energy Policy at Xiamen University, Fujian Province, said the rise in coal prices is mainly due to post-pandemic economic recovery and seasonal factors.
Electricity use has increased as the postCovid Chinese economy continues to recover, which pushes up demand. In February, the China Electricity Council predicted total electricity consumption would increase 6-7 percent this year. But statistics from the National Energy Administration show that between January and July, consumption rose by 15.6 percent year-on-year, far beyond estimates. In addition, raw coal production dropped in March, April, June and July, as China is gradually reducing reliance on coal in favor of renewable energy sources and optimizing its energy mix. In August, surging prices drove coal production to rise again. Decreased imports of coal in the first half of 2021 also tightened supply.
Abnormal summer weather exacerbated the power supply shortfall at a time when electricity use peaks. Summer rains fell more in the north, resulting in a reduction in production in the south where hydroelectricity plays a bigger role. More pressure fell on coalfired power to meet demand, Lin said. He also cited the rise in bulk commodities prices and a corruption campaign in coal-rich Inner Mongolia Autonomous Region that targeted business such as mines and other coal-related firms as having contributed to the surge in coal prices.
Yet the increased cost of coal cannot be passed on to end users, which is highly regulated as it concerns the national economy and livelihoods. In addition, China’s electricity price is lower than average. China’s average electricity price was 0.611 yuan (US$0.09) per kWh, while that for the 35 OECD members (excluding Israel) in 2019 was 1.029 yuan (US$0.16) per kWh, according to statistics from State Grid.
In 2004, the government put forward a coal-electricity price linkage mechanism in an attempt to ease the tension. If coal prices rise more than 5 percent within half a year over the previous period, then electricity prices are adjusted by the NDRC. Since then, China has raised power prices several times. But sometimes the adjustment was not quick enough, leading to huge losses among power enterprises and criticism of the mechanism.
In 2019, China abolished the 15-year-old linkage policy and adopted a more flexible pricing system which uses the benchmark price and allowed margins for electricity prices to float. This involves direct trading between power generators and big industrial end-users like high energy-consuming industrial consumers, such as coal and iron and steel, allowing fluctuations of at most 10 percent up and at most 15 percent down based on the benchmark price.
When the system came into effect in January 2020, the notice stipulated that the electricity price should not go up in 2020 to ensure the price for industrial consumers would not rise. “But so far, it’s proved much easier to lower the price than raise it,” Lin said.
The benchmark price, determined by the on-grid tariff at which the power grid buys from power plants, was fixed in 2019, and is far from reflecting current coal prices. But since the linkage policy was abolished, the government cannot casually raise the benchmark price against the backdrop of a marketoriented reform of the pricing mechanism. “That will probably stir market worries about a return to the era when the government takes full control of the price,” Yuan noted.
Besides big end-users that directly buy electricity from power plants, most smalland medium-sized (SMEs) enterprises that are the bedrock of the Chinese economy rely on buying from State grid companies. If the benchmark price is raised, consumer prices go up, translating into a direct increase in cost for SMEs which is then passed on to customers.
Knowing the difficulty of allowing the benchmark price to float, the 11 power companies appealed to allow trading prices to float instead, hoping that the BMCUM would allow them to raise the trading price on the basis of the benchmark price. NewsChina learned that on September 2 Beijing Electric Power Industry Association also sent a letter to the BMCUM, backing up the 11 companies’ appeal. But up to now, there is no clear feedback from the BMCUM yet.