Authors: Fan Ruohong and Coco Feng
Posted on: Caixin Global, April 24th, 2017

An undercurrent of tension pitting the nation’s power companies and coal suppliers has bubbled to the surface over surging prices for thermal coal.

In the latest dispute, seven power companies with coal-fired plants in northwestern China’s Ningxia Hui Autonomous Region recently backed down after urging their dominant supplier, Shenhua Ningxia Coal Industry Group Co. Ltd., to cut prices.

The state-linked power companies apparently felt they had no choice after Shenhua, which is partly owned by the Ningxia government’s State-Owned Assets Supervision and Administration Commission (SASAC), replied to their March petition with a “warm reminder” that coal prices would not change. Furthermore, the supplier said, coal shipments would be cut for any client refusing to pay in full.

Coal prices in China are largely market-based and, thus, can fluctuate. Since early 2016, the Bohai-Rim Steam-Coal Price Index (BSPI), which tracks domestic thermal coal spot prices at major ports in northeast China, has climbed by about 60%, mainly in response to government efforts to reduce overcapacity by closing mines.

Power prices, meanwhile, are tightly controlled by the government and slow to change.

Despite the recent jump in coal prices, the central government did not adjust the 2017 tariff for power generators, who sell the electricity to grids. At its annual meeting on the pricing topic January 4, the National Development and Reform Commission (NDRC) said electricity tariffs would remain unchanged this year.

Following the NDRC decision, the Ningxia power companies wrote a petition letter to the regional government’s Ningxia Economic and Information Commission (NEIC) claiming they were losing 0.0105 yuan ($0.0015) for every kilowatt-hour of electricity generated.

“All Ningxia power companies are now suffering losses,” they wrote. They also asked NEIC to intervene and help them negotiate a new contract with Shenhua.

NEIC officials sat down with power plant representatives in late March to discuss the complaints. But there’s little if anything the government can do because coal prices are determined by market supply and demand, Cui Haishan, NEIC power office director, told Caixin after the meeting.

A power company representative who asked not to be named told Caixin “it’s almost impossible for the Ningxia government to handle this” based on its deep ties to the coal supplier.

Reform Impact                              

Since the government ordered coal mines nationwide to reduce overall output in March 2016, Shenhua has closed several mines in northern Ningxia and cut annual production by 7.8 million tons.

The cuts began just as the region’s power companies were upgrading their networks, adding 3,000 megawatts of capacity last year alone.

To supply that new capacity, the power companies decided to continue buying coal from Shenhua rather switch to small mines, which couldn’t maintain stable output, or foreign suppliers that cost much more for transport.

The deal was good for Shenhua, which in 2015 reported its first loss ever after coal prices hit a six-year low. The Ningxia government helped the supplier by persuading power companies to pay Shenhua 20 yuan per ton above the market price, a power company executive told Caixin.

“The government helped when the coal industry was sluggish,” the executive said. “So we think it should ask coal miners to properly discount when life gets tough for power companies.”

Nationwide Tension

The tension in Ningxia mirrors coal supplier-power company relations in other parts of China where local governments are struggling to strike a balance that’s profitable for everyone. Coal-fired plants satisfy about 65% of the nation’s electricity demand.

Electricity prices are regulated as tariffs paid by power distribution companies, or grids, to power plant operators. These tariffs and coal prices were about even between 2005 and 2016, when NDRC adjusted power prices every January based on costs from the previous year.

Few were satisfied with the pricing system, but complaints were rare.

In a step toward a more market-oriented approach, the State Council in 2015 gave power generators more flexibility in price-setting, allowing them to sell electricity directly to manufacturers. Each power company could set prices within a range determined by a local government.

But the reform merely shifted central government pricing power to local authorities, who in turn have been accused of using it benefit their favorite manufacturers. And local government ranges, so far, have always fallen below central government prices.

In the first eight months of 2016, the coal power companies in Ningxia made 770 million yuan less than they should have, due to the reform, NEIC’s Cui told the Economic Information Daily newspaper.

Steep price hikes for thermal coal since last year have brought tensions to the fore, especially after NDRC decided to leave 2017 prices unchanged based on an assessment of coal prices between November 2015 and October 2016, while coal prices in China remained low until last July when it started to surge by 50% for the rest of the year.

A dispute similar to Ningxia’s surfaced in northern central Shaanxi province in November when four power companies submitted a petition demanding the government raise electricity prices to cover high coal costs. The request was rejected.

A power industry expert who asked not to be named told Caixin that the once-a-year price review system fails to track the fluctuating differences between electricity and coal prices. He suggested the government give up electricity price controls altogether.

Indeed, the nation’s five largest power companies reported combined earnings from electricity generated by coal plants fell nearly 70% last year, according to Yang Kun, deputy managing director of China Electricity Council.

The central government has reportedly started looking for a way to ease the tension. The central government’s SASAC, for example, and officials from the top five power companies are now taking a closer look together.

Ningxia’s NEIC also cut the amount of electricity that power companies were required to bargain to manufacturers by 20%.

But some experts doubt an easy solution can be found.

“China’s power generating system is chaotic,” a power system reform expert who declined to be identified told Caixin.

 

Read at: http://www.caixinglobal.com/2017-04-24/101082444.html