Energy crisis: China goes for 'boldest' power pricing reform in decades

China said on Tuesday it will allow coal-fired power plants to charge some customers market-driven prices for electricity, as a worsening energy crisis persuaded authorities to rush through their boldest reform of the power sector in decades.

Responding to shortfalls in power generation brought on by shortages and record high prices for coal, the government has taken a range of steps to boost coal production and manage electricity demand at industrial plants.

To help power companies pass on the high costs of coal, the National Development and Reform Commission (NDRC) said that all electricity generated by coal-fired plants would be priced via market trading “in an orderly manner” from October 15.

It also instructed commercial and industrial users to buy direct from the market or via agents over the grid “as soon as possible”.

A worsening power crunch has forced production curbs across industries such as cement, steel and aluminium, dampening the outlook for China's economy.  Utilities have struggled to keep up with post-pandemic demand for electricity, and power plants generated less as rising price of coal rendered operations uneconomic.

Pushing all industrial and commercial users to the power exchanges and allowing prices to be set by the market may encourage loss-making generators to increase output.

Addressing a press briefing, NDRC official Peng Shaozong said the reform was “designed to reflect power demand and consumption, and to some extent to ease operation difficulties of power firms and encourage plants to increase power supply”. The most-active China thermal coal futures contract soared 11 per cent to a record high 1,507.8 yuan ($233.55) a tonne on Tuesday.

About 44 per cent of China’s industrial and commercial firms are currently trading in power markets, buying electricity over exchanges in cities such as Beijing and Guangzhou, while other such customers buy electricity at fixed prices direct from the state-owned grid firms. China’s State Council on Friday said it would allow coal-fired power prices to fluctuate by up to 20 per cent from base levels.