China Plan to Cut Wholesale Power Price May Help Coal Producers

Aug 18, 2014 1:40 am ET

Aug. 18 (Bloomberg) -- China will cut wholesale prices that distributors pay for electricity from coal-fired plants, two government officials said, a move that may allow it to compensate struggling coal suppliers.

The National Development and Reform Commission told provinces to impose cuts at an average rate of about 0.0093 yuan a kilowatt-hour, according to the officials, who asked not to be identified because they weren’t allowed to discuss the matter publicly. Some cuts took effect on Aug. 15, while power companies’ regional branches may adopt different dates for implementation, they said. The retail price won’t change.

China last adjusted on-grid power tariffs in September 2013, cutting it by as much as 0.025 yuan a kilowatt-hour. The nation uses a coal-tariff linkage system where tariffs are subject to change when coal prices fluctuate more than 5 percent. The mechanism, introduced in 2004, wasn’t strictly followed. The country’s benchmark coal price fell 21 percent this year, trading from 470 yuan to 480 yuan a metric ton as of Aug. 17.

“There’s a possibility that the government will conversely use the extra money to compensate coal producers since they are barely making money,” Tian Miao, a Beijing-based analyst with researcher North Square Blue Oak in London, said by phone. More than 70 percent of Chinese coal companies are losing money and 50 percent aren’t paying wages on time, according to China National Coal Association.

The tariff cuts are relatively small and will have “limited impact” on power companies’ profits, according to Tian. It will remove more than 5 billion yuan ($813 million) of profit for the top five state-owned power companies, including China Huaneng Group and China Guodian Corp., in the second half of the year. These companies will still have “double digit” growth in their 2014 earnings because the cost of coal is at a seven-year low, Tian said.

--With assistance from Aibing Guo in Hong Kong.