China said on Monday it would raise electricity prices for some users by about 3 percent, the first increase since 2009 as it tackles its worst power shortage in seven years. The power price rise affects industrial, commercial and agricultural users in 15 provinces, state media said after a briefing by the National Development and Reform Commission (NDRC), China's top economic planning agency.
But authorities in the world's second biggest economy may have already played one of their strongest cards to combat the shortages as the NDRC revealed power companies in 13 of the 15 provinces have been paid higher prices for their electricity since April 10.
China's electricity demand is running so far ahead of supply that it is expected to be short of 30-40 gigawatts of power capacity this summer, twice the deficit caused in Japan by the earthquake and tsunami on March 11.
China has created the shortage by foisting low prices on power companies, who have little incentive to produce electricity because of high coal costs, economists say. It will avoid a big inflationary effect, economists said, because it excludes residential users but it may also have little impact on the power shortages as it means any filip for power supplies in those 13 provinces already happened almost two months ago.
The other two will follow on June 1, along with the end-user prices in all the provinces. "If you take a look at the power shortages over the past month, you can see that the hike had no significant impact on the current power shortages," said Wang Wei, senior analyst at Guotai Junan Securities. "Actually, it didn't have the impact it should have because after the on-grid power price hike in April, coal prices rose again, eroding the power price hike. "Coal imports could rise after the power rise hike as coal producers and trading companies are likely to raise coal prices, triggering more coal imports. Every 0.01 yuan rise in power price could offset an increase of 50 yuan in coal prices," he said.
At an average of 0.02 yuan per kilowatt hour, that would add 100 yuan ($15.43) to a tonne of coal, which was trading around 850 yuan per tonne on May 20. Chinese coal imports rose in April after a slow start to the year, and analysts at Commonwealth Bank of Australia said on Monday that rising prices suggested further Chinese buying.
Jianguang Shen, chief economist at Mizuho in Hong Kong, said the government would try to support power producers by ordering big state-owned coal miners not to increase their prices, but it would be difficult to stop prices rising. While higher coal costs may swamp the effect of the price rise on the supply side of the market, power consumers may not flinch at their own increase, which averages 0.0167 yuan per kilowatt hour.