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Facing an increase in coal prices of up to 10 percent this year, China's electricity generators may resort again to asking for government-permitted price hikes

"Power producers may suggest to the government raising electricity tariffs in order to counter coal price increases of an average of 30 yuan per ton this year," said Ye Rongsi, senior adviser with the China Electricity Council (CEC).

However, an analyst from the China Coal Industry Association, who did not want to be named, threw a spanner in the works by saying that power companies cannot easily raise prices since they face an on-grid electricity price bidding mechanism.

Rising coal prices have long been a bone of contention between power generators and coal producers in China. Electricity giants maintain that rising coal prices are undermining their profits.

Compared with the coal prices, which are more market-oriented, the nation's electricity prices still come under government control.

Due to the rising cost of coal which is China's main resource for electricity production, the Chinese government decided to approve a mechanism linking coal and power prices at the end of 2004.

Under the linkage, electricity prices will fluctuate in line with coal price increases. If coal prices rise by more than 5 percent in a six-month period, electricity prices will be centrally adjusted.

Under the mechanism, 70 percent of coal price increases are passed on to consumers with power generating firms absorb the remaining 30 percent.

Leaving key energy prices to market forces is an inevitable step on the road to a market-oriented economy, said Zhou Dadi, former director of the Energy Research Institute of the National Development and Reform Commission (NDRC).

Coal prices rise

Just a few days ago China's electricity giants and coal producers gathered in Guilin, South China's Guangxi Zhuang Autonomous Region, to sign this year's electricity coal supply contracts.

The recent gathering was the first following the government's scrapping of its previous coal procurement meeting. Unlike meetings in the past, electricity companies agreed to increases in coal prices without the habitual tough negotiation.

Some analysts said the rapid development of the nation's electricity industry has put pressure on power companies to produce more coal for fuel expansion, leaving them in a bad position to take a tough stance.

Electricity consumption is certainly on the rise. Datang International Power Generation Co Ltd, one of China's five main power companies, says the company produced 93.5 billion kilowatt-hours of electricity in 2006, an increase of 31.65 percent over 2005.

The rising price of coal is due to both environmental and safety factors that have been included in overall cost calculations, said analysts.

"The coal price rise in China will be a gradual process," said Jiang Zhimin, vice-chairman of the China National Coal Association, "and the nation should further improve its coal pricing system to make it more market-oriented."

The electricity industry

Coal-fired power plants account for over two thirds of the nation's installed capacity. Last year the nation's total generating capacity surpassed 622 gigawatts, an increase of 20.3 percent, according to statistics from the CEC.

Furthermore, the proportion of coal-fired power plants saw a rise in their total installed capacity amounting to over 77 percent.

The coal industry has undergone rapid development, producing 1.86 billion tons of coal in the first 11 months of 2006, an increase of 12 percent, said the National Bureau of Statistics.

China's coal output is expected to reach 2.6 billion tons in 2010 as it continues to be the nation's most important energy resource, according to an NDRC outline of the 11th Five-Year Plan (2006-10) for the coal industry.

Despite the nation's economic reform, technological innovation and energy-saving efforts, the demand for coal will not slowdown in the foreseeable future, said the outline.

(China Daily January 25, 2007)