Sat, 20 Jul 2019

China Struggles to Pay For Power Price Plan

RFA
18 Jun 2019, 04:42 GMT+10

As China's businesses come under pressure from the trade war with the United States, the government has ordered major cuts in power prices to support their bottom lines.

Last year, the government-controlled State Grid Corp. granted a 10.6-percent rate break to commercial and industrial customers, saving them 91.5 billion yuan (U.S. $13.2 billion), the official Xinhua news agency reported in March.

In higher estimates reported Sunday, the China Electricity Council (CEC) said the cut saved businesses 125.79 billion yuan (U.S. $18.1 billion) in 2018.

This year, the utility has promised businesses an additional 10-percent cut in average electricity charges "to relieve the burden on the real economy." The government has not given its estimate of the savings from the latest price cut, which is set to take effect in most provinces on July 1.

The rate rollbacks are unusual because they have little to do with the actual costs of providing electricity and instead have a purely economic goal.

While the artificial lowering of power prices may raise energy consumption and environmental concerns, the government views the subsidies as necessary support for businesses affected by the economic slowdown.

On May 27, the National Bureau of Statistics (NBS) reported that industrial profits of enterprises with annual revenues over 20 million yuan (U.S. $2.9 million) fell 3.4 percent in the first four months of the year.

Disappointing figures

The NBS also announced a series of disappointing five-month figures on Friday.

Growth in industrial output in May slowed to 5 percent from 5.4 percent in April, hitting a 17-year low, Reuters reported.

Fixed-asset investmennt posted a 5.6-percent growth rate for the five-month period, down from 6.1 percent after four months and 6.3 percent in the first quarter. The weakening of investment in assets like buildings and machinery threatened a longer-term impact on the economy.

The latest report on the official purchasing managers' index (PMI) for the manufacturing sector showed a dismal reading of 49.4 in May, an 0.7-point dip from April that dragged the barometer down below the 50-point mark between expansion and contraction.

After two previous Xinhua reports on the PMI omitted the manufacturing data, the agency quoted a Nomura International economist, attributing the drop to a slump in new export orders.

On May 26, a Xinhua analysis said that the 5.8-percent increase in April power consumption from a year earlier "reveals China's economic vitality." But Reuters noted that industrial power consumption rose just 3.8 percent.

On Friday, the NBS said that power production in May edged up only 0.2 percent from a year earlier. Power consumption increased 2.3 percent from a year before, the National Energy Administration (NEA) said.

Manufacturers need help

While the price cuts for power may play only a small role in encouraging economic growth, it seems that China's manufacturers need all the help they can get.

Last week, China's chief negotiator in the tariff conflict with the United States, Vice Premier Liu He, said the government should do more to back the economy, suggesting more steps are in the works, Reuters and the South China Morning Post reported.

In his government work report to China's annual legislative sessions in March, Premier Li Keqiang promised to "push forward fee reduction for enterprises through reform," according to Xinhua's translation.

"We will deepen electric power market reform, overhaul electricity price surcharges, reduce the electricity usage cost for the manufacturing industry, and reduce the average electricity price of general industrial and commercial industry by another 10 percent," Li said.

But the policy challenge for the government has been in deciding how to pay for lowering electricity prices and settling on a segment of the supply chain to shoulder the costs.

Burden shifted

Grid companies absorbed most of the cost from last year's rate cut, although several provinces reduced on-grid tariffs, shifting some of the burden onto coal-fired generators, said Philip Andrews-Speed, a China energy expert at National University of Singapore, in March.

On Sunday, the CEC estimated that grid companies suffered a 24.3-percent drop in profits as a result.

Plans for this year's cut called for the costs to fall mainly on the generators, since most or all of the provinces were expected to lower their on-grid tariffs, according to an earlier analysis by Hong Kong-based Ping An Securities.

The anticipated savings for business customers from this year's rate reduction is 81.28 billion yuan (U.S. $11.7 billion), the analysts said, suggesting there will be a major cost to be absorbed by the power sector somewhere.

"The price cut means that the income of the electricity (companies) will decrease, and the profit margin will be suppressed if there is no significant change in the cost side," said the securities firm in a downgrade of its power industry rating to "neutral."

Since then, complaints from the generating companies have pushed the National Development and Reform Commission (NDRC) to pressure the coal industry into lowering prices so that the power plants can save on fuel.

Price cuts proposed

On May 28, Bloomberg News reported that the nation's top planning agency "proposed" to coal companies that they should cut their prices for benchmark steam coal to below 600 yuan (U.S. $86.72) per metric ton following an appeal from six major power producers.

"China plans to lower the coal prices to answer the call and encouraged miners to lower the benchmark grade to below 600 yuan a ton," the businesstimes.cn website said.

The reports cited a recent price of 613 yuan (U.S. $88.61) per ton at the Qinhuangdao port distribution center in northeastern Hebei province. Benchmark steam coal traded as high as 634 yuan (U.S. $91.63) per ton in March, Bloomberg said.

The coal industry could be an attractive target for the government as it seeks to cover the costs of Li's promise, at least in the near term.

In March, the China National Coal Association (CNCA) reported that profits of major producers last year rose 5.2 percent to 288.8 billion yuan (U.S. $41.8 billion) on revenues of 2.27 trillion yuan (U.S. $328.8 billion), gaining 5.5 percent from a year before.

The industry has benefited from consolidation and closing of smaller, less efficient mines under the government's orders to reduce surplus production capacity.

But in the longer term, prospects are clouded by the government's goal of cutting coal's share of China's energy mix to make way for renewable sources.

Unrecoverable costs

A study by the University of Oxford Smith School of Enterprise and the Environment in 2017 warned that obsolescence of coal-fired power plants will lead to unrecoverable costs, turning coal-related holdings into "stranded assets."

In the meantime, the government's search for deep pockets in the energy industry to fund its economic stimulus for manufacturing appears to be a case study in anti-market intervention and price controls.

The cost break for business is also a potent combination of bad policy and bad timing.

Coal-fired power generation is already a low-margin business, plagued by overcapacity and underutilization, due to unrestrained expansion.

With the cooling economy and the added pressure of U.S. tariffs, the government's rate cut for manufacturers is likely to make matters worse.

The effect of the government's arm-twisting on coal prices is uncertain since industry indexes for steam coal are already well below 600 yuan per ton.

Last week, Xinhua reported that the Bohai-Rim Steam Coal Price Index for benchmark coal remained flat at 577 yuan (U.S. $83.40) per ton, although daily demand had risen at major coastal power plants since April.

The government may be aiming at a moving target, since economic weakening is likely to undercut energy demand. But the cost-shifting among the players in the power sector is a sign that the government has put energy reforms on hold.

Copyright © 1998-2018, RFA. Published with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036

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