China’s power sector, after riding a reform roller coaster for years, faces new challenges as coal talks stall over price controls.
Li Qiyan, Caijing 4 February 2009
Annual contract negotiations between state-owned power producers and coal suppliers have broken down, casting a long shadow over China’s power industry and focusing new attention on calls to eliminate price controls on electricity and dismantling employee-shareholding systems.
The country’s largest power producers and coal suppliers locked horns over whether to cut or increase coal prices in 2009, walking away from the bargaining table in late December. No new talks have been scheduled.
Five of the largest power companies offered to pay 50 yuan per ton less than the 2008 contract price. But major coal suppliers including Shenhua Energy and China National Coal Group have insisted on a 10 percent price increase, about 30 yuan to 50 yuan per ton.
Power companies say they’ve been backed into a corner by government price controls. The five biggest producers -- China Huaneng Group, China Datang Corp., China Guodian Corp., China Huadian Corp., and China Power Investment Corp. – posted combined losses of 30 billion yuan between January and November 2008.
“It was inevitable that negotiations would collapse,” said a power company source. “Most power producers suffered huge losses in 2008 and can no longer endure rising coal prices.”
Cries for Reform
Industry experts blame the impasse on a pricing system they say fails to properly reflect market supply and demand.
“China’s government-controlled power system has blocked efficient communication between the supply side and the demand side, so the price fails to reflect the market demand,” said Han Xiaoping, chief information officer for industry website China Energy Net. Only system-wide reform can rescue the industry, Han said.
Coal contracts need not be contentious. Recent price negotiations between coal suppliers and other industrial users concluded successfully.
But power sector reform has been a difficult task for a long time. In the first major reform step in 2002, the government oversaw a separation of power producers and distributors. Since then, the process has been hindered. Still in limbo are proposals to spin off power company affiliates from their core businesses, and to divide power transmission and distribution networks.
A reform plan drafted by a special team has been on the government’s desk since late 2004. But the plan was stalled for the next two years due to power shortages that influenced policy decisions. Follow-up reform attempts were impeded by various forms of opposition.
In late 2007, several government departments reached a consensus on a reform plan to divide the core businesses and affiliates held by power companies. The proposal was shelved, however, due to a winter storm crisis in early 2008 and surging coal prices.
Now, while the government continues to hesitate over reform, the power industry is facing mounting pressures. According to the National Statistics Bureau, power industry profits for the first 11 months of 2008 fell 84 percent year-on-year, compared with 39 percent growth a year earlier.
In the industry’s eyes, the distress should encourage reform. “China’s power industry crisis also means is a time for reform,” said a senior industry expert, who added that power price mechanism reform and proposals to divide core from affiliated businesses are most likely to succeed.
Indeed, the State Electricity Regulatory Commission is working on draft plans for power sector reforms, Zou Yiqiao, the commission’s director-general for tariffs and financial regulation, told Caijing.
“We are studying the preparation of a reform to divide power transmission and distribution,” Zou said. “The first task is to work out independent pricing systems for power transmission and distribution, and then the reform can be pushed forward.”
The National Development and Reform Commission published tariff standards for provincial power grids in November 2008 and encouraged major power consumers to buy electricity from power plants directly. An expert at the China Electricity Council told Caijing the move set the stage for separating transmission and distribution networks, which he expects to be moved forward in 2009.
Dismantling ESOPs
Despite financial woes and contract squabbles, reform progress can be found in the power sector, particularly in terms of company shareholding structures.
Three major merger deals were completed at the end of 2008 as part of a government effort to eliminate employee stock ownership plans (ESOPs) at regional power enterprises.
The breakups followed regulations released last year by four government agencies aimed at encouraging grid employees to sell their stakes in power generator. Under the regulation, power companies must dismantle ESOPs by May, offering new opportunities to major power companies interested in expanding by taking over ESOP assets.
ESOPs were launched two decades ago as part of a government effort to increase power sector investment through “various types of investors,” who including state-owned firms, joint ventures, private companies and individuals. Investments were needed to build the power stations needed to satisfy surging power demand during an economic boom.
But ESOPs fell from grace in 2007 after the central government found illicit profiteering by company executives and other officials tied to regional power companies.
All enterprises targeted in the recent mergers were controlled through ESOPs. Guizhou Province’s biggest power generator, Jinyuan Group, was taken over by China Power Investment Corp. on December 28. The power generation assets of Shandong Luneng Group in Shandong Province were bought by Huaneng Group. And GD Power Development Co. Ltd., a subsidiary of China Guodian, acquired a 51 percent stake in Ningxia Younglight Electricity Group.
ESOP companies were leading power enterprises for provinces and autonomous regions until 2002, when the government embarked on reforms aimed at separating the power generating and grid systems for industry expansion. In that reform, the State Power Corp.’s distribution network was divided into State Grid and China Southern Power Grid, while the generation assets were divided among the country’s major producers.
Even after the 2002 reform, however, provincial branches of national grids continued raising capital and expanding ESOPs, commanding huge profits. These branches included Jinyuan, Luneng, Jiangsu Suyuan Group, and Sichuan Qimingxing Group.
Now that ESOPs are on the way out, a China Electricity Council expert told Caijing that private and foreign market players may join major power companies in competing for business, which could lead to “a new wave of reshuffling in China’s power sector” to complement reforms.
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Power: Stymied Coal Talks Point to Power Reform
China’s power sector, after riding a reform roller coaster for years, faces new challenges as coal talks stall over price controls.
Li Qiyan, Caijing
4 February 2009
Annual contract negotiations between state-owned power producers and coal suppliers have broken down, casting a long shadow over China’s power industry and focusing new attention on calls to eliminate price controls on electricity and dismantling employee-shareholding systems.
The country’s largest power producers and coal suppliers locked horns over whether to cut or increase coal prices in 2009, walking away from the bargaining table in late December. No new talks have been scheduled.
Five of the largest power companies offered to pay 50 yuan per ton less than the 2008 contract price. But major coal suppliers including Shenhua Energy and China National Coal Group have insisted on a 10 percent price increase, about 30 yuan to 50 yuan per ton.
Power companies say they’ve been backed into a corner by government price controls. The five biggest producers -- China Huaneng Group, China Datang Corp., China Guodian Corp., China Huadian Corp., and China Power Investment Corp. – posted combined losses of 30 billion yuan between January and November 2008.
“It was inevitable that negotiations would collapse,” said a power company source. “Most power producers suffered huge losses in 2008 and can no longer endure rising coal prices.”
Cries for Reform
Industry experts blame the impasse on a pricing system they say fails to properly reflect market supply and demand.
“China’s government-controlled power system has blocked efficient communication between the supply side and the demand side, so the price fails to reflect the market demand,” said Han Xiaoping, chief information officer for industry website China Energy Net. Only system-wide reform can rescue the industry, Han said.
Coal contracts need not be contentious. Recent price negotiations between coal suppliers and other industrial users concluded successfully.
But power sector reform has been a difficult task for a long time. In the first major reform step in 2002, the government oversaw a separation of power producers and distributors. Since then, the process has been hindered. Still in limbo are proposals to spin off power company affiliates from their core businesses, and to divide power transmission and distribution networks.
A reform plan drafted by a special team has been on the government’s desk since late 2004. But the plan was stalled for the next two years due to power shortages that influenced policy decisions. Follow-up reform attempts were impeded by various forms of opposition.
In late 2007, several government departments reached a consensus on a reform plan to divide the core businesses and affiliates held by power companies. The proposal was shelved, however, due to a winter storm crisis in early 2008 and surging coal prices.
Now, while the government continues to hesitate over reform, the power industry is facing mounting pressures. According to the National Statistics Bureau, power industry profits for the first 11 months of 2008 fell 84 percent year-on-year, compared with 39 percent growth a year earlier.
In the industry’s eyes, the distress should encourage reform. “China’s power industry crisis also means is a time for reform,” said a senior industry expert, who added that power price mechanism reform and proposals to divide core from affiliated businesses are most likely to succeed.
Indeed, the State Electricity Regulatory Commission is working on draft plans for power sector reforms, Zou Yiqiao, the commission’s director-general for tariffs and financial regulation, told Caijing.
“We are studying the preparation of a reform to divide power transmission and distribution,” Zou said. “The first task is to work out independent pricing systems for power transmission and distribution, and then the reform can be pushed forward.”
The National Development and Reform Commission published tariff standards for provincial power grids in November 2008 and encouraged major power consumers to buy electricity from power plants directly. An expert at the China Electricity Council told Caijing the move set the stage for separating transmission and distribution networks, which he expects to be moved forward in 2009.
Dismantling ESOPs
Despite financial woes and contract squabbles, reform progress can be found in the power sector, particularly in terms of company shareholding structures.
Three major merger deals were completed at the end of 2008 as part of a government effort to eliminate employee stock ownership plans (ESOPs) at regional power enterprises.
The breakups followed regulations released last year by four government agencies aimed at encouraging grid employees to sell their stakes in power generator. Under the regulation, power companies must dismantle ESOPs by May, offering new opportunities to major power companies interested in expanding by taking over ESOP assets.
ESOPs were launched two decades ago as part of a government effort to increase power sector investment through “various types of investors,” who including state-owned firms, joint ventures, private companies and individuals. Investments were needed to build the power stations needed to satisfy surging power demand during an economic boom.
But ESOPs fell from grace in 2007 after the central government found illicit profiteering by company executives and other officials tied to regional power companies.
All enterprises targeted in the recent mergers were controlled through ESOPs. Guizhou Province’s biggest power generator, Jinyuan Group, was taken over by China Power Investment Corp. on December 28. The power generation assets of Shandong Luneng Group in Shandong Province were bought by Huaneng Group. And GD Power Development Co. Ltd., a subsidiary of China Guodian, acquired a 51 percent stake in Ningxia Younglight Electricity Group.
ESOP companies were leading power enterprises for provinces and autonomous regions until 2002, when the government embarked on reforms aimed at separating the power generating and grid systems for industry expansion. In that reform, the State Power Corp.’s distribution network was divided into State Grid and China Southern Power Grid, while the generation assets were divided among the country’s major producers.
Even after the 2002 reform, however, provincial branches of national grids continued raising capital and expanding ESOPs, commanding huge profits. These branches included Jinyuan, Luneng, Jiangsu Suyuan Group, and Sichuan Qimingxing Group.
Now that ESOPs are on the way out, a China Electricity Council expert told Caijing that private and foreign market players may join major power companies in competing for business, which could lead to “a new wave of reshuffling in China’s power sector” to complement reforms.
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