China has raised power prices for industrial, commercial and agricultural users in some regions by about 3 percent in an attempt to ease what threatens to be the worse power shortage in seven years in the world's second-largest economy.
The power price rise, which excludes residential users, will add to inflationary pressures but revive profit margins at power producers.
That should prompt an increase in electricity supplies from loss-making power plants that had failed to keep up with rising demand. Higher prices should also discourage excess power consumption.
This is obviously good for the power shortages and it was very much expected - the only way the problems can be solved is by adjusting prices, said Lin Boqiang, director of the Center for Chinese Energy Economics Research.
The other problems - like the power grid or the transportation of coal - are long-term and can only be solved after several years. There was just no other way. This is clearly going to have some sort of impact on industry but the impact of actually having no power is much bigger. Most businesses will be more willing to accept higher prices than power cuts.
China looks set for the worst summer power shortages since at least 2004 as demand growth remains strong while coal-fired power plants, which generate 80 percent of national electricity output, have restricted production due to operating losses resulting from high coal costs.
At the same time, hydropower has been hit by a drought in central China, including Hubei province, home of the Three Gorges Dam, the world's biggest hydropower project.
The government raised the prices that grid firms charge industrial consumers by 0.0167 yuan per kilowatt hour , Chinese state media said after a briefing by the National Development and Reform Commission, the country's top economic planning body.
Lin said the price rises would add about 0.5 percentage points to inflation, but the impact would be much more if the shortages were allowed to continue unchecked.
The increase, ranging from 0.004 yuan/kWh to 0.024 yuan/kwh in 15 Chinese provinces including Shanxi, Qinghai, Gansu, Jiangxi, Hainan, Shaanxi, Shandong, Hunan, Chongqing, Anhui, Hubei, Sichuan, Hebei and Guizhou.
The price rise came earlier than some analysts had expected. Several had said China would first raise on-grid power tariffs, the prices at which power generating firms sell to grid operators, and then hike prices for end-users once inflationary pressure had subsided.
The move aims to ease power shortages, this will add to inflationary pressures but the impact will be limited and it will take some time for upstream price rises to trickle down to downstream, said Wang Jun, an economist at CCIEE, a government think-tank.
The increase was the first since November 2009 and follows on-grid tariff hikes in 12 provinces on April 10, with three more provinces following suit on June 1, the NDRC was quoted as saying. The average price rise offered to power producers was 0.02 yuan per kWh, slightly more than the hike for end-users.
Jianguang Shen, chief economist at Mizuho in Hong Kong, said he expected the price of coal would jump in response to the price hike, wiping out the margin gain for power producers and adding to Chinese coal imports. To prevent that, the government would order state-owned coal producers to hold down their own prices, he said.
The previous on-grid price hike had no significant impact on the power shortages because of a concomitant coal prices rise, said Want Wei, a senior analyst Guotai Junan Securities.
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, he said. Every 0.01 yuan rise in power price could offset an increase of 50 yuan in coal prices.
China has already cut power supplies to some industrial users in eastern, southern and central regions as pent-up demand rebounded after local governments ordered power cuts in late 2010 for the purpose of achieving energy saving goals.
In addition, power generating firms curbed their output levels because rising coal prices undermined their operating margin.
The National Development and Reform Commission, China Electricity Council and some industry analysts have all warned of the possibility of worse shortfalls in summer when demand peaks.
The State Grid of China, the country's dominant power distributor, said it would cut supplies to more industrial users in summer to shortfalls expand.
China's five state-owned power generating groups lost more than 10 billion yuan ($1.5 billion) on their thermal power operations in the first four months of the year, an official with the council said on Tuesday.
The five groups, parents of China Power International Development Ltd <2380.HK>, Datang International Power Generation Co Ltd <0991.HK> <601991.SS>, Huadian Power International Corp Ltd <1071.HK> <600027.SS> and Huaneng Power International Inc <0902.HK> <600011.SS>, had racked up more than 60 billion yuan in losses in past three years, according to the State Electricity Regulatory Commission.
(Additional reporting by Judy Hua, Kevin Yao and David Stanway; Editing by Ken Wills and Simon Webb)