China Environmental Law

Caijing Magazine this week explores pricing policies in China’s electric power industry. It’s not a pretty picture. The subtitle sums up the conclusions: “Market reform of China’s power sector began in 2002, but achievements have been limited and goals remain unmet.” Here are the details:

Pricing is at the center of China’s power industry reform. But in the six years since a reform plan was approved by the central government and State Council in 2002, power price policy has not followed the state’s original route.

Price adjustments were supposed to rely on market supply and demand. Instead the old, traditional methods of administrative regulation and price control are in place, and there is hesitancy on the way forward.

The result has been a series of conflicts and problems. Timetables for reform steps have not been kept. And now, nothing less than getting to the root of the problem can be expected to bring resolution.

Caijing recommends that

The first issue worth tackling is to break the government’s grip on pricing by separating the prices for electric power and distribution, and letting the market manage the market while the government manages the government.

As part of the 2002 reforms, China split the old state-owned power units into several power generation companies and two grid systems. Since the power generation companies theoretically compete with each other and new market entrants:

Price fixing by power companies should be a competitive process, allowing marginal costs at the balance point between supply and demand to determine prices.

Electricity prices should reflect the supply-demand relationship, with the goal of fair prices. When the government, following administrative methods, approves different electricity prices for individual producers based on individual costs, market optimization is meaningless.

The grid companies

are monopolistic and don’t follow the same price rules as those in a competitive environment. Monopolistic companies let the government strictly set prices and supervise according to average costs. The government compares costs across the grid industry, seeking relative averages, and then encourages grids to increase efficiency and profits by lowering costs.

Unfortunately, all the initial talk in 2002 about “electricity price reform” has been “reduced to prattle.” A real opportunity was missed as Caijing notes “during the rare period of high growth and low inflation in recent years, price reform should not have been neglected.” 

If every reform detail had been implemented on time, we could be looking at an entirely different reality. Enterprises could have been regulated according to the rising costs of coal, thus increasing fuel supplies and lowering electricity demand. Introducing horizontal competition among grid companies could have brought positive developments more rapidly. If, within the distribution network, a modern enterprise system was established in a timely manner, rural areas may have seen the vast benefits that can only now be dreamed about. But the timetable was ignored.

As long as the central government remains spooked about raising inflation, any significant moves to allow more market-oriented pricing in the electric power sector are probably out of the question. Let’s hope that when inflation fears subside, that the opportunity to correct this situation is seized and not missed.