China to Let Power Prices Rise in Bid to Fix Electricity Crunch

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The shortage has slowed factory production, affecting companies around the world.

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The National Development and Reform Commission said the price of coal-fired power could rise by up to 20% above the commission’s benchmark price, compared to the previous 10% cap. It said all coal-fired power would be part of market-based trading, with a range of volatility, which is now over 70%, without any specific time frame.

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And it said the price cap would not apply to industries that consume a lot of electricity, meaning those users could pay even more if supplies are short.

“Overall, such measures are conducive to improving electricity supply and demand,” Peng Shaozong, a commission official, told a news conference on Tuesday.

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Several factors have recently come together to create an electricity shortage in the world’s second-largest economy after the US, including the rapid rise in coal prices, the reluctance of power producers to generate loss-making electricity, and the reduction of carbon emissions. Including government-mandated energy cuts for the purpose of Coal-fired plants produce 60% of China’s electricity.

The troubles have slowed factory production, in turn companies around the world that sell products made in China or use Chinese electronic parts in their factories.

Sugar commission officials said they soon want to allow all industrial and commercial users to buy electricity from the market, as now less than half can buy electricity.

The measures announced on Tuesday could help bring the electricity market to stable levels, but they also point to inflation risks in China as prices of many commodities rise.

Mr. Peng said that although the changes could increase producer prices, he did not expect an impact on consumer prices. Economists at Nomura estimate that the new pricing mechanism will push up China’s consumer prices by as much as 0.4 percent. He estimated inflation to reach 2.6% by the third quarter of 2022, which is still a relatively modest level.

China has used fixed rate benchmark pricing for coal-fired electricity for more than 15 years. Last year, it added flexibility by allowing volatility around benchmarks, which are set by government regulators. In addition to the upper limit, they set a lower limit, which was earlier 15% below the benchmark and has been increased to 20%.

Since prices do not move perfectly with market supply and demand, they leave room for power producers to make windfall profits when coal prices are low, while potentially losing them if coal prices skyrocket. forced to sell. Commission officials said they are hopeful that the revised system will help the producers to stabilize production.

The government is also trying to increase the supply of coal, although timing is awkward with the global climate summit in Glasgow in November.

This week, coal miners in Inner Mongolia, a major Chinese coal-producing region, said they would boost supplies, and signed long-term contracts with some Chinese provinces, state media reported. State media said Chinese Premier Li Keqiang led meetings on Friday and Saturday in which he urged officials to address the shortage of energy supplies.

Yang Jie at [email protected]

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