SINGAPORE, Oct 13 (Businesshala) – The liberalization of China’s electricity markets, which allows generators to charge market value from commercial and industrial customers, has significant repercussions for energy-intensive sectors, which previously struggled to lock in fixed electricity costs. were capable.
Below is a look at the policy change, which sectors will be most affected and what it means for the Chinese economy.
What is the latest China power policy change?
China said on Tuesday it would allow coal-fired power plants to charge market-driven prices for electricity to commercial and industrial customers from October 15, as the worsening energy crisis pushed officials into its boldest power sector in decades. persuaded to pass the reform.
This follows a statement from China’s State Council on October 8 that coal-fired electricity prices could fluctuate by as much as 20% from base levels, and together these measures provide some relief to power producers, Those who have had to stop power generation this year. Facing rising operating losses.
According to the state planner, to encourage greater energy use efficiency, some high energy users may face increases of more than 20%.
Previously, more than half of all commercial and industrial power users in China had fixed price deals of some sort with grid operators, so a change to 100% market pricing for the industry marks a significant change in China’s electricity landscape. Is.
Fixed price will continue to be charged from residential and agricultural users as well as public welfare initiatives.
Why did China change?
Some 54% of China’s electricity comes from thermal coal, and utilities have struggled to keep up with post-pandemic demand for electricity this year as domestic coal mines limited supply as demand from industry and manufacturers expands. As security checks have been tightened.
Coal prices in China rose nearly 200% from a year earlier, resulting in the unviable power generation for most power plants in recent months.
Coal-fired power cuts in turn led to power shortages in many parts of China, including major industrial centers on the eastern and southern coasts, where most of China’s manufacturing sector is based. Here
Which industries have been affected by power cuts?
Many sectors, from chemical plants and cement makers to fertilizer makers and even shopping malls, have faced restrictions during recent power shortages, which have prioritized service to homes over business.
Going forward, as generators pass some of the rising costs on to consumers and increase the supply of electricity, power-hungry industries such as steel, aluminum, cement and chemical producers face higher and more volatile electricity costs because The previous fixed cost arrangement is replaced by market based pricing.
How will this affect the production of major metals?
Analysts say China’s world-leading steel industry could be forced to cut production from electric arc furnaces (EAFs), which account for about 15% of China’s total steelmaking capacity.
Electric furnaces run on electricity and therefore have lower emissions than conventional blast furnaces, but have higher power requirements.
“The broader story is that steelmaking costs will increase, even more so for EAF. This could be about 4.5% of the current rebar prices, which are currently (5,860 yuan per tonne),” said consulting firm CRU. According to senior steel analyst Li Wang.
China is also restricting conventional steel production until mid-March next year to reduce smog, which could further bring down steel prices.
China is also the top producer of aluminum, according to CRU analyst Ross Strachan, but power shortages over the past several months have led to a reduction in energy-intensive Chinese aluminum capacity of 2.9 million tonnes.
That has helped aluminum prices in China climb 50% already this year, and any continued power-fuel supply restrictions should continue to support the market.
“Aluminum prices are already at record highs, and these moves on core input costs will only support those higher prices,” said Paul Adkins, managing director of China-based aluminum consultancy AZ China.
“The downstream industry is already hurt by the combined effects of power shortages and high electricity prices, and this will only worsen.”
What effect will these higher costs have on the economy?
China’s factory gate prices hit a 13-year high in August amid high electricity and commodity prices, and may climb further as higher energy costs are passed on by utilities.
“We estimate that the new pricing scheme could increase electricity prices for non-farm businesses by about 10%, which, in turn, could increase China’s GDP deflator (the ratio of nominal GDP to real GDP) by 0.4 percentage points. When electricity prices rise, it could add up to the rest of the economy,” according to Ting Lu, chief China economist at Nomura, Hong Kong.