The guidelines will abolish electricity and coal contracts from 2013. Coal companies and power plants will be able to settle coal prices through negotiations, says an article in 21st Century Business Herald. Excerpts:

The State Council has issued guidelines to deepen the reform of the electricity and coal markets.

The guidelines will abolish electricity and coal contracts from 2013. Coal companies and power plants will be able to settle coal prices through negotiations.

According to the guidelines, when the coal price rises by 5 percent, the electricity price can increase accordingly on an annual basis.

This is good news for power plants. In the past decades, power prices have been kept artificially low by authorities to avoid increasing inflation, despite the constant rise of coal prices. Most power plants have been running in the red for a long time.

The new reform designed by the State Council basically ends the coal pricing mechanism for power generation in a planned economy. But the reform has not touched the power generation and grid systems. Although power plants will benefit from the reform, the conflicts between power plants and power grid companies are inevitable.

If coal prices increase, power grid companies will have to pay more to power generation plants. The coal pricing mechanism reform just transfers the burden from power plants to power transmission grids, which will be finally paid by consumers at the end of the chain.

Given China’s needs to boost environmental protection and improve productivity, raising power prices will be helpful to promote the economic model transformation and energy saving.

However, before increasing power prices, the authorities should also reform power generation plants and power grid companies and improve the efficiency of these State-owned enterprises.