World Energy Outlook 2007

to consumers approximately 70% of any increase in coal prices. An increase of
5% or more triggers an automatic adjustment to wholesale electricity prices.
With coal prices nearly tripling in the last five years, this reform has saved
generators from a financial crisis. Planned retail pricing reforms include a
mechanism to adjust end-use prices to reflect fuel cost increases. In the long
run, the pricing system is expected to be further reformed to make electricity
prices fully cost-reflective and to give timely and adequate signals to consumers
and investors.
As wholesale power markets develop, the relationship between coal and power
prices may be weakened, as electricity prices will eventually be mainly
determined by market forces through the bidding system into the power pool.
Coal prices are now to some extent largely determined by markets, but the
system of “allocation”, under which producers and major users agree contracts
on an annual basis, has features which undermine this.
China adopted in the 1960s a so-called Catalogue System for consumer prices
that allows for cross-subsidisation between various categories of customer. It
allows for preferential treatment for heavy industry, chemical plants,
agriculture and irrigation – in terms of both the allocation and price. Time-ofday
variations apply to all tariffs, except for those for residential customers and
irrigation. However, the differentials are low, being designed to support
industry rather than provide incentives for efficient use of energy. Electricity
rates vary considerably across the country (Figure 10.16). Each province and
major municipality may amend the Catalogue price to suit its own
circumstances and policy goals, and may add additional fees. Rates are
generally lower in central and western China than in the south and east. Each
province has the same rates for each category of customer, regardless of location
within the province. For each category, current rates consist mainly of a
bundled per-kWh energy charge, plus a capacity charge for large industrial
customers.
10
Thus, power markets in China are not yet structured to provide well-developed
market-based price signals. China has tested competitive power pricing in
Shanghai and five other provinces, but that pilot programme covered less than
10% of the electricity generated in those areas. Until now, power sector
investors have had the security of sales contracts based on a cost-plus pricing
regime. The price reform policy seeks to allow the wholesale market to
determine tariffs on the generation side, while the government will regulate
transmission and distribution prices as well as the relative prices to end users.
Sufficiently high electricity prices are needed to attract the necessary
investments in power infrastructure.
Chapter 10 - Reference Scenario Supply Projections 351