A circular issued by the State Development Planning Commission late last month indicated that it would no longer guarantee profit returns for newly built power plants.

Electricity prices for newly built coal-fired power plants should now be determined by the average production costs of "competitive plants. The prices will also include the amortization of investment in the power plant based on an operating period of 20 years. This would lower prices as it extends the payback period, which previously stood at 10 years.

China used to individually set electricity prices for each plant, promising a profit return of 10-15 percent, in a bid to encourage investment in the power sector in order to ease electricity shortages.

The circular said the pricing reform, aimed at lowering electricity prices, is expected to lay a solid foundation for power plants to bid for electricity supplies to grids in the future.

It also said prices at hydropower plants would be based on an operating period of 30 years.

Liu Jipeng, a leading expert in the sector, said the move is expected to encourage power plants to lower their production costs, "but the reform is only a small step forward from the planned economy, rather than a breakthrough to the competitive market.''

"Prices are still subject to rectification by the commission, and not determined by demand and supply in the market,'' said Liu.

"In the framework of the current pricing system, the long-proposed bidding system can not be implemented,'' he added.

It is widely believed that the new power reform package, currently in draft, will require that a certain proportion of China's electricity bids to supply power grids, a move that hopes to boost competition between power plants.

It also aims to separate power plants from the State Power Corp, a virtual monopoly that controls half of the nation's power plants and almost all the power grids.

An official from the commission admitted that the pricing amendment is "only a temporary approach before the overall reform package is launched.''

"Anyway, the reform is a step-by-step procedure, not an overnight strike,'' said the official.

Liu said it would take China at least three years to set up the bidding system across the country.

He said it would take time for consumers to benefit from the price cuts, because the commission said it would use the initial money saved to subsidize newly built plants enabling them to make use of modern technology and environmentally friendly facilities, to upgrade urban and rural grids, and to lower electricity prices in remote rural areas.

He went on to say that the latest reform is welcome because it hopes for the first time to separately set prices for power grids, based on production costs and rational profit-returns.

In the past, China has combined the price of electricity generation with that of transmission. Only 15 percent of the price would go back to power grids, compared with the 60-65 percent in developed nations.

"If the grids only get that much, it would be hard for them to cover their costs, after the plants are separated from grids,'' said Liu.

Huo Ji'an from the State Power Corp said the separate pricing system will help power grids receive stable revenues of their own.

Huo admitted that the little profits power grids get under the combined pricing system hinders their development.

The official from the commission said existing power plants should also revise their pricing as required by the circular, but "existing contracts between foreign investors and local governments will be respected. Foreign investors can also negotiate with governments to revise their terms according to the circular.''

The official said it will "strictly prevent a price rise as a result of the acquisition or sell-out of power assets.''

(China Daily 07/10/2001)