The central government is mulling over electricity price rises in order to generate funds for a massive project to build more power grids and support some power plants suffering from lower-than-usual prices.

Industry sources say the National Development and Reform Commission (NDRC) is looking at lifting the current electricity sale price by an average of 0.02 yuan (0.24 US cent) per kilowatt hour.

This would mean an increase in costs of nearly 40 billion yuan (US$4.8 billion) in real terms for power-hungry industries, such as aluminium, steel and cement.

This is calculated on the expectation that China's electricity generation will grow by 12 percent year-on-year, or by 180 billion kilowatt hours this year.

Electricity users in western China would feel the greatest impact of any price rise, as rates in that part of the nation are relatively low.

But eastern China would see meagre price rises, if any.

But domestic users can rest assured they will be free from any price rises, the sources said.

Experts said the price rise would pile further inflationary pressures on China's economy.

China's consumer price index, policymakers' key inflation gauge, rose a year-on-year 3.2 percent in January and December, the biggest since April, 1997, when prices also rose by 3.2 percent year-on-year.

People's Bank of China Governor Zhou Xiaochuan said recently that the government should be wary of possible inflation.

The NDRC had already raised the sales price of electricity by 0.008 yuan (0.1 US cents) per kilowatt hour at the start of the year, in order to offset the power plants' rising production costs due to the coal price hike.

This time, however, the price rise (including the early 0.008 yuan) will also benefit the two power grid operators State Grid Corp and China Southern Power Grid which buy electricity from power stations and sell it to end-users.

Part of the gains will help finance the cash-starved grid operators to reinforce the construction of vulnerable transmission lines.

More than two thirds of the nation's territory suffered from power cuts last year, mainly a result of insufficient electricity transmission capacity.

The State Grid Corp said earlier last month that it plans to invest 81.5 billion yuan (US$9.8 billion) this year in the construction of electricity transmission and distribution networks.

But grid companies currently lack a healthy enough cash flow to finance this construction, largely because the existing State-governed tariff system favors power generators.

More than 60 percent of tariffs paid by end-users go to generators, as the government wants to attract investors to build electricity plants.

Analysts have expressed worries that the finances of the grid operators may deteriorate further after the government forced the State Grid Corp to offload its own generating plants at the end of 2002. The State Grid previously used the revenue from the generating plants to finance the construction of the grids.

"We are seriously lacking enough capital to construct power grids," Zhao Xizheng told the company's annual meeting earlier last month.

"We need to find new sources to raise funds."

Industrial sources said the price raise will also be used to support the grid firms in paying back bank loans for upgrading grid networks in recent years.

The companies have spent more than 300 billion yuan (US$36.3 billion) in recent years to improve power grids in rural and urban areas.

Most of the cash was borrowed from State banks, and was due to be paid back starting from last year.

The debt asset ratio of the State Grid Corp reached more than 61 percent last year.

"The electricity price rise will improve the finances of our company," said a senior official from the State Grid Corp. "But it still cannot cover the costs."

"We cannot expect prices to reach a normal level overnight, because this would increase users' production costs by far too much. The price increase should be implemented gradually," said the official.

Sources said revenues from electricity price rise will also be used to increase the on-grid prices of some power plants.

The government promised higher electricity tariffs for new generators in order to encourage investment in power plants, but these prices failed to be realized in some power stations.

China's power consumption rose by 15 percent in 2003 to a record 1.91 trillion kilowatt-hours.

It is forecast that power consumption will hit 2.09 trillion kilowatt hours this year.

(China Daily March 3, 2004)