China’s coal-fired power plants are threatened with bankruptcy due to government policy and rising coal prices, say industrial groups.
On September 11, the South China Morning Post reported that companies in the electricity sector had asked the authorities to raise electricity tariffs in order to contain losses and avoid bankruptcies due to record coal costs.
In a letter to municipal regulators, the Beijing Electric Power Industry Association urged higher consumer prices, citing losses at five member companies between 20 million yuan and 192 million yuan ($ 3 million to $ 29.7 million) in the first seven months of the year the year, the Morning Post said.
The lawsuit follows a similar letter in August from eleven power producers who power the Beijing-Tianjin-Tangshan power grid, warning that they are “on the verge of bankruptcy” due to the tightness between fixed tariffs and rising coal costs.
“It has seriously disrupted normal electricity trading and stable power supply … It is extremely difficult to operate as some companies have broken capital chains,” the Generators said.
The letter was received from companies such as Datang International Power Generation, China Huaneng Group, China Huadian Corp. and CR Power signed, Reuters reported.
Steam coal prices peaked at 1,028 yuan ($ 159.46) per ton on September 9, according to Reuters. In July, prices rose 65.3 percent year over year, although regulated retail prices have fallen so far this year, it said.
China’s rate hike rules are the subject of conflicting accounts.
Electricity suppliers have so far been allowed to increase their tariffs by up to 10 percent in order to cover higher operating costs. But in October 2019, the government’s top economic planning agency, the National Development and Reform Commission (NDRC), banned all rate hikes for industrial and commercial users, the Morning Post said.
A provision of the NDRC “guide” leaves unclear when the rate lock should end. According to the rule, courses were not allowed to “float” in 2020, but the NDRC “can regulate the floating patterns after 2020 depending on the situation,” the document says.
Even without the lockdown, a 10 percent adjustment wouldn’t cover the cost of generating this year’s huge surge in coal prices, said Philip Andrews-Speed, a senior principal fellow at the National University of Singapore’s Energy Studies Institute.
“This is not enough to compensate producers for the recent rise in coal prices. But the government is not interested in keeping prices up as it will put further pressure on the economy,” said Andrews-Speed.
The difficulties facing China’s domestic coal-fired power plants have highlighted the need for major changes in the country’s energy and environmental policies after more than a decade of intermittent power shortages and conflicts over government controls.
On Tuesday, President Xi Jinping suggested that some partial policy changes may be in the works.
In a videotaped statement to the UN General Assembly’s annual session on Tuesday, Xi pledged that China “will not build new coal-fired power plants overseas.” Chinese coal projects are a major source of pollution in countries that have joined China’s Belt and Road Initiative.
Xi’s commitment has been hailed as a “great contribution” and “important decision” by John Kerry, the President’s US special envoy on climate change, Reuters reported.
But Xi didn’t say anything about the bigger problem of the ongoing construction of domestic coal-fired power plants in China.
Environmental group Greenpeace East Asia estimates that 250 gigawatts (GW) of domestic coal-fired power plant capacity are still under construction, despite warnings that the new plants will lose money if the cost of renewable energy sources falls.
In the meantime, the government is trying to find short-term solutions for those assets that are already losing money.
On Tuesday, the NDRC announced that it is sending joint teams with the National Energy Administration (NEA) to unspecified regions, businesses and ports to see that energy supply and price stabilization guidelines are implemented, Reuters reported.
The agency said it cut the minimum coal inventory for power plants to seven days and set the maximum to 12 days to curb market demand.
The pressure on power generation companies is the result of a series of political decisions in response to economic conditions and market forces in recent years.
In February 2020, the NDRC ordered a 5 percent interest rate cut for businesses and commercial users to help recover from the COVID-19 crisis, and projected to reach 59 billion yuan ($ 9.1 billion) by mid-year. Dollars) for about 50 million customers. The cut was later extended to the end of 2020.
But the government had already cut rates by around 10 percent a year in 2018 and 2019 to boost corporate profits and ailing economic growth.
Policies backed by Premier Li Keqiang were in line with fiscal stimulus measures, including cuts in taxes, fees and social security contributions.
Over time, the stimulus measures have increased the impact on coal prices by stimulating growth and increasing demand for China’s primary fuel.
The costs of the first reduction in electricity tariffs were borne primarily by the network operators, but the burdens from subsequent reductions were borne by the generation companies.
At the same time, the government supported an increase in coal production to alleviate the energy shortage. As economic growth rates recovered from the record slump in the first quarter of 2020, coal prices rose as demand recovered.
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Coal mines affected by COVID are struggling to keep up with demand, putting more pressure on prices. A wave of fatal mine accidents also led to government safety inspections, which slowed production.
The NDRC responded by calling for more imports. But in December it ruled out coal supplies from Australia, China’s leading supplier, in an escalating dispute over human rights abuses and foreign policy differences.
Analysts are divided on how much the political feud with Australia has affected China’s prices, but coal costs have hit a number of new highs since then.
The government’s reluctance to pass the increased cost of coal on to consumers and end users in the form of tariff increases reflects the “usual tension” between market forces and government control, Andrews-Speed said.
The China Electricity Council (CEC) called for “further price reforms to create a market-based system that allows fuel cost fluctuations to be fully reflected in end-user prices,” the Post reported in late July.
Conflicts and shifts in costs have also been reflected in the economy as a whole.
In August, China’s producer price index (PPI) rose 9.5 percent year over year to a 13-year high, reported the National Bureau of Statistics (NBS), but the consumer price index (CPI) rose just 0.1 percent.
The low CPI benefited from falling pork prices and the heavy weighting of food in the index, while coal mining and laundering were a major contributor to the rise in the PPI, a senior NBS statistician said.
But the large discrepancy in gate and retail price growth reflects the government’s efforts to contain this year’s commodities boom, which has hit sectors like crude oil, liquefied natural gas (LNG), iron ore, copper and coal.
In recent months, the government has resorted to a number of non-market-oriented tactics to keep inflation in check by pressuring producers to bear higher production costs.
In July, the NDRC said it would “closely monitor” price changes and futures trading to “maintain market order,” and threatened to crack down on violations such as hoarding, the official English-language China Daily said.
In June the agency also enacted new rules for publishers of private commodity indices, apparently to prevent the reporting of price increases and inventories.
The bankruptcy warnings suggest that the government’s use of such coercive measures to contain prices may be limited.
With coal supplies at power plants plummeting, power generating companies started replenishing their stocks earlier than usual for the winter, Reuters reported. The move should continue to burden the supply.
The coal-fired power station crisis comes as environmental groups and climate activists increase pressure on China to stop building new coal-fired power stations.
Although China has made great strides in developing renewable energy sources, it still relies on coal for about 60 percent of its electricity needs.
Despite international criticism, China’s provinces are still planning to add 104.8 GW of new coal-fired power plant capacity, Greenpeace said in August.
However, recent figures on China’s electricity consumption suggest that demand growth may slow.
In August, electricity consumption rose by only 3.6 percent compared to the previous year. According to the NEA, consumption rose by 13.8 percent in the first eight months of the year.
The electricity consumption in the secondary industrial sector including the manufacturing sector was almost unchanged in August with an increase of 0.6 percent compared to the previous year, announced the NEA.