The State Council has issued a new guidance document titled "Guidance Opinion on Deepening the Market-oriented Reform of Thermal Power Coal," marking a significant step in the reform of China's coal and power pricing systems. The key message is the cancellation of the dual-track system for coal prices, which previously separated contracted coal and market-based coal. Under this new policy, coal companies and power plants will now negotiate their own contracts and set prices independently, reducing government intervention.
This move is seen as a signal of broader electricity price reforms. Industry experts suggest that while it may help ease some pressures on power companies and stabilize coal price fluctuations, the full implementation of a market-driven electricity pricing mechanism remains uncertain. The adjustment of on-grid tariffs based on coal price changes—triggered when fluctuations exceed 5% annually—will also play a key role in balancing costs between coal producers and power firms.
Historically, since the 1990s, China operated under a dual-track system where certain "key contract" coals were priced lower than those in the open market. This led to inefficiencies, unfair competition, and disputes during contract negotiations. The new policy aims to eliminate these issues by promoting a more transparent and competitive market.
The State Council’s guidance also emphasizes the continuation and improvement of the coal price linkage mechanism. For instance, if coal prices fluctuate significantly, on-grid tariffs will be adjusted accordingly. Power companies will now absorb only 10% of coal price volatility, down from 30%, easing their financial burden.
Experts like Li Ying from the State Grid Energy Research Institute believe that this is a clear signal of deepening market reforms. While many aspects of electricity sector reform have been ongoing, this document represents a pivotal moment in moving toward a more market-oriented system.
In the short term, coal prices are expected to remain relatively stable. With the elimination of key contracts and reduced government interference, coal prices are becoming more market-driven, which benefits coal companies. However, if coal prices rise sharply, power companies could still face challenges due to the lag in on-grid tariff adjustments.
Moreover, analysts warn that frequent adjustments to on-grid tariffs may lead to similar changes in retail electricity prices. Given the need to control inflation and protect consumer interests, the government is likely to continue regulating downstream prices, potentially shifting the burden onto the grid companies.
Ultimately, as the on-grid price becomes more market-oriented, consumers may see greater price fluctuations. However, if long-term contracts between coal and power companies are established, this could lead to more stable pricing for both sides. While large-scale marketization of electricity prices is still in early stages, the current reforms mark an important shift towards a more flexible and efficient energy market.
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