The State Council has issued a significant policy document titled "Guidance Opinion on Deepening the Market-oriented Reform of Thermal Power Coal," marking a major step in reforming China's coal pricing system. The key move is the cancellation of the dual-track system for coal prices, which previously allowed for separate pricing mechanisms between contracted coal and market-based coal. Now, coal companies and power plants will be free to negotiate their own contracts and set prices independently, promoting greater market flexibility.
Industry experts suggest that this reform signals a deeper push toward electricity price liberalization. While it may help ease some pressure on power companies and stabilize coal price fluctuations, the full implementation of a market-driven mechanism remains uncertain. The new system aims to reduce government intervention and let market forces play a more decisive role in determining coal and electricity prices.
Historically, since the 1990s, China operated under a dual-track system where "key contract coal" was priced lower than market coal, leading to inefficiencies and unfair competition. The State Council’s guidance highlights these issues, noting that the existing system limits the effectiveness of the market and creates disputes during contract negotiations. As a result, reforms are necessary to promote fairness and efficiency.
Since 2013, the government has been gradually phasing out key coal contracts and eliminating the dual-track pricing model. This includes discontinuing the annual framework for inter-provincial coal railway capacity allocation. The new policy also continues and improves the coal price linkage mechanism. If coal price fluctuations exceed 5% annually, on-grid tariffs will be adjusted accordingly. Additionally, the portion of coal price volatility absorbed by power companies will be reduced from 30% to 10%, easing their financial burden.
Li Ying, chief economist at the State Grid Energy Research Institute, emphasized that electricity price reforms involve multiple aspects, including power management systems and industry structures. While progress has been made, this latest document represents a clear signal of further deepening reforms.
In the short term, coal prices are expected to remain relatively stable. With the narrowing gap between contract and market coal prices, and the government no longer setting fixed prices, the market is becoming more efficient. Analyst An Zhiyuan noted that the current coal market is still in a low phase, and supply and demand conditions are unlikely to change significantly in 2023.
However, challenges remain. Although reducing the absorption rate of coal price fluctuations benefits power companies, they could still face losses if coal prices rise sharply. Moreover, frequent adjustments to on-grid tariffs may lead to corresponding changes in retail electricity prices, which the government is likely to regulate to protect consumers.
Ultimately, as the on-grid tariff becomes more market-oriented, these changes will eventually be passed on to end-users. Li Ying warned that without long-term contracts between coal and power companies, all coal price volatility could have a greater impact on both on-grid tariffs and user electricity prices. While large-scale electricity price marketization has started, widespread implementation remains difficult.
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