China to allow power prices to rise amid energy squeeze that's a threat to its economy

Beijing

CHINA will allow higher power prices in its most dramatic reform in years in a bid to ease a worsening energy crunch that's a threat to its economy.

Electricity prices will be allowed to rise by as much as 20 per cent against a benchmark, compared with a current cap of 10 per cent, said a statement posted by the State Council, the country's cabinet, after a meeting chaired by Premier Li Keqiang.

Costs for the most energy-intensive industries in the country could be brought in line with supply and demand without a cap, the statement said.

Bloomberg reported last month that the Chinese government was considering raising power prices for industrial consumers to help ease a worsening supply squeeze.

A power crunch across China has rippled from factory floors to homes as the nation's coal-based electricity producers, which account for more than 70 per cent of the country's generation, are unable to buy enough fuel.

That's also crimping growth forecasts for the world's second-largest economy.

China's government has asked miners to spare no effort in boosting coal supplies, and has given them permission to operate at full capacity even after hitting their annual quotas.

A shortage of the fuel could cut industrial power use by 10 per cent to 15 per cent in November and December, which would potentially translate into a 30 per cent slowdown in activity in the most energy-intensive sectors like steel, chemicals and cement-making, said UBS Group.

Local governments are being urged to offer power-price discounts to smaller firms, and tax deferment will be offered to coal and power companies, the State Council statement said on Friday.

The State Council also urged putting curbs on the expansion of energy-intensive industries and for improvements in emission controls at the local government level.

The council also suggested removing renewable energy sources from total energy consumption for a time period, but it did not offer any details. Here are more takeaways from the meeting:

• China will gradually allow all coal-fired power to be traded in the market;
• It reiterates that power demand for livelihood and winter heating shall be met;
• It urges securing coal supplies for power and heating production, especially for use in the North-eastern regions;
• China will promote capacity growth in qualified coal mines, especially the approved open-pit ones;
• It asks the relevant authorities to prioritise coal transportation;
• It emphasises financial support for coal-fired power generation. BLOOMBERG