While coal prices have been left to market determination, the price of electricity is under strict regulation. Naturally, coal prices have been rising these years. Since the 2002 marketization of coal, the price of coal used to generate electricity has increased from 110 yuan per ton in 2002 to nearly 950 yuan now, and in some regions, the price has reached 1000 yuan per ton. Taiyuan’s coal companies, affected by the price hike of raw materials and the shortage of supply, have increased their coke prices by 100 yuan to 200 yuan per ton. Many miners are now selling their first level coke at over 2000 yuan per ton.
General manager Lu Qizhou of China Power Investment Corporation says that the company’s price for coal increased 35 yuan per ton on average in 2007, and in some regions, the price increased 65 yuan per ton, resulting in a 1.968 billion yuan rise in annual production costs. According to contracts with coal companies this year, the price of coal will rise another 40.12 yuan per ton, bringing an energy cost increase of more than 4 billion yuan.  China Power Investment Corporation’s 2007 annual profit was 4.5 billion yuan.
Li Xiaolin, the general manager of China Power International Development, claims that coal and electricity use, the construction of power plants and the allocation of coal resources have not been optimized. She suggests that the government should try to create a harmonious and healthy environment in the coal and electricity sector by paying special attention to financial resources and market entry threshold, encouraging collaboration between the two industries, and increasing the amount of electricity produced from coal per unit.
Currently the five biggest power producers, including big regional power plants, have sped up their collaboration with coal enterprises. Most of them have become coal firm shareholders, but as coal prices rise, acquisition will become the focus of some power producers, starting with relatively small coal operations.
"The coal price has increased 8.9% this year, further narrowing margins for power producers," says Wang Yonggan, the general secretary of the China Electricity Council. In recent years, profit growth in the electricity industry has lagged behind that of industrial enterprises. This year, the increase is predicted to be 20%, below the 38% level of other industrial firms.
The coal-electricity linkage policy
According to the coal-electricity linkage policy, if average coal prices rise more than 5% in 6 months, electricity prices will be adjusted accordingly. By the end of 2007, the price of coal in the National Coal and Coke Trade Fair had increased by more than 10%, and the coal used for generating electricity by 30-40 yuan, adding around 42 billion yuan to power producers�costs. Analysts have calculated that the increased cost could be absorbed by an increase of only 0.02yuan per Kwh in the electricity price. But prices have not been allowed to rise
According to the China Electricity Council, the total amount of coal contracted in 2008 was 593.49 million tons more than the 585.15 million tons planned and available railway transportation can not satisfy the need. The average price of these contracts has risen 35-45 yuan per ton, costing the electricity generating companies nearly 20.5 billion-26.6 billion yuan. The stoppage early this year of coal production in some regions to undergo urgent safety inspections will further boost prices.
Although the State Council clearly stated on January 9 that no electricity price increase would be allowed, the increasing pressure on electricity producers is not going without notice. Last month, Meng Jianmin, the minister of the Bureau of Performance Assessment of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), invited representatives from 8 domestic power producers to a seminar on the price hike of coal. Representatives from China Power Investment, Hua Neng Power International, China Da Tang, China Guo Dian Corporation, Shen Hua Group, SDIC Huajing Power Holdings Co. Ltd, and China Resources all complained that thermal electricity producers were already suffering serious losses this year that would drag down profits for the whole year. They strongly urged that the third round of coal-electricity linkage be undertaken. SASAC representatives said they understood the costs of rising coal prices and promised that after studying and analyzing the situation, they would report this to the State Council.
NDRC’s problem is to control the price of electricity in order to keep down the CPI, and says that while any adjustment of prices must take into account the rise in the cost of producing coal, the ability of electricity plants to absorb coal price hikes and the development of electricity plants, a rise in electricity prices would have to be absorbed by the whole industrial sector as well as the average household and would have an impact on the prices across the board.
Lu Qizhou is of a different opinion. He believes that an electricity price increase would lift CPI by only 0.1 to 0.2 percentage points, almost negligible compared to the CPI rise in February of 8.7%. He believes that according to the policy, the third round of coal-electricity linkage should have begun in the first half of 2007. In that year, the coal price reached 80 yuan per ton, which added 0.04 yuan per Kwh to electricity generating companies�production costs.
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