Extended pilot scheme – another move towards reform of China’s power market?

7 July 2009 – According to Reuters, China has extended a pilot scheme that allows high electricity users to purchase power directly from generators, marking a further, albeit tentative move towards power market reform.

Currently, the government sets the prices at which generators sell power to the grids, as well as the prices that grids charge end users. The gap between the two covers transmission, distribution, sales and other costs, as well as grid operators’ profit margins.

Open and fair charges for power transmission however, are part of China’s long-term plan for its power market reforms, which will maintain the state’s controls on the transmission lines while freeing up power generation and distribution, as well as sales to end-users.

According to Pierre Lau of Citigroup, large end-users would be winners in cost saving by buying electricity at lower prices via this scheme than at normal retail prices.

However, there is a catch: before the companies can get power directly, they need to agree to the transmission fees they will pay to the state-run electricity grids.

The original pilot programme involving 15 aluminium smelters was launched in March this year, but there has been no progress with that scheme.

This is due to none of the aluminium smelters agreeing the grids’ transmission fees.

However, the National Development and Reform Commission, China’s main planning body, is expected to provide guidance on transmission fees soon.

To widen the pilot scheme, the State Electricity Regulatory Commission said in a statement that all power users conforming to industry policies and consuming 110 kV or more would be eligible, provided they bought power from generating firms that met certain criteria.

With no independent pricing system for power transmission, the electricity regulator said grid operators should charge 110 kV users 10 per cent less than the existing average and 220 kV users 20 per cent less.

But it did not provide any reference prices for such fees.

Excluding line losses, electricity transmission and distribution charges averaged 0.134 yuan ($0.02) per kW, or around a quarter of China’s average power retail prices in 2008.

In a further hurdle, provincial governments must agree to participate in the programme before any companies can take part.

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