Summary: Coal-fired power generation will, in principle, be fully brought into the electricity market, with on-grid electricity prices formed within the "benchmark price + floating range". The floating range for market-based electricity trading prices will in principle be expanded to no more than 20% in either direction, and high energy-consuming enterprises will not be subject to the 20% upper cap on market trading prices.
Coal-fired power generation will, in principle, be fully brought into the electricity market, with on-grid electricity prices formed within the "benchmark price + floating range". The floating range for market-based electricity trading prices will in principle be expanded to no more than 20% in either direction, and high energy-consuming enterprises will not be subject to the 20% upper cap on market trading prices.
On October 12, the National Development and Reform Commission (NDRC) issued the "Notice on Further Deepening Market-Oriented Reform of On-Grid Electricity Prices for Coal-Fired Power Generation" (hereinafter referred to as the "Notice"), marking a leapfrog step in China's electricity market reform.
According to the Notice, residential electricity prices will remain unchanged at current retail levels, but commercial and industrial users will be affected, especially high energy-consuming industries. Reporters from Securities Times · e Company interviewed power generation enterprises and high energy-consuming industry insiders and learned that the new electricity pricing policy has not yet had an impact, but high energy-consuming enterprises have already anticipated higher costs and begun to mitigate the pressure from electricity price increases, with deploying new energy becoming a necessary choice for most large electricity consumers. Industry analysts believe that this adjustment to the electricity pricing mechanism is an inevitable path to rationalize China's electricity price mechanism. In the long run, it is conducive to alleviating the contradiction between coal and electricity and promoting the ultimate realization of China's dual carbon goals.
To a certain extent ease pressure on power enterprises: "If the policy is implemented, the impact will be significant. Taking Anhui Province as an example, the current benchmark electricity price is 0.3844 yuan/kWh. A 20% upward float is more than 7 fen, which can offset more than 200 yuan/ton of coal cost." Li Yong (pseudonym), who works in power planning and operations at a power generation enterprise in Anhui, told Securities Times: "If calculated based on the cost price of long-term agreement coal, a 660MW supercritical unit should no longer lose money." Since 2021, the gradually rising coal price has become a heavy burden on thermal power companies, and Li Yong has faced many challenges in his work. He gave the reporter a breakdown: most power generation enterprises purchase coal through a combination of "long-term agreement coal + market coal". Long-term agreement coal can lock in prices to a certain extent, while market coal follows the market. At present, the market coal price has exceeded 2,400 yuan/ton, several times higher than the roughly 600 yuan/ton in the same period of previous years. Calculated at the current coal price, even with a 20% upward space for trading electricity prices, it would still be impossible to fill the losses of most power generation enterprises, but it can ease the cost pressure on power companies to a certain extent.
The Notice also clarifies that high energy-consuming enterprises will not be subject to the 20% upper limit for upward float in market trading prices. Localities should orderly promote all commercial and industrial users to enter the electricity market, purchase electricity at market prices, and cancel the commercial and industrial catalogue sales electricity prices. Residential, agricultural, and public welfare electricity prices will not be affected; grid companies will guarantee supply and keep current retail electricity price levels unchanged.
Implementation of the electricity price reform has already received responses in many provinces across the country: Anhui will pilot a seasonal peak electricity price and demand response compensation electricity price policy for commercial and industrial users across the province starting December 1, lasting two years. The electricity price will float upward by 0.072 yuan per kWh on the basis of the electricity purchase price during the peak period of the day;
In Jiangsu Province, the average transaction price of the mid-October monthly listed transaction organized on October 15 was 468.97 yuan/MWh, already up 19.94% from the province's coal power benchmark price of 391 yuan/MWh;
On October 17, the Guangxi Department of Industry and Information Technology issued an urgent notice that electricity prices for high energy-consuming enterprises would be settled directly with an upward float of 50%.
An insider at a power generation enterprise in East China told a Securities Times · e Company reporter that to this day, both the overall national environment and the industry-specific environment provide effective support for electricity price increases. On the one hand, local dual-control (energy consumption caps) measures are being ratcheted up at every level, and reducing energy consumption across all industries is the general trend. On the other hand, coal prices are currently high, power generation enterprises are unable to make ends meet, and the operating environment is harsh. It has become urgent to pass on costs through upward electricity price adjustments.
Strong expectations of price increases: "A price increase is inevitable. As for whether the upward space can reach 20%, it will not be the same in every locality." The above-mentioned East China power generation enterprise insider mentioned that the market-oriented mechanism of "benchmark price + upward/downward floating" for electricity prices has long been established. As early as 2019, the NDRC issued a document specifying that the floating range for market-based electricity trading prices was no more than 10% upward and, in principle, no more than 15% downward. In this round of adjustment, the aforementioned floating range restrictions have been further broadened.
According to reports, the electricity generated by power generation enterprises is currently divided into two major parts. One part is supplied to the grid, which sells it uniformly and settles at the benchmark electricity price, accounting for about 20%-30%. The remaining 70%-80% is market-based trading electricity, most of which is sold in the form of long-term agreements signed with users, usually signed once a year, with the power supply price for the next year determined at the end of the year. A small remaining portion is sold through competitive bidding at the power trading center. This round of price floating space adjustment targets market-based trading electricity.
"Although the policy allowing electricity prices to float upward has existed for a long time, in actual power trading, upward floating has never occurred; electricity is basically sold at a discount. Last year, the long-term agreement price we supplied to major customers was 0.04 yuan/kWh lower than the benchmark electricity price. This year, although it has risen somewhat, it is still 0.02 yuan/kWh lower than the benchmark electricity price." The above-mentioned insider said that in the past, power generation enterprises wanted to sell more electricity to State Grid at the benchmark price, but the grid's purchase volume was limited after all, so the remaining electricity had to enter the market for trading. But times have changed. Under the current background of abnormally high domestic thermal coal prices, the possibility of this round of electricity reform being implemented... "Now some provinces have already followed up with policies. Jiangsu's most recent competitive bidding transaction price has approached the 20% upward ceiling. It is expected that all provinces will formulate specific implementation plans later." Li Yong also believes that under the current circumstances, since rules exist, power generation enterprises will certainly make full use of them and are unlikely to cut prices for users. An upward electricity price adjustment next year is basically a certainty. For now, however, power generation enterprises are mainly concerned about whether the long-term agreement electricity price contracts signed with users at the end of last year can be adjusted in the remaining more than two months of this year according to the 20% upward space. "Power generation enterprises have lost a lot this year. It would be good to recover some losses," he frankly said.
During the interview, insiders in the electricity industry said that it remains unclear whether this policy adjustment will affect the price of electricity supplied to the grid, thereby affecting the electricity costs of commercial and industrial users whose electricity is purchased on their behalf by the grid.
"The NDRC notice was issued not long ago, and the grid is still in the research stage. There has been no specific implementation communication at the provincial and municipal levels yet, and it is not entirely clear how the policy will be implemented." A staff member of State Grid Anhui told reporters that at present, commercial and industrial users in Anhui Province whose electricity is purchased by the grid are all charged according to the catalogue electricity price. The actual electricity price is about 0.7 yuan per kWh. Whether and how to float upward later is still awaiting notice.
Market transmission will take time. According to the Notice, market-traded electricity prices for high energy-consuming enterprises are not subject to the 20% upward cap. This may create greater cost pressure for downstream high energy-consuming enterprises. However, during interviews, many enterprises in high electricity-consuming industries such as cement, building materials, steel and nonferrous metals said that the power reform has not yet affected their production.
"The company’s production capacity is mainly concentrated in Yunnan and Xinjiang. Yunnan mainly uses hydropower, while Xinjiang uses self-supplied electricity. Neither has been affected so far," a person in charge of Shenhuo Co., Ltd. told reporters. Xinjiang has relatively low coal prices and is currently one of the advantageous regions for electrolytic aluminum production. Even with market-based electricity price adjustments, the per-kWh cost increase in Xinjiang would be very small and would not have a significant impact on overall costs. However, Xinjiang accounts for a relatively low share of electrolytic aluminum output, with most production capacity concentrated in inland areas.
A person in charge of Tongling Nonferrous Metals also told reporters that although copper smelting has higher energy consumption than ordinary enterprises, the company’s unit electricity consumption in the nonferrous industry is not particularly high, at about 1,100 kWh per ton of copper produced. The company has not yet received any notice of an electricity price increase, and the impact is expected to be limited.
According to the introduction, Tongling Nonferrous Metals has a self-supplied waste heat power plant with an annual generation of about 250 million kWh. At the same time, at the beginning of the year, the company signed a direct power supply agreement with a power plant, locking in part of the electricity price in advance, which also offsets possible future electricity price increases.
"Costs will certainly rise in the long run, but since the policy has not been rolled out in the short term, it is hard to predict. Sixty percent of the company’s electricity comes from waste heat power generation in the production process, so the current impact on us is limited," an unnamed insider at a building materials company also said.
"We are certainly worried about the electricity price increase, after all, electricity is a rigid demand and accounts for about 10% of our production costs, which is not negligible. But the specific policy has not yet been issued, so it is hard to draw a conclusion." A person related to a large chemical enterprise in East China told a Securities Times · e Company reporter. The company has signed a long-term direct power supply agreement with a power plant; so far, no power plant has taken the initiative to discuss price increases, but in two months, they will sign the direct power supply agreement for the next year, and whether prices will rise will be known then.
During the interview, a person from Magang Steel also said that the specific impact of the adjustment of the electricity price floating range on the company is still being evaluated.
High energy consumption means high cost. Although the impact cannot yet be detailed, most enterprises in high energy-consuming industries have already mentally prepared for the impact of electricity price increases.
"An upward electricity price will raise cement costs. For enterprises, it tests their ability to control and pass on costs," said Chen Bailin, deputy secretary-general of the China Cement Association and president of Digital Cement Network. He believes that the impact of electricity price increases on cement enterprises’ production costs will be extremely evident. Based on the national cement output of 2.377 billion tons in 2020, the cement industry alone consumed more than 200 billion kWh of electricity in 2020.
He mentioned that in addition to electricity prices, high coal prices and the future advancement of carbon trading will also pose challenges to the cement industry. Five ministries recently issued a document requiring that by 2025, more than 30% of cement clinker production capacity should have comprehensive energy consumption reaching 100 kg of standard coal per tonne. At present, a considerable portion of enterprises in the industry cannot meet this standard. "In normal years, coal and electricity costs account for 60% of total cement costs. Now that coal prices have risen and electricity prices will rise further later, the cost share may reach about two-thirds," Chen Bailin said.
A person in charge of Shenhuo Co., Ltd. also said that if electrolytic aluminum enterprises had previously been using grid-supplied thermal power, the cost increase for this part after the reform would be very obvious.
"The energy consumption of electrolytic aluminum is about 13,600 kWh per ton. If the electricity price rises by 0.2 yuan per kWh, the cost per ton will increase by about 2,700 yuan. Most enterprises in the electrolytic aluminum industry use self-supplied electricity, but in inland provinces such as Henan and Shandong, due to abnormally high coal prices, the cost of self-supplied power generation is also around 0.6 yuan per kWh, and may even exceed the grid-supplied electricity price," he admitted. Although the current market price of electrolytic aluminum has reached a high of 22,000-23,000 yuan per ton, if the electricity price is 0.6 yuan per kWh, the electricity cost per ton of electrolytic aluminum is close to 10,000 yuan. Adding depreciation, labor and other costs, the cost of electrolytic aluminum in Henan and other places has already exceeded 20,000 yuan per ton, leaving enterprises with little profit.
"In the latest round of market-based trading in Jiangsu, the price has already risen by nearly 20%. We expect to use Jiangsu as a benchmark or reference for future price negotiations," the aforementioned chemical enterprise person said. "Of course, this also depends on the bargaining between power plants and enterprises. After all, there is market competition among power plants themselves. They will certainly pay attention to the stability and sustainability of their operations, and customer relationship maintenance is also a factor to consider. If the upward adjustment is too large, they may lose large electricity users." Transformation and layout have been launched.
"Under highly marketized power resources, high energy-consuming enterprises need to pay very high electricity prices when power is tight, and may even fail to obtain electricity," the aforementioned State Grid staff member said. This forces high energy-consuming industries to carry out technological transformation and eliminate outdated production capacity. It should be noted that high energy-consuming enterprises are mostly large electricity users with relatively strong overall bargaining power, so they may not necessarily be at a disadvantage in market games.
"According to our forecast, although high energy-consuming enterprises are under considerable pressure this time, the increase should not be too large. At present, power enterprises have ample generating units. If coal prices stabilize later, power generation enterprises will be more willing to generate. As long as profit margins allow, they will still choose to retain large customers," Li Yong said.
During the interviews, reporters learned that most high energy-consuming enterprises have already formulated relevant contingency plans to relieve the pressure of possible electricity price increases. Among the various measures, developing new energy in a timely manner has become a consensus.
"It is already very difficult to get approval for thermal power plants, and new energy is the general trend," the aforementioned chemical enterprise person said.
A person in charge of Tongling Nonferrous Metals told reporters that the company will consider using industrial plant buildings to build photovoltaic power stations in the future, with new energy power generation as a supplement to electricity. In terms of internal management, it will significantly reduce non-production electricity consumption and has already introduced supporting power-saving incentive policies. Each unit will calculate a total load quota; if actual electricity consumption is lower than the quota, the unit can enjoy rewards. At the same time, the few cases of external power transfer will also be controlled in the future.
The aforementioned building materials enterprise person also said that the company has been actively laying out in the field of new energy power generation, which should be a key investment focus in the later stage. From the current perspective, the investment return rate and economic viability are quite good. In his view, if electricity costs rise by a relatively large margin, the possibility of price pass-through cannot be ruled out.
Conch Cement is also promoting the use of clean energy such as photovoltaic power generation and biomass alternative fuels. In April this year, Conch Cement’s "Research and Development and Comprehensive Utilization of Agricultural and Forestry Biomass to Replace Cement Kiln Fuel" project passed the scientific and technological achievement appraisal meeting of the China Building Materials Federation and was recognized as reaching the domestic advanced level. On September 1, Conch Cement announced that it plans to acquire 100% of the equity of Anhui Conch New Energy Co., Ltd., owned by its controlling shareholder, with a total transaction consideration of 443 million yuan.
The raising of the electricity price fluctuation range not only forces high-energy-consuming enterprises to deploy new energy, but also brings greater development opportunities for the new energy power generation industry.
"According to changes in market supply and demand, when coal power prices rise, new energy electricity prices are also expected to adjust accordingly. This is a good thing for new energy enterprises in the future," a person in Ningxia’s new energy industry told reporters. The country’s relaxation of planned electricity price fluctuation limits to an appropriate range is a market-oriented direction, and the upper limit has been lifted for some industries. Ningxia is also studying relevant policies and expects them to be introduced soon. It is understood that Ningxia already introduced a relevant policy in August this year, allowing coal power prices to rise by up to 10% above the benchmark price.
As the marketization of electricity prices increases and thermal power prices rise, new energy electricity prices will become relatively more competitive. Lin Boqiang, director of the China Energy Policy Research Institute at Xiamen University, believes that another point requiring attention is that in the future, the major cost of new energy power will be grid connection cost rather than power generation cost. Because wind and solar resources are not controllable, the instability factors will increase as the share of clean energy power generation increases, and the power grid will need more investment to address stability issues.
Reporter’s observation: Straightening out the electricity pricing mechanism to guide supply-demand balance. The recent sharp fluctuations in coal prices have not only affected the power generation industry, but also profoundly influenced social production and daily life. As an important energy source in China, coal’s downstream extends to many industries. An abnormally high source price will inevitably have adverse effects on every link of the industrial chain.
Chen Bailin, deputy secretary-general of the China Cement Association and president of Digital Cement Network, believes that the abnormally high coal prices this year have profoundly affected the cement industry. At present, market demand has weakened significantly compared with previous years. In addition to macro-control issues, there are also problems such as the capital pressure on downstream caused by rising bulk commodity prices. At present, almost all building materials are rising in price except cement, and downstream construction progress has also slowed. In addition, the supply-side contraction in the cement industry is more obvious than the demand-side contraction, especially in the southern market. This has also led to the current high cement prices.
The weak supply and demand in the downstream sector indicates that the current high energy price problem needs to be resolved urgently.
"The economy is systematic, and economic logic cannot be defied. It is impossible for the upstream to keep making money while the downstream keeps losing money," said Cheng Xiaoyong, director of the Financial Research Institute of Baocheng Futures. The macro data for the first three quarters of this year reflect a weak situation on both supply and demand sides. In the industrial sector, the industrial added value of ferrous and non-ferrous smelting, including chemical and other industries, saw negative growth in September. Demand-side growth is very poor, and this round of price increases was not driven by demand. In the short to medium term, market demand will continue to decline when energy prices are so high. Multiple economic data have already shown the negative feedback of rising raw material prices on the overall economy. Finished goods inventories in many industries are increasing, and passive inventory accumulation has already occurred. Some industries have also stopped taking orders because costs are too high.
Weakened demand will eventually lead processing links to reduce procurement from upstream, which will in turn transmit to declining upstream demand, allowing supply and demand to return to balance. At the same time, the country has recently increased supply-guarantee measures, and intervention measures for coal prices have also been introduced. The decline in many commodities has already been relatively obvious.
This new policy in the power sector is expected to further push coal prices into a reasonable range.
"Most of China’s electricity is consumed by high-energy-consuming industries. This reform pushes high-energy-consuming industries into the market and is a major reform in the history of China’s power industry," said Lin Boqiang, director of the China Energy Policy Research Institute at Xiamen University. China is not short of coal or electricity. The problem that appeared in the market before was the electricity pricing mechanism. Once the pricing mechanism is straightened out, coal prices will return to a reasonable range. If the electricity price adjustment range is expanded to 50%, as proposed by Guangxi and other provinces, then the effect of this new policy on balancing power supply and demand will soon become apparent. Because high-energy-consuming enterprises have huge electricity demand, even a slight reduction in their electricity demand can make up for the current power shortage.
Lin Boqiang believes that straightening out China’s electricity pricing mechanism is the correct direction of reform. Since the high-energy-consuming sector is relatively dynamic, short-term policies will still mainly focus on high-energy-consuming areas. Next, the marketization of electricity prices for general industry will also be gradually pushed toward the market. Residential electricity consumption accounts for a relatively small proportion of total social electricity consumption. Although there may be room for adjustment in residential electricity prices later, it will be relatively moderate.