China likely to introduce new coal-power link regime

China will cut the on-grid price of electricity generated by coal-fired power plants and sold to the country's power grid operators in a bid to cut emissions and reduce the burden on industrial enterprises.

In addition, the country is mulling over a new mechanism that will better link the fluctuation of coal prices with power prices. The new mechanism is expected to be rolled out soon, according to people with knowledge of the matter.


China will lower the on-grid thermal power price by an average of 0.03 yuan per kilowatt-hour (kWh) starting from Jan. 1, 2016, according to a statement released on Thursday after a State Council executive meeting presided over by Premier Li Keqiang.

The government will continue to impose punitive power prices on sectors that consume a lot of energy on a tier basis, the statement said. The price cut is expected to hurt performance of coal-fired power companies in 2016, said Deng Shun, a coal industry analyst with ICIS.

Prior to the announcement, the government has pledged to lower electricity prices, push forward the marketization reform of the power industry, and improve the mechanism that links prices of coal and thermal power.

The move is hailed by industry experts as a step forward in a reform that aims to let the market play a bigger role in deciding power prices. The cut in the on-grid price of coal-fired power signals that there will be big changes in the coal-electricity link regime, according to Lin Xiaotao, a coal industry analyst with market research firm ICIS.

The National Development and Reform Commission (NDRC), China's top economic planner, launched a coal price index in September, which reflects the prices of coal with a fuel value of 5,000 kilocalories per kilogram.

The index, seen by many as preparation for the new coal-power link mechanism, will enable the market to see the direction of future power price adjustments, according to Lin.

Coal prices in China are largely decided by the market after years of reform. The market will play an increasingly bigger role in power prices, according to Deng.