ANALYSIS-China may further raise tariffs to tackle power crunch

Tag : power tools
China - By Chen Aizhu
BEIJING, Aug 20 (Reuters) - After two tariff increases in as manymonths totalling 10 percent, China may have set itself on a fasttrack to reform the world's second-largest electricity market andend the worst supply crunch in four years.
Within this year and maybe within weeks, the government mayannounce another hike either on wholesale or retail prices, orboth, to lift its generators into the black and curb consumption bypower-hungry sectors, analysts said.
Having exhausted almost all its policy tools to ease coal shortage-- the main culprit for this summer's power crisis which has forcedrationing in nearly half the country -- tariff hikes were left asthe last effective solutions.
(For a factbox of China's moves to end power shortage click on)
And action is needed soon to pre-empt a worsening power crunchahead of another peak consumption in winter and to boost thin coalinventories essential for higher productions.
"It's Beijing's goal to correct market distortion and push forwardeconomic reforms. Beijing will raise power rates and fuel pricesagain this year," Merrill Lynch (nyse: MER - news - people ) said in a client note on Tuesday.

RETAIL HIKE
The two tariff rises were to thermal generators. Some analysts betthe next one will be a retail hike.
"Policy-wise the government has mostly exhausted its tools -- fromurging the restart of small coal mines, freezing coal prices, andraising on-grid prices twice. The only other tool left is raisingthe retail," said Chen Liang, power analyst with Ping AnSecurities.
"We expect such a hike will come after the Olympics, the Paralymicsin late September."
For now, Beijing is taking a breather on retail tariffs by keepingthem unchanged in Tuesday's 5 percent hike that were only onwholesale rates charged by generators.
China last raised retail power prices by 4.7 percent in July thatonly targeted non-residential and non-agricultural users.
But in a follow-up document published on its websitewww.ndrc.gov.cn on Wednesday, the National Development & ReformCommission hinted at a retail price move.
"The on-grid tariff hike will be compensated next time when Beijingraises retail power prices," the NDRC said, without saying when thenext retail hike will be.
Others speculate that more on-grid hikes are on the way to furtherboost margins at generators such as Datang International Power Co.
"This (10 percent increase in on-grid tariffs) can only offset50-60 percent of thermal cost of listed power producers...We expectmore hikes this year, each around similar rate," said Daisy Zhangof BNP Paribas (other-otc: BNPQY.PK - news - people ).
China is battling a most severe power shortage since 2004, asloss-making generators refused to stock up coal, which fires morethan 80 percent of the country's power, at market prices that havemore than doubled in the past year.

SUBSIDY
A retail price hike could, however, be tricky.
China's easing consumer inflation, down for three straight monthsto an annual rate of 6.3 percent in July, seems to provide a windowfor more energy price hikes that may also include another increasein state-controlled fuel prices after an up to 18 percent rise inJune.
The government, however, has to weigh in another inflation index,factory-gate prices that rose the fastest in 12 years in July at 10percent, suggesting inflation pressure remains.
In the absence of price hikes, Beijing may be forced to resort to asafer move -- a handout to state-run, unlisted grid operators whichare now bearing the brunt of revenue loss due to the on-grid ratehikes, similar to what it did to oil firms to help them recouprefining losses.
Instead of another on-grid increase, it could opt for a cut invalue-added tax to return some revenues to power generators.
"Beijing will definitely go and compensate grid firms, like what itdid to oil companies," said a grid executive who asked not to benamed.
Top refiner Sinopec Corp got a $4.4 billion bailout for itsfirst-half refining losses, industry sources have said.
For each 0.01 yuan/kwh increase in on-grid tariff hike, the stategrid will suffer a loss in revenue of 30 billion ($4.4 billion)yuan on an annual basis, estimated the official.
"You can't really ask grids to sacrifice loss of revenue for toolong, as they already suffered a lot in last winter's icestorm andhave scaled back investment in infrastructure," said Ping AnSecurities' Chen. (Editing by James Jukwey) Copyright 2008 Reuters, Click for Restriction
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