China abolishes talks to reform coal pricing

China will abolish the annual price negotiations organized by the government for coal suppliers and power producers from next year as the country seeks to take advantage of lower prices to propel reform.

Coal companies and power firms will negotiate prices themselves and are encouraged to sign long-term contracts, the State Council, China's Cabinet, said in a statement yesterday.

For a long time, term contracts were signed every year at a year-end annual meeting organized by the National Development and Reform Commission and the coal industry association. Under the contracts, coal producers have to sell certain quantities to utilities at prices below market rates as the state wants to ensure supplies for power plants and prevent widespread blackouts.

But sharp gains in spot prices in some years had caused coal suppliers to renege on the contracts and revise them upward. The State Council said the system is unfit for a market economy and reform is inevitable.

"Coal supplies have been easing this year, which was rare in recent years, and the price spread is narrowing between key term contracts and the spot market," it said, adding that term prices are even higher than spot prices in some regions and the situation for power plants has improved.

The State Council also lengthened the period from six months to one year for the cost pass-through mechanism by which a change in on-grid tariffs will take place when coal prices fluctuate more than 5 percent.

Some analysts interpret the longer period as a government concession to grid firms which have to pay the on-grid tariffs charged by power producers.

"The government is avoiding adjusting on-grid prices too frequently because grid companies have to shoulder the cost increase at a time when retail power prices are still tightly regulated on concerns about consumer inflation," said Armand Cao, consulting director of energy and power business at Martec Group.

On-grid tariffs won't be adjusted following the abolition of the annual contract talks because market prices are close to term prices currently, according to the State Council.