China Sets First Transmission Fee for Direct Power Sale

BEIJING, Oct. 20 -- China has for the first time set power transmission rates on a generator's direct power sale to an end-user in a new pilot scheme, raising the hopes of some industry users for cheaper electricity costs.

    Beijing announced plans this year to open up to 20 percent of China's power market for direct trading between power generators and power users, but little progress had been made because both sides were hampered by uncertainties including transmission fees.

    The National Development and Reform Commission said on Monday it set the transmission charge at 0.117 yuan per kilowatt-hour for electricity sold by Huaneng Power's (0902.HK: Quote) Yiming power plant to Liaoning Fushun Aluminum Plant.

    The move brings both sides closer to a specific deal but analysts and officials warned uncertainty remained and a planned overhaul of the power sector was far from being advanced.

    The price was lower than the average power transmission price of 0.134 yuan per kwh grid firms were granted by Beijing in 2008. A lower electricity cost could benefit industry users, especially energy-intensive consumers hit by the global financial crisis.

    "The determination of the transmission rate was good for us," said an official with Huaneng, who declined to identify herself as she was not an official spokeswoman.

    "We can have clearer expectations of cost and revenues. But having a rate is one thing, whether it was fair is another," she added. "And how much electricity the grid could carry would be another test ahead for the deal."

    The government-set transmission price is not binding on other generators, but could become a reference point for future deals.

    "The transmission tariff differs case by case, so whether the direct negotiation could be expanded or how it would be expanded is far from certain," said an official with the State Electricity Regulatory Commission (SERC), who requested anonymity.

    "Direct power sales are only a tentative step towards China's power sector reform. The government wants to determine the transmission and distribution costs and hopes eventually to separate the two sectors," said a Beijing-based industry executive familiar with China's power policy.

    "But the truth is nobody can determine the costs, partly because the powerful grid operators do not want to do it, while the regulator, SERC, is not powerful enough to supervise or monitor the costs."

    DELAYED REFORM

    China has long vowed to reform its prices of energy, including oil, gas and power, but the power sector has moved much slower than oil, which is now indirectly priced over international crude markets CLc1.

    Power market reform stalled soon after the state monopoly was partially broken in 2002, as the fast-expanding economy has since faced frequent power shortages.

    Open and fair charges for power transmission are part of China's long-term plan for power market reform that includes the state's controls on the transmission pipelines, which serve as national highways, and freeing up of power generation and distribution as well as sales to end users.

    The government sets on-grid power prices that generators sell to grids and sale prices that grids charge end users. The price gaps in between include everything from transmission, distribution, sales costs and grid operators' profit margins.

    Beijing plans to use the pilot programme of direct price talks between some power users and generators as a new starting point in China's long-delayed power market reform that has separated power generation from the state power monopoly.

    The State Grid Corporation of China and smaller China Southern Grid Corporation control power transmission in 30 of China's 31 regions while dominating power distribution and sales in more than 80 percent of the country.

    "I don't see the government is hugely determined to reform the sector, as they have seen limited success worldwide...the grid operators can always argue integration of transmission and distribution provides more security than competition," said the Beijing-based industry executive.

    (Source: Reuters)