Explainer-China signals likely rise in household electricity prices

BEIJING (Reuters) - China's state planner said last week it will change the way it sets residential electricity prices to better reflect power supply costs, a move likely to raise household power costs.

Responding to an online comment on its website about falling utilization rates at coal-fired power plants, the National Development and Reform Commission (NDRC) pointed out that China's residential users pay relatively low prices for power due to cross-subsidies from commercial and industrial users.

The NDRC did not give any details on any planned price reforms, but the statement has been taken by analysts as a signal that price hikes will be coming for residential users.

Below are more details about China's electricity prices and the proposed changes to the world's largest power market:

HOW DO HOUSEHOLD ELECTRICITY PRICES IN CHINA COMPARE WITH OTHER COUNTRIES?

China has a three-tiered pricing system for households based on the amount of electricity used - the more consumed, the higher the fees. The first and second tiers cover nearly 95% of residential consumption, and third tier prices are charged on only about 5% of China's household use.

In Beijing, the first tier is set at 0.4883 yuan ($0.0756) per kilowatt-hour (kWh), the second at 0.5383 yuan, and the third at 0.7883 yuan).

Graphic: Household electricity prices in 2019

That puts China's lowest household power prices at about a third of average household electricity prices in Japan of 24.76 yen ($0.2241) per kWh in 2020, and just under 40% of prices in Australia at A$0.265 ($0.1987) per kWh.

WHAT IS A CROSS-SUBSIDY?

Cross-subsidies occur when one group of consumers pays more than the cost of a commodity to subsidise prices for others.

In China, cross-subsidies exist between non-residential power users - typically industrial and commercial consumers - and households; between developed and undeveloped regions; and between high-voltage and low-voltage users.

China does not reveal the amount of cross-subsidies given to households each year. Analysts from a research institute affiliated with the State Grid, however, estimated the subsidies totalled more than 270 billion yuan ($42 billion) in 2019.

WHAT IS THE PRICE FOR INDUSTRIAL AND COMMERCIAL USERS?

Average electricity prices for industrial users across China are 0.635 yuan per kWh, compared with an average of 0.542 yuan for households. It is not clear if the difference fully represents the cross-subsidy coming from industrial consumers.

WHY IS THE NDRC SIGNALLING AN ADJUSTMENT TO PRICES NOW?

The NDRC statement was issued in response to a netizen comment about how falling utilisation rates at coal-fired power stations indicated China has surplus power capacity.

The netizen, based in Shaanxi province, said the surplus meant "China should further improved the tiered pricing scheme", without explicitly indicating if that meant China should raise or lower prices.

The NDRC statement also follows recent power shortages across China's key manufacturing hub in Guangzhou, and a probe into record high coal prices that have raised generating costs.

The NDRC said the improved pricing system will speed market reform and allow for the gradual easing of cross-subsidies.

The state planner said in a separate statement on Monday that some coal-fired power plants in the northern Chinese region of Ningxia are under pressure to shut due to high power generation costs and low electricity fees.

WHAT IS THE MARKET'S INTERPRETATION OF THE NDRC STATEMENT?

Some analysts say the main motivations for any coming price reforms are to boost revenues for power generators and ease the burden on industry after supply-chain costs surged this year.

"By reforming the pricing mechanism, power plants could be in a better position to pass through the higher costs to downstream producers and consumers," said Lisheng Wang, an economist at Nomura who focuses on China.

Wang does not expect Beijing to fully liberalise electricity prices anytime soon, however, as the sector remains dominated by state-owned firms and power prices have a direct impact on livelihoods.

WHAT ELSE IS KNOWN ABOUT THE PROPOSED CHANGES?

In China, provincial governments are in charge of setting household electricity prices, but can only act following orders from Beijing. The local governments will have to hold hearings about any planned price adjustments related to so-called "livelihood products", including electricity and water, before making any changes.

WHAT IS THE EXPECTED IMPACT ON CHINA'S POWER CONSUMPTION?

Analysts do not anticipate any impact on China's total electricity consumption, as residential use only accounts for about 15% of it.

"The macro impact on consumption will be negligible," said Dan Wang, chief economist at Hang Seng Bank (China).

Individual electricity consumption in 2018 was about 0.6% of GDP per capita and 2% of average consumer expenditure, she said.

Zhang Shuwei, a director at Draworld Energy Research Centre, estimated most of China's residential electricity consumption remains rigid demand, and that the actual impact on Chinese consumption would depend on the range of any price hike.

($1 = 6.4605 yuan)

($1 = 110.4800 yen)

($1 = 1.3335 Australian dollars)

(Reporting by Muyu Xu, Stella Qiu and Gabriel Crossley; Additional reporting by Samuel Shen in Shanghai, Sonali Paul in Melbourne and Yuka Obayashi in Tokyo; Editing by Gavin Maguire and Tom Hogue)