The Strategist

China Is On the Way to an Open Electricity Market

11/30/2015 - 15:37

China has announced that its plans to terminate the state electricity distribution companies’ monopoly, allowing end-users themselves to discuss the price directly with generating companies.

Christoph Filnkößl
Christoph Filnkößl
The website of the main state economic planning agency announced that Chinese generating companies will be able to sell electricity to consumers through regional trade platform.

Under this plan, companies State Grid Corp. of China, China Southern Power Grid Co. and Inner Mongolia Power Group Co. will operate the networks and supply electricity for fixed government payments.

"Direct purchase of power will help restore the status of electricity as a raw material. This is an important step towards a fully open electricity market in China," - said the National Commission for Development and Reform of China in their statement.

Direct sales will bring benefit to end-users, as lower coal prices and surplus of electricity will lead to lower prices.

Electricity is one of the industries that President Xi Jinping is committed to review and allow the market forces to play a greater role in resource allocation.

In September, China has expanded direct supply of electricity in seven cities. The authorities say they are planning to add other cities in the program later.

The Government is also developing a trading platform to facilitate direct sales.

State Grid Domination

Shares of energy companies in Hong Kong and Shanghai have reacted to the news differently.

For example, shares of Huaneng Power International Inc in Hong Kong decreased by 2.7% to HK $ 6,79, while Hang Seng Index – by 0.2%.

Shares on the Shanghai Stock Exchange jumped by 1.7% to 8.93 yuan, and Shanghai Composite Index rose by 0.3%.

Shares of Datang International Power Generation Co in Hong Kong fell 0.8% and increased by 1% in Shanghai.

State Grid, China Southern Power Grid and Inner Mongolia Power Group carry out transmission, distribution and sale of electricity.

State Grid accounts for 80% of the power system operation, transmission and distribution of sales in the country, according to Bloomberg New Energy Finance.

This reform will allow generating companies to enter the retail market and expand revenue sources, avoiding network operators, said Shi Yan, an analyst at UOB-Kay Hian Ltd.

Wrestling for clients

"If the reform is implemented, the electricity consumers in most regions will be able to buy it at a lower price, as several suppliers will be competing for customers," - said Shi.

The National Commission for Development and Reform said that it is going to monitor implementation of these pilot programs until 2018. Consequently, time frame for wider reforms will not be set.

The five largest Chinese companies led by China Huaneng Group accounts for 49% of all power generation according to Bloomberg New Energy Finance.