Power Tariffs Turn on Cheaper Electricity for Industrial Firms

China has for the first time set power tariffs in its direct power trading pilot program between big users and generators, which gives industrial manufacturers access to cheaper electricity.

As part of its power market reform, the government announced in March that it will open up to a fifth of China's power market for users and generators to negotiate to generate competition in power prices and also enable consumers to choose suppliers.

Yesterday, the National Development and Reform Commission, the price setter, said it has approved a transmission charge of 0.117 yuan (1.7 US cents) per kilowatt-hour for electricity sold by Huaneng Power's Yiming plant in Hulunbeier, Inner Mongolia Autonomous Region, to a Chalco aluminum factory in Fushun in northeast Liaoning Province.

Analysts said that would mean an overall tariff of 0.407 yuan per kWh for the Chalco plant, based on the on-grid tariff of 0.29 yuan in Liaoning. On-grid tariff is charged by power plants to grids. Industrial firms are typically paying 0.475 yuan now, Essence Securities analyst Heng Kun said.

"That's not a small cut," Heng said. "But the Fushun unit still has to pay more than 0.4 yuan given the relatively high tariff base in northeast China. Tariffs in areas like Qinghai (in the west) are only above 0.3 yuan."

Chalco President Luo Jianchuan said in August that the company expects to lower power tariff on average this year by 0.01 yuan per kWh under the direct purchase program, resulting in annual savings of 320 million yuan. Power is one of the biggest cost components in alumina and aluminum production.

Heng said although the news could be positive to aluminum firms in the short term, it could also prompt smelters to restart idle capacity which could worsen oversupply.

The NDRC said the latest approved price could become a reference point for future deals, and industry sources said it is still uncertain how the program would be expanded.

The government expects to use the direct purchase scheme as a new starting point in its long-delayed power market reform.