China widens power pilot scheme to cut users' costs

BEIJING, July 7 Tue Jul 7, 2009 2:41am EDT

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BEIJING, July 7 (Reuters) - China has widened a scheme that allows big electricity users to buy power directly from generators, a tentative step towards reform of the power market.

The move offers a chance for big power users, including dozens of metals smelters such as Aluminium Corp of China Ltd (2600.HK) (601600.SS) and Jiangxi Copper (0358.HK) (600362.SS), to reduce power fees and cut their costs of production.

Currently, the government sets the prices at which generators sell power to grids as well as the prices that grids charge end users. The gap between the two covers transmission, distribution, sales and other costs as well as grid operators' profit margins.

Open and fair charges for power transmission are part of China's long-term plan for power market reforms that will maintain the state's controls on the transmission pipelines while freeing up power generation and distribution as well as sales to end-users.

"Large end-users would be winners in cost saving by buying electricity at lower prices via this scheme than at normal retail prices," said Citigroup analyst Pierre Lau in a note to clients.

But there is a catch: before they can get power directly, the companies involved need to agree to the transmission fees they will pay to the state-run electricity grids.

The original pilot programme involving 15 aluminium smelters was launched in March, offering a major fillip to the companies involved, since aluminium prices were nearing breakeven at the time. Aluminium smelters use so much electricity that power can rival their raw material, alumina, as their biggest cost.

There has been no progress with that scheme.

"No aluminium smelters have reached agreement. It is all about the grids' transmission fees," an executive at one of the 15 aluminium smelters said late Monday.

"We expect the NDRC is going to announce such transmission fees soon," he said, referring to China's top planning body, the National Development and Reform Commission.

He added that his smelter was about to agree a power supply price with a generating firm and was waiting for the NDRC's decision on the transmission fees to the regional grid.

Chalco may have set the transmission fees of 0.03-0.06 yuan with the State Grid, Chinese daily, China Securities, said on Tuesday. The fees would need approval from regional governments for Chalco's smelters.

To widen the pilot scheme, the State Electricity Regulatory Commission said in a statement dated June 30 that all power users conforming with industry policies and consuming 110 kilovolts or more would be eligible, provided they bought power from generating firms that met certain criteria.

With no independent pricing system for power transmission, the electricity regulator said grid operators should charge 110 kilovolt-line users 10 percent less than the existing average and 220-kv users 20 percent less.

But it did not provide any reference prices for such fees.

Excluding line losses, electricity transmission and distribution charges averaged 0.134 yuan per kilowatt, or around a quarter of China's average power retail prices, in 2008.

ADMINISTRATIVE BARRIER

And, in a further hurdle, provincial governments must agree to participate in the programme before any firms can take part.

"Such administrative processes can be enduring, and actual implementation may not happen in the near term," said Nomura analyst Ivan Lee in a note to clients.

Lau at Citigroup expected little movement in the next year or two, with an "immaterial" impact on power firms' earnings.

Jiangxi Copper has already applied to Beijing for approval to buy electricity directly from power companies, which would help it save power costs, spokesman Pan Qifang said. [ID:nHKG15545]

"The power cost saving will be huge if approved," Pan said, adding that Jiangxi Copper consumed more than 2 billion kilowatt-hours (kWh) per year. (Editing by Ben Tan)

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