- Coal prices in China soared since August, driven by a combination of factors: government efforts to limit coal capacity expansion and to decrease coal consumption, tighter environmental criteria for coal mining as well as rising global coal prices.
- High coal prices put pressure on China’ coal power plant operators. The tight governmental restrictions on power pricing mean that they cannot pass on the additional costs to end-users by raising prices.
- Despite being state-owned and influenced by policy objectives, power plants were unwilling and unable to absorb the resulting losses continuously. Therefore, they chose to reduce their power production volume, causing power shortages with widespread negative impact on China’s industry.
- Given the threat of systemic damages to the Chinese economy, the powerful National Development and Reform Commission (NDRC) stepped in. Typically, NDRC combined market-mechanisms and interventionist actions: On the one hand, it pushed power price liberalization via a refined power trading mechanism allowing a larger range of fluctuation around a benchmark (up from 10% to 20%). On the other hand, it also intervened directly and heavy-handedly, imposing strict “guidance” on coal price and production.
- As a result of NDRC actions, the power market is stabilizing quickly and concerns about larger economic setbacks are fading. This also bolsters NDRC’s general approach to combine gradual market liberalization measures with strong ad hoc government intervention.
Sinolytics is a European consulting and analysis company that focuses entirely on China. It advises European companies on strategic orientation and specific business activities in China.