China to Break Electricity Distribution Monopoly Over Sales

  • Customers can negotiate directly with suppliers on price
  • State-owned grid operators to charge only a transmission fee

China said it will end the monopoly of state-owned power distributors over electricity sales by allowing end users to negotiate prices directly with generators, pressing ahead with reforms the State Council flagged in March.

Generators will be able to sell power to customers through regional power trading platforms, the country’s top economic planning agency said in a statement on its website Monday. As part of the plan State Grid Corp. of China, China Southern Power Grid Co. and the Inner Mongolia Power Group Co. will operate networks and carry electricity for a government-set fee.

“Direct power purchase will help restore electricity’s commodity character and is an important step toward fully opening-up China’s electricity market,” the National Development and Reform Commission said in the statement on its website. “Direct trading will bring end users benefits” as low coal prices and power oversupply push down rates.

Government Reform

Power is among the industries in President Xi Jinping’s drive to overhaul the nation’s bloated state-owned businesses and allow market forces to play a bigger role in the allocation of resources. The NDRC said it will monitor pilot programs until 2018 without providing a time frame for the broader reforms.

The recent revamp has been in the works for a while. China expanded direct power sales to seven cities from just one, Shenzhen, earlier this year with plans to add more cities to the pilot program, an NDRC official said in September. The economic planner said in the same month it has started to set up an electricity trading platform and will give up its pricing authority once the new rules are in place.

China issued rules to overhaul its electricity market in March, aimed to gradually loosen the state’s monopoly and encourage competitive energy pricing. State-owned transmission companies such as State Grid Corp will operate as a utility, charging only a transmission fee.

Dominate State Grid

Dual-listed utility shares in Hong Kong and Shanghai reacted differently to the news. Huaneng Power International Inc’s Hong Kong-listed shares dropped 3.2 percent to HK$6.76 at the market close while the city’s benchmark Hang Seng Index fell 0.3 percent. The stock in Shanghai advanced 1.7 percent to 8.93 yuan, compared with a 0.3 percent gain in Shanghai Composite Index.

Datang International Power Generation Co.’s Hong Kong shares dropped 0.8 percent, while the company in Shanghai gained 1 percent.

State Grid, China Southern Power Grid and the Inner Mongolia Power Group manage transmission, distribution and the sale of power. State Grid accounts for 80 percent of the country’s power system operations, transmission, distribution and sales, according to Bloomberg New Energy Finance.

The reform will allow power generators to bypass grid operators to penetrate the retail market and expand income sources, said Shi Yan, a Shanghai-based analyst at UOB-Kay Hian Ltd.

“If properly executed, power users in most regions can get lower prices as they’ll have a couple of suppliers lining up to sign them as a customer,” Shi said.

The nation’s five-largest power producers, led by China Huaneng Group, account for 49 percent of all power generation, Bloomberg New Energy Finance data show.

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