[BEIJING] A crash in Chinese coal prices, and a flood of clean energy, are cutting power rates in major industrial hubs, easing pressure on some of the factories caught in the crossfire of trade hostilities with the US.
In Jiangsu province, the average price for June contracts settled by centralised bidding plunged 24 per cent year on year to 313 yuan (S$56) per megawatt-hour (MWh), the lowest level regulators allow. In Guangdong, the rate dropped 8.3 per cent to the government’s floor of 373 yuan per MWh. The two coastal powerhouses are heavily dependent on exports, with a combined economy bigger than that of France.
The main driver is a collapse in the price of coal – down 30 per cent over the past year – which accounts for more than half of the electricity generated in China. A shift to market-based pricing, particularly for renewables, is also helping to weaken rates.
“Generation costs are cracking,” said David Fishman, a Shanghai-based principal at consultancy The Lantau Group. “Coal generators, when they are bidding into the system, they are able to entertain lower prices because all of the generation costs are lower.”
Just as economic conditions worsen due to the trade war, Chinese industry is finding relief in the government’s drive for energy security. That effort has been most successful in power markets. The country is sitting on a glut of coal that’s built up over years and leads the world in its rollout of wind and solar.
Lower power costs are not universal though, because of the way the market is structured. The monthly contract declines apply to only about a quarter of electricity sales, Fishman estimated, with some 70 per cent of transactions decided on a yearly basis. Spot or short-term trades account for the rest.
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Still, a lot of annual deals are at least partially tied to monthly or short-term pricing, which will have expanded the number of beneficiaries, Fishman said.
“I would be surprised if there were a lot of power buyers out there just seething, looking at the prices dropping, thinking how come I didn’t see that?” he said.
Policy shifts
Recent policy changes have also pressured electricity prices. The sharp drop in Jiangsu’s monthly rate was largely due to the start-up of its spot market in June, said Nannan Kou, head of China research at BloombergNEF.
Power generators were keen to lock in buyers ahead of the extra competition from spot traders, and lower coal prices allowed them to offer discounts while still eking out a profit, he said. Most regions in China are expected to have at least trial operations for spot markets, which rely on near instantaneous assessments of supply and demand, by the end of the year.
Clean energy is a key pillar of China’s embrace of market forces. Starting Jun 1, all renewables generators have to sell their power on the open market, although projects connected to the grid before that date will retain price protections that limit their downside.
That creates the incentive to sell electricity without worrying too much about falling prices, said Lantau’s Fishman, which could put more pressure on rates and deliver even lower costs to customers. BLOOMBERG
