Goal and Progress of Power Tariff Reform——An interview with Liu Zhenqiu,Vice Director ofDepart

L TRI ITY N By Sha Yiqiang
Journalist of China Power Enterprise Management
Go al an d Pro gr es s of Po wer
Tariff Reform
——
—An in t erview wit h Liu Zh en q iu ,Vice D ire ctor of D ep a rtm e n t of P rice,NDRC
Te n progre s s es of th e p owe r tariff refo rm
J our nalist:There are many discussions on tariff reform inside the power industry,and someone even think that the power institutional reform was slowed down by the tariff reform,what do you think of it?
Liu:As viewed from the goal of reform towards marke-tization,there is still a long way to go for the tariff reform;but I think that the tariff reform in recent years has met the needs of the power institutional reform in measures taken and has made many important and substantial progresses in the reform of marketization.
Document No.62"Notice on the Issuance of Power Tariff Reform Program"issued by the General Office of the State Council in 2003is an important supporting document to the power institutional reform,and is also a programmatic docu-ment for the tariff reform.Accordingly,NDRC issued the "Tentative Procedures for Management of On-Grid Tariffs,""Tentative Procedures for Management of T&D Tariffs"and "Tentative Procedures for Management of Sales Tariffs."z "f T ff R f "ff y ,f ,
the tariff reform has always been implemented according to Document No.62and the three supporting documents in recent years.The power tariff reform is worth mentioning in the following aspects.
Separ at ion of on-gr id t ariff fr om T&D tar iff was implemented.In May 2003,the "Procedures on Implementing Price Separation for Plant and Grid"was issued.According to the principle of "zero profit,"on-grid tariffs were verified for enterprises separated from power grid enterprises.
The policy about benchmark tariff came on.A policy was executed and publicized starting from 2004,which stipulated that a uniform on-grid tariff,i.e.,the so-called benchmark tariff,would be formulated for newly-built generation projects based on the average cost within a region or a province.Thus the original pricing mechanism of "repaying capital with interest"and the price pattern "one tariff for one unit of one plant"were discarded.
Experiment for policy of bidding for access was made.In the regional electricity market of Northeast China,the on-grid tariff reform based on two-part system was performed,f y ff f ,
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Although some people critici ed that the Program o Power ari e orm was not e ectivel implemented in act or which a capacit tari standard was veri ied and approved and procedures concerning bidding or access and procedures
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for management of supplementary service pricing were promulgated respectively.
T&D pricing standar ds wer e announced.T&D pricing standards of provincial grids were announced to the public successively in2006and2007.This has provided conditions for both the gradual establishment of market-oriented pricing mechanism and the promotion of direct power supply for larger consumers,and has laid foundations for advancing the reform on T&D pricing.
C oal-electricit y pr ice linkage mechanism was set up. To rationalize the contradictions between coal price and power price,a coal-electricity price linkage mechanism was approved and promulgated by the State Council.So far the mechanism has been activated three times.
The t ime-of-use pr icing m echanism was fur t her impr oved.On the basis of w ide implementation of time-of-use price across the country,the time-of-use pricing systems in Beijing,Jiangsu,Shanghai and Guangdong were adjusted. These actions have shown a positive effect on alleviating power shortage and smoothly passing summer peak of power con-sumption.
The elect ricity pr icing policy for renewable ener gy was const it uted.The pricing policies for electricity generated by new energy such as wind energy,biomass energy and solar energy were made clear.Procedures for apportioning exces-sive electricity price of renewable energy over conventional energy nationwide were also clarified.
The policy of differ ential pr ice was improved and implemented.In September2006,Document No.77issued by the State Council transmitted the"Proposals on Improving the Policy Concerning Differential Price"made by NDRC. According to it,the executing scope of differential price has been expanded since October1,2006,and the limits of additional tariff for relative energy-intensive industries were lifted.Entering2007,special inspection was initiated and preferential tariff for energy-intensive industries was abolished.
The policy of desulfur ization power tariff was executed. Since2004,the policy concerning desulfurizati on tariff of 1.5cents for coal-fired units has been executed.Meanwhile, managerial procedures for desulfurization pricing and desulfu-rization facility operation were put forward.
On-gr id t ariff was reduced for small ther mal units.In March2007,the"Notice on Reducing On-Grid Tariff to Urge Retirement for Small Thermal Units"was issued.For small
f,ff
y ff depending on their actual situations.This action would encourage small thermal units to transfer their generation rights to highly efficient generation units.
Among the items of tariff reform mentioned above,the first five are closely related to marketization.Without them, the reform of marketization would be difficult to advance. Therefore,the tariff policy has a positive impact on actively promoting the development of the power industry and the construction of power market.
As to the words"The tariff reform slows down the power institutional reform,and electricity price was still managed by planned means,"it seems to be a misunderstanding.
First of all,it is inappropriate to confuse price regulation with the means of planned economy.As long as monopoly or market failure exists,price regulation is whenever necessary. Direct government determination or intervention in price formulation also exists in matured market economies.In coun-tries where power reforms were conducted earlier such as the United Kingdom,the electricity price was also regulated and determined directly by the government before the reform. Therefore not all government management of power price should be categorized as planned economy means.
Secondly,the direction of tariff reform is to let the rela-tionship between supply and demand be the main determinant of electricity price,however,even at the international level, from establishment of a electricity market to fully liberaliza-tion of price,it needs seven or eight years at least and ten-odd years at most.China has a long way to go to reach a matured competitive market in which electricity price is determined by the market.Currently the institutional environment,market environment and the legal environment are all not yet perfect for the power institutional reform.Under these conditions,it is impossible to build a matured market only by liberalizing electricity price.
Thirdly,to evaluate whether a policy is good or not,the criterion should be whether it meets the situation of economic and social development,something more important should be whether it promotes the development of productivity.
Brea kth ro ugh of b enc hm ark ta riff a nd
its effe cts
J our nalist:What is the most important breakthrough in the power tariff reform in recent years?
Liu:Compared to traditional electricity tariff manage-ment,the"benchmark tariff"is a very important and revolu-y T y"f"
ff
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thermal units listed in the scope o depreciation the tari s would be grad uall cut down to local bench mark tari tionar progress.he old polic one price or one plant in which tari s were determined based on individual costs was
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N L TRI ITY
L TRI ITY N once summarized as "profit is first guaranteed and cost is all covered by the price lever";whereas the goal of the reform is "price is first fixed,costs are by all means reduced and profits are different."According to the new policy of benchmark tariff,newly installed power generating units must execute the unified benchmark tariff set for the region.benchmark tariff has made two important breakthroughs:firstly,it realized the transition from individual cost pricing to social average cost pricing;secondly,it made the pricing procedures and results open,fair and transparent.
Before 2004,China's on-grid tariff had been under highly centralized management of the state and priced based on indi-vidual cost of power units,and,the approval of electricity tariff had not been so transparent.The execution of standard tariff changed "pricing after generation"into "pricing before gener-ation."This greatly enhanced the transparency and reduced the discretion of government in pricing process,and shifted the government form concrete administrative actions to abstract administrative actions.
In a market economy,price as an adjustment lever func-tions primarily in the following three aspects:optimizing the allocation of resources,improving efficiency and redistribu-tion.The benchmark tariff scheme has achieved remarkable results integrating perfectly the incentive and restrictive features of price.Firstly,benchmark tariff mobilizes the activity of the potential investors in the whole society to invest in power industry through the leading role of price signals.Investors can measure the profitability of a project according to the benchmark tariff.As long as the cost can be controlled at a reasonable level,investors can obtain a profit as expected.Secondly,the benchmark tariff scheme introduces competition among power generation enterprises,which i s helpful to encourage enterprises to reduce costs and increase petition among generating enterprises becomes competition among capital costs and operation costs,and ultimately boils down to competition among operations and managements.According to statistics,the coal price in 2007rose by about 90per cent compared to that in 2003,the prices of production material rose about 25per cent,the benchmark tariff increased by only 10per cent,yet the capital cost of newly-built power plants reduced by 1,000Yuan/kW.Thirdly,the benchmark tariff scheme eases consumers'burden,and lays foundation for the gradual transition to electricity market.
J our nalist:But the benchmark tariff is still an adminis-trative pricing approach.It isn't the ultimate goal,is it?Liu:Sure,the benchmark tariff is only a means to transit to marketization,not the optimal approach.However,we must realize that it is a self-revolution of the government,which z 'D f ,""the actual conditions.In terms of the function of price itself,it is a big step forward.Although there are human factors,the introduction of market competition has paved the way for realizing the ultimate goal of power tariff reform.
Fun ctio n of c oa l-elec tricity price linka ge polic y a nd imp ro ve me nts nee de d
J our nalist :The policy of coal-electricity price linkage is also an important progress of power tariff reform in the transition to marketization,but has been suffered much criti-cism.Particularly in 2007when coal price rose by about 9per cent,the linkage mechanism failed to be activated.How about the future of this policy?
Liu:The policy of coal-electricity price linkage is an effective way to keep up with the system change and to resolve the contradictions between coal price and electricity price.Currently a competitive structure has been initially set up in the power generation market,but due to the constraints of various factors,it is not yet the time for electricity price to be fully liberalized.This policy eases the contradictions between coal price and electricity price,guarantees the sustainable development of power generation enterprises and transmits to the customers through price signals about the tense supply of primary energy such as coal and scarceness of resources,which spurs consumers to adjust their power consumption and save electricity.At the same time,by requiring power enterprises to moderately tackle fuel cost increase,it forces the enterprises to further reduce coal consumption and improve efficiency.Consequently,the policy has played a positive role in these aspects.
Of course,this policy is a transitional approach after all;it still needs to be improved.For example,the linkage is not sensitive enough to price changes taking six months as a cycle;requiring the generatingenterprises to deal with 30per cent of the cost increase is unlikely reasonable,so the current approach need to be further improved.Even so,the establish-ment of such a mechanism is still a fairly good solution to resolve the contradictions.
The policies or measures brought forward over the past few years were all for the transition period.On one hand,they should reflect the encouraging and restrictive effects of price on enterprises;on the other hand,they should be conducive to the transition toward marketization.In accordance with the tariff reform program,China will gradually deregulate elec-tricity price;coal price and electricity price will be formed in the market;and interest relationships between coal industry,power industry and electric consumers will be adjusted through marketization.Similarly,although the coal-electricity y f ,
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minimi es the government s discretion.uring the course o market construction it is a sub-optimal choice in line with
price linkage is still a wa o administrative management it should not be looked upon the same as an approach o planned
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economy.In fact,it is a kind of management of electricity price based on market rules under the control of government before power market is perfected at last.It is a simulation to market mechanism utilizing jointly market regulation and government control.
Whether coal-electricity price linkage should be activated depends on comprehensive considerations on all aspects.The situation of power supply and demand is further alleviated in 2007,and operational profits are not bad with power enter-prises.In order to ease inflationary pressure,the possibility is little to activate the coal-electricity price linkage.
Tariff refo rm a nd e le ctric ity ma rket
es ta blis h me nt
J ournalist:Many experts believe that the power tariff reform is the core of the power institutional reform;whether the tariff reform could finally succeed is the key in the estab-lishment of electricity market.What is your opinion about this?
Liu:I think this viewpoint is worth discussing.The tariff reform does have significant effect on electricity market construction.However,as viewed from the overseas practices of power reform,the main procedures included monopoly elimination,deregulation and privatization,which together constituted the core of the reform.It is hard to say which link is more important.Breaking up the vertically integrated monopoly system can clear the way for establishing an elec-tricity market,liberalizing prices and introducing competition; while the market competition mechanism,to be brought into full play,shall be established on the basis of micro market main bodies of enterprise corporations with clear property rights.China's power reform does not take the way of privati-zation,but the introduction of corporate governance structure with diversified ownership is quite necessary.Even if a competitive electricity market is established,it does not mean that electricity prices can be decontrolled.This is because the decontrol of prices needs further the perfection of the market system,which features1)a market environment in which power supply and demand are balanced or supply exceeds demand, 2)strong grid systems,3)a sound system of laws and regula-tions,4)higher capability of government in electric supervi-sion,and5)market main bodies with reasonable corporate governance structure.Presently,China does not have all the conditions in these aspects.
The course of China's power tariff reform also stands for this point.In the initial stage of the reform,there were disputes about whether the price system or the institutional system should be changed first.Practice showed that price f f f
y If j f introducing corresponding incentives and restraints,enterprises would hardly make appropriate responses to price changes, thus price would fail to play its role of regulation.Therefore, I think Document No.62has accurately summarized the relationship between the tariff reform and the power institu-tional reform,that is,the power tariff reform is an important component of the power institutional reform.
Price system reform in China's other industries also experienced long courses form unified pricing to dual-track pricing,and finally to market pricing.Power tariff reform and the construction of electricity market should both follow the principle of designing as a whole,advancing step by step, making experiments first and implementing by stages.
P rinciple s a nd problems o f T&D pricin g
J ournalist:But next,whether bilateral transactions or direct supply of large consumers,T&D pricing is vital.How will NDRC push T&D pricing mechanism to come on? Besides,the proportion of T&D price is relatively low in China's power tariff structure,which has affected the sustainable development of power grid enterprises.Should this problem be solved as soon as possible?
Liu:We have released in two successive years the T&D price standards for provincial grids.The T&D pricing should follow the principle of cost plus a reasonable profit.Presently, the most critical problem is that the costs of grids are not clear.Before the T&D prices are calculated accurately,they can be controlled pro rata based on measurement,as they are controlled in many foreign countries.Taking a foreign 220-kV-class transmission system for example,the T&D tariff accounts for25per cent in the structure of sales tariff.Of course,the situation in China is not quite the same as in foreign countries,but it can be adjusted until it is relatively reasonable.Therefore,the T&D tariff can be decided according to the process of market construction,and will not affect heavily the power market.The problem of the Northeast power market is not lack of T&D price,but lack of linkage of sales tariff.
We are drafting the"Supervising and Approving Proce-dures on Pricing Cost of Transmission and Distribution,"so as to further standardize the cost calculation of power grids.For instance,the depreciation rate of a provincial power grid reached11per cent;so many profits were covered up by depreciation.With the new method,the depreciation could go down.In a word,cost and income should both be made clear. This regulation method will strive to come on in2007.
As to the problem relating proportion of T&D tariff in sales tariff,it is not serious at present.The reform has just ;y
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re orm must be carried out along with the re orm o the insti-tutional s stem.we ust re ormed pricing scheme without been started it is impossible to make ever thing in good order
at the beginning.hen power plants were ust separated rom
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L TRI ITY N power grids,they were given on-grid tariffs based on zero profit;yet,they could still operate normally,and,the on-grid tariffs may be adjusted constantly through reforms.
Mode s e le ction fo r ele ctric ity ma rket
J ournalist:The tariff reform is closely related to the mode of power market competition.In your opinion,which mode is more suitable for China at present stage?
Liu:From the practices abroad,we can see that there are generally two modes of price competition:one is centralized market in which full electricity is bid for access;the other one is the combination of bilateral contracting and centralized market.In the latter mode,the market participants can either conduct the transaction through a centralized market or directly by bilateral contracting.In a bilateral contract,the quantity and price of electricity is set by the two sides through negotia-tion;while the price in a centralized market is the equilibrium price of supply and demand.
The advantage of the mode with centralized market is that the power grid system is responsible for dispatch and balance of electricity,which is conducive to stable operation of the system;the main disadvantage is that the market price is decided by a small number of suppliers who may use monopoly to manipulate price without the involvement of demand side in market pricing.The combination of bilateral contracting and centralized market has the advantage that price is deter-mined by both supply side and demand side so the price levels are relatively low and stable.But this needs sufficient quantity of demand side and has higher requirements for power grid dispatching and government supervision.
Only the market with the introduction of buyer competi-tion is a perfect and fully competitive market.Almost all of the countries having already carried out power reform of marketization choose this transaction mode that is full of competition.In my opinion,China's electricity market should choose the mode of bilateral contracting combined with centralized market.At present stage,particular importance should be attached to the construction of contracting market,and large consumers should be encouraged to sign power purchasing contracts with generation enterprises at prices set through negotiation.
Ro ad ma p of pow er tariff re form
J ournalist:What are the major difficulties in China's power tariff reform?Can you describe the road map of the power tariff reform?
L N y ,y 'f y ff f My in the process in which competitive market structure has just been established but electricity price cannot be fully liberal-ized.The biggest difficulty is that we have to make efforts to adapt to this market structure;we always encounter problems no matter how we manage it.Some people expect that market pricing can come true immediately,but can market be formed as long as prices are decontrolled?Price is only the appear-ance;contradictions in institutions and mechanisms are all reflected through it,so there must be a gradual process.In the tariff reform in early 1980s,there were proposals for tariff management,either control or decontrol,and the final solution is the combination of control and decontrol with the former dominant in the earlier stage and the latter domi-nant in the later stage,gradually increasing the proportion of market pricing.Tariff reform progressed along this route.The goal of establishing market is clear,but we cannot substitute its policy objective for the process.
As to the road map for power tariff reform,the three documents about tariff management we developed previous have described it very clearly,that is,on-grid tariffs and sales tariffs should be gradually liberalized and marketized.T&D tariffs should be subjected to government control and gradually shift form the "cost plus profit"principle to upper limit control,so as to encourage power grid enterprises to reduce costs and improve efficiency.
In a certain period to come,the focus of reform should be to let electricity tariffs better reflect supply-demand changes and scarcity of resources,and promote energy saving and emission reduction.
In the link of power generation,the policy of benchmark tariff and the pricing mechanism of renewable energy power should continue to be improved,tariff policies supporting generation dispatching based on energy saving should be studies;meanwhile,competitive bidding should be promoted along with the process of electricity market construction.In the link of transmission and distribution,the measures for supervising and approving T&D pricing cost should be urged to be studied and developed,so as to create conditions for implementing the T&D pricing mechanism of "cost plus profit."
In the link of electricity sale,various preferential tariffs should gradually be abolished,tariffs classification should be simplified,and the tariff policy of time-of-use should be continuously improved.
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iu:owada s man people don t ull understand the power tari re orm.personal understanding is that we are
ranslated b J ia ulu and edit ed b i hulan 12。