Price strategies that will matter

Stable costs for energy can help China achieve future prosperity and growth with less guesswork

Though China has signaled its intention to let the market play a decisive role in allocation of resources, it would need to make considerable progress on energy pricing to achieve tangible results in the long term.

Decisive steps on energy pricing will also help reiterate the government's strong commitment to reforms, and indicate the way forward for energy producers and consumers.

Zhang Chengliang / China Daily

Since 1984, China has dabbled with energy reforms in one form or another. While the focus of these reforms has been to move away from a centrally monitored pricing mechanism to a more market-driven approach, the pace and scale of reforms have differed for various types of energy.

Among these reforms, the coal-pricing mechanism that has drawn much attention, especially in terms of pace and scope. The first major reform in this sector was the dual pricing system, which was introduced in 1984. Enterprises were required to sell a quota of coal at prices that were set by the central government and the rest at prevailing market rates. In 1993, the central government decided to adopt a pricing mechanism based on usage patterns.

Under the dual-pricing system, coal prices for non-utility use - the so-called market coal - were determined by the market. But the price of coal for utilities - the so-called power coal - was based on the guidance price set by the National Development and Reform Commission, often at rates lower than prevailing market rates.

In 2004, the commission decided to use price bands for fixing coal prices. Though the mechanism involved extensive discussions with coal producers and electricity generators, it was scrapped in 2006.

The commission also proposed, in May 2005, that it would consider a coal-electricity price "co-movement" mechanism that would allow power tariffs to be raised if coal prices rose by 5 percent or more over a six-month period. The scheme also allowed power generators to pass up to 70 percent of the increased fuel costs to grid companies.