The National Development Reform Commission (NDRC) is considering plans to abolish the fixed coal prices currently enjoyed by the nation's power plants.

The idea, which is intended to balance coal supplies and electricity generation, is the highlight of a proposal submitted by the China Society of Coal Industry (CSCI) to the commission to amend the coal trading rules.

The proposal, still under initial discussion, aims to replace the 1960s rules, which were designed to serve the needs of the planned economy. New regulations would update such areas as coal quality ratings, transportation, legal contract terms and the pricing mechanisms.

CSCI officials say that they have proposed completely liberalizing the coal market and abrogating the existing double-pricing systems for thermal coal to power plants. Liberalization should resolve the enduring disputes between coal and power companies.

At present, Chinese power plants sign one-year-forward coal purchase contracts with mines at the end of each year to supply about one-quarter of the coal they will consume in the coming year.

The government tends to cap the contracted prices much lower than that on the spot market out of concern that power companies cannot afford a rise in coal prices. Electricity sales prices are pegged by the government.

Thermal coal prices on the spot market have risen this year by 25 to 30 percent year-on-year, while contracted prices increased by less than 10 percent. Many coal mines refused to observe their contracts and sold the coal on the spot market to cash in on the price hike.

As a result, some power plants have run out of coal and had to stop operating, aggravating the nationwide power shortage.

"The double-pricing system should be abolished," said a CSCI official. "Transactions should be fair to both sellers and buyers. But historically, coal companies have been suffering from the lower prices."

Experts agree that liberalization of coal prices is inevitable.

Wu Zhonghu, an analyst with the NDRC's Energy Research Institute, said the pricing reform is a way to resolve the dispute between coal and power companies.

"Prices should be decided by the market," said Wu. "Government interference will distort it."

But opening the market is a tough decision for the government.

The premise for the complete freeing up of the coal market is that the government would establish a mechanism to float electricity tariffs, allowing the power companies to pass on coal price hikes.

But the government is concerned that the decision will hurt the interests of millions of power users.

A deputy director of the China Electricity Council said the government is studying ways to push through the coal-electricity pricing collaboration mechanism.

Meanwhile, the government is encouraging coal and power generating companies to enter into long-term contracts to stabilize coal supplies. It also encourages power companies to invest in coal mines to ensure supplies.

Last month, the NDRC increased the end-user electricity tariff by an average of 22 yuan (US$2.70) per megawatt-hour on the eastern, northern, central, and southern grids to help generating companies offset some fuel cost increases.

(China Daily July 23, 2004)