China is planning to establish a pricing system for power transmission and distribution to finance its grid construction, which industry insiders say would lead to a hike in electricity prices.

Following a trial operation in May of the regional power market in east China which covers Shanghai, Zhejiang, Jiangsu, Anhui and Fujian provinces, the pricing system will be introduced there, according to East China Grid Co.

The regional market is being established to eliminate barriers in power transactions among provinces.

"It is part of the country's efforts to reform its power price system to make the price more market-oriented, and to optimize the price structure," said an official with the company who asked not to be identified.

Officials, however, refused to reveal the possible price, only saying it is under discussion by the central government.

Currently the government-mandated price for power for end users takes into account the cost of power generation, transmission and distribution.

However, there is no clear price standard for power transmission and distribution, but the government prices the supplies by power generating firms to grid operators before construction of the generators to ensure a steady return to the firms.

Grid operators mainly depend on the gap between prices for the end users and generators' supply to cover their cost of transmission and distribution, and also to finance grid construction.

But the gap is too narrow. Currently it is 0.086 yuan (1.03 US cents) per kilowatt-hour on average in China, accounting for only 24.6 percent of the average end user price, while a reasonable percentage should be 40 percent, and the gap should be 0.125 yuan per kwh, according to a recent report from the Development Research Center of the State Council.

The grid operators' returns are therefore low, only 0.4 percent year-on-year, while that of the independent power providers is 7.1 percent. It is also lower than the average return for all the country's industries.

"The obscure and low transmission and distribution price has caused a fund shortfall to finance grid construction. A feeble transmission and distribution capacity also accounts for the continuing power shortage as power can't be sent to places where it is badly needed," commented Yan Maosong, a noted power expert with Shanghai University.

Based on the low returns, grid construction will suffer a fund shortage of 55 billion to 60 billion yuan between 2001 and 2005. The shortage will reach 90 billion yuan from 2006 to 2010 if the low returns continue, according to the report.

Once the transmission and distribution price is settled, the price for the end users may increase, Yan said.

"If the price doesn't increase, power providers will have to pay for the price hike themselves. But it will be unfair, as transmission and distribution also serves end users," he said.

"So power users and power providers would have to pay more for grid operators' service. The main problem is which part pays more."

(Eastday.com April 5, 2004)