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

The idea, which would stabilize coal supplies and electricity generation, is the highlight of a proposal submitted by the China Society of Coal Industry to the commission to amend the coal trading rules.

The proposal aims to replace the old rules stipulated in the 1960s which were designed to serve the needs of the planned economy.

The new proposal will spell out more relevant regulations in terms of coal qualification, transportation, legal contract terms and the pricing mechanism.

The proposal is still under initial discussion.

According to society officials, they suggested in the proposal to completely liberalize the coal market and abrogate the current double-pricing systems for thermal coal to power plants. Liberalization aims to resolve the enduring disputes between coal and power companies.

At present, Chinese power plants sign one-year coal purchase contracts with coal mines at the end of the previous 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. The government is concerned that power firms cannot afford the coal price rise, given that electricity sales prices are pegged by the government.

Thermal coal prices on the spot market have risen this year by 25-30 per cent year-on-year, while contracted prices increased by less than 10 per cent.

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, making the nationwide power shortage even worse.

"The double-pricing system should be abolished," said an official from the China Society of Coal Industry. "Transactions should be fair to both sellers and buyers," said the official who refused to be identified, "But historically, coal companies have been suffering from the lower prices."

Experts agree that liberalization of coal prices will be the inevitable direction of the reform.

Wu Zhonghu, an analyst with the Energy Research Institute under the NDRC, 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 the market."

But it would be a tough decision for the government to open up the market.

Experts said the premise for the complete freeing up of the coal market is that the government should establish a mechanism to float electricity tariffs to allow 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.

"It is a dilemma," said Wu.

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

The official said 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.

In fact, the government has also moved.

Last month, the NDRC increased the end-user electricity tariff by an average of 22 yuan (US$2.7) 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)