China May Raise Retail Power Prices, Official Says

By Helen Yuan and Wang Ying

Sept. 3 (Bloomberg) -- China may raise retail electricity prices by 4.5 percent, the second increase this year, to help narrow losses at power producers and ease a nationwide shortage.

Prices may be raised by 0.025 yuan per kilowatt-hour, Zhang Zengchan, secretary general of China Ferroalloys Industry Association, said today, citing talks with government officials.

Higher tariffs would help electricity generators cope with record coal costs, encouraging them to expand output as the government combats a sixth year of power shortages. China's inflation has cooled for three months since reaching a 12-year high in February, giving the government room to increase prices.

``If power prices are raised in the near term, it would be a big surprise,'' Martin Wang, an analyst with Guotai Junan Securities HK Ltd., said by phone from Hong Kong. ``We had forecast the next price hike at the beginning of next year when contractual coal prices are set to rise further.''

China raised retail prices by 0.025 yuan, or 4.7 percent, in July, as record coal costs slashed profits at power generators and distributors. The second gain being considered would represent about a 4.5 percent gain based on Bloomberg's calculations derived from figures provided by the National Development and Reform Commission then.

Huaneng Power International Inc., a unit of China's biggest power producer by capacity, and Huadian Power International Corp. reported first-half losses because of higher fuel costs.

Higher Costs

``They need to raise power rates by 0.20 yuan to break even,'' said Ferroalloys' Zhang at a conference in Xiamen. ``But of course they can't do that. The tariff hike will lead to higher costs for ferroalloy producers.''

He didn't say when prices will be raised.

Power shortages in China have forced the largest aluminum smelters to cut output by more than 10 percent. Some zinc smelters have also reduced production.

The price gain being considered comes as the government loosens loan policies to sustain the world's fourth-largest economy after four quarters of slowing growth. Industrial production grew in July at the weakest pace in 16 months amid faltering orders for Chinese exports.

State Grid Corp. of China, the larger of two distributors in China, said Aug. 20 the government needs a system that allows retail and on-grid prices to rise at the same time because it is struggling to raise funds for its network.

State-owned State Grid said in August it shoulders the ``social responsibility'' to expand its network even as profit slumped 80 percent between January and May because of damages from snowstorms and earthquakes.

The grid operator will need 73.6 billion yuan ($10.7 billion) to restore power lines after the natural disasters, it said. The Beijing-based company needs to invest more than 1.2 trillion yuan in the five years ending 2010, it said.

As much as 3 percent of China's coal-fired generating capacity was forced to shut down in July as fuel supplies dwindled, State Grid said.

-- Editors: Tan Hwee Ann, Amit Prakash

To contact the reporters on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net; Wang Ying in Beijing at wang30@bloomberg.net;