China power:First step on power sector reform

Power sector reform on the way。

    According to Shanghai Securities News, the National Development &Reform Commission (NDRC) had a meeting with industry experts in end-October 2014 to discuss the potential power sector reform. Per the newsreport, the potential reform plan may include the following:· Deregulation of the on-grid and retail power tariffs, with transmission anddistribution tariffs to be fixed by the NDRC.

    Opening up the power distribution market to all parties (including theprivate companies) in relation to the incremental power supply, with theexisting power supply to remain under the grid companies.

    Opening up the power retail market, which allows all parties to participateto be the power retailers.

    Establishing a market-driven mechanism (or a bidding mechanism) toallocate the power generation quota (instead of allocating by the gridcompanies).

    Establishing a power trading platform which will be owned by the gridcompanies but supervised by the independent third parties.

    Pilot programme of power sector reform in Shenzhen。

    After the abovementioned meeting, on 4 November, the NDRC published anotice titled “Pilot Program for the Transmission and Distribution (T&D) TariffReform in Shenzhen”. The programme states that the business model (orthe T&D tariff) of the Southern Power Grid in Shenzhen will be changed,effective 1 January 2015, from the current mechanism wherein the T&D tariffis based on the difference between the retail and on-grid power tariffs, to thenew mechanism which will use a cost-plus method based on a predeterminedreturn on assets for the grid company. Upon the successfulimplementation of the T&D tariff, the NDRC targets to deregulate the on-gridand retail power tariffs and use a bidding mechanism to determine them.

    Our initial comments: On the right track but this is only the first step。

    Compared to the previous widely-circulated version of the power sectorreform plan, this new version includes more content on tariff deregulation,etc. Together with the pilot programme in Shenzhen, this clearlydemonstrates the central government’s direction and determination todeepen and implement the power sector reform.

    Having said that, this is just the first step on the reform and we note thatthere is still a long way to go, given the above is at the discussion phase andthe Shenzhen initiative is solely a pilot programme in which time is requiredto monitor the effectiveness of the programme. In addition, although the pilotprogramme can reduce the bargaining power of the Southern Power Grid inShenzhen, so far it has not impacted the State Grid which we believe hasstronger bargaining power than the Southern Power Grid. As such, webelieve that any significant changes and impact on the power sector will onlymaterialise in the long-term.