China Faulted For Cutting Power Prices – Analysis
By Michael Lelyveld
China is making major cuts in electricity rates to support business and its sagging economy, raising questions about government subsidies and environmental concerns.
On March 9, China’s central electric utility, State Grid Corp., announced a 10-percent reduction in average electricity charges for business users this year “to relieve the burden on the real economy,” the official Xinhua news agency said.
The break comes on top of a 10.6-percent rate cut for “commercial” users in 2018 that saved China’s businesses 79.2 billion yuan (U.S. $11.7 billion), according to the report.
With industrial users included, the assistance last year totaled 91.5 billion yuan (U.S. $13.6 billion), the state-owned utility said.
While state-controlled rates are subject to change, the announcement appeared to be unusual in citing the economic benefit as the purpose without any reference to market conditions, fuel prices, or generating costs.
The moves posed a host of policy questions about regulation in the power sector, pricing reform, and the potential for anti-competitive industrial subsidies.
The huge drop in electricity bills also highlighted the government’s all-out response to China’s economic slowdown, which has so far included tax cuts, infrastructure spending and a surge in bank loans.
Although the cost of the combined rate cuts for 2018 and 2019 appears to be substantial, the announcement did not specify whether the State Grid, power producers or the government would pay for it.
According to the Xinhua report, the State Grid topped the list of China’s largest companies last year with revenue of 2.36 trillion yuan (U.S. $351.7 billion), suggesting that the utility could cover the cost.
But the company’s total profit fell 14.3 percent from a year earlier, dropping for the first time in five years, an analysis by Hong Kong-based Ping An Securities said.
The burden of the break
The burden of last year’s break fell mostly on grid companies, although some provinces reduced on-grid tariffs for coal-fired generators, said Philip Andrews-Speed, a principal fellow at the National University of Singapore’s Energy Studies Institute.
The plan this year calls for the coal-fired power plants to pay for the rate reductions for business consumers, since most or all of the provinces are expected to cut their on-grid tariffs.
“The coal-fired generators are complaining now, which is quite justified,” Andrews-Speed said.
“Overcapacity of generation has drastically reduced their operating hours and is squeezing margins, and now they are getting lower tariffs, some for the second year running,” he said.
The government’s decision to manipulate electricity rates for the purpose of economic stimulus is seen as a setback for energy reforms.
“These measures completely undermine the development of the power market,” Andrews-Speed said.
“This has been announced at a time when the government is claiming to be liberalizing the power market by allowing generators to sell to large users at tariffs to be set by negotiation and allowing a proliferation of power retailers,” he said.
In his annual work report to the National People’s Congress on March 5, Premier Li Keqiang suggested that the government would advance reforms and set lower electricity rates at the same time.
“We will deepen electric power market reforms, overhaul electricity price surcharges, reduce the electricity usage cost for the manufacturing industry, and reduce the average electricity price of general industrial and commercial industry by another 10 percent,” Li said.
From an environmental standpoint, large rate cuts are also likely to be counterproductive, since cheaper power prices encourage energy consumption.
While the rate reductions are across the board, they will likely provide the biggest benefit to the largest energy users and sources of emissions, including makers of steel, cement, and building materials.
The double-digit cuts will also come as a gift and effective subsidy to marginal state-owned enterprises (SOEs), potentially raising competition concerns of trading partners.
American steelmakers and other manufacturers have long complained about the effects of Chinese subsidies, but whether the issue of power pricing will figure in the current U.S.-China trade negotiations is open to question.
The issue of whether the rate cuts constitute a subsidy is complex, said William Reinsch, a former Commerce Department official, now a senior adviser at the Center for Strategic and International Studies in Washington.
“The definition of subsidy in both U.S. law and WTO (World Trade Organization) rules requires specificity,” Reinsch said. “That is, to be a subsidy there must be a specific benefit to somebody.”
“If the government lowers the rate for everybody, that would not be a subsidy because it is not specific,” Reinsch said.
There are other complications. The laws would not support U.S. action against a subsidy unless a U.S. party was injured, raising more questions about competition and the size of per-unit costs.
The WTO would want to know whether the rate cuts apply only to Chinese companies or also to foreign companies manufacturing in China.
The question of whether the decrease qualifies as a subsidy also depends on whether the price of electricity has been lowered below a “market rate,” which is hard to determine in China. And so on.
Taking all that into account, the rate cuts might still be “actionable,” which could trigger a countervailing duty, Reinsch said. But the outcome seems far from a slam dunk.
A hot-button issue?
In any case, it is unclear that Chinese subsidies in general are the hot-button issue that they once seemed to be for U.S. negotiators.
A review of statements and reports over the past year suggests that U.S. complaints about subsidies were mostly directed at the Chinese government’s support for high-tech industries under the “Made in China 2025” initiative.
As the government has stepped back from promoting the plan, the subsidy issue seems to have largely faded from view.
Still, U.S. policy statements continued to cite opposition to Chinese subsidies as a top agenda item in the past year.
Speaking in November at the Asia-Pacific Economic Cooperation (APEC) summit in Papua New Guinea, U.S. Vice President Mike Pence blasted China for unfair trade practices that included subsidies.
Pence cited “forced technology transfer, intellectual property theft, and industrial subsidies on an unprecedented scale,” USA Today reported at the time.
A government white paper on trade frictions last September also made clear that China had come under pressure on the subsidy issue.
“China’s subsidy policy complies with WTO rules and should not be attacked,” said a Xinhua report on the white paper arguments.
But with signs that U.S. and China negotiators are closing in on a trade deal, the years of controversy over subsidies may be left to another day.
“We have not emphasized subsidies and, when we do, it’s (about) lending,” said Derek Scissors, an Asia economist at the American Enterprise Institute in Washington, who has reportedly advised the administration of President Donald Trump on the negotiations.
In an email message, Scissors indicated that the rate cuts are unlikely to raise U.S. concerns.
“This reads like another attempt to bolster business confidence and will barely be noticed by the U.S. team,” Scissors said.
If that is the case, China may be free to pursue a bad economic, energy and environmental policy on its own.