Power companies cheer coal price reforms

China's set to free up prices of coal supplied to power plants, one of the last bastions of state capped pricing. But there are concerns coal mines may exploit the reforms to monopolize prices, which would push up electricity tariffs.

Most power generated in China comes from coal fired plants, which makes power producers heavily exposed to coal prices. In order to keep electricity traffis stable, for years the government has asked coal suppliers to sell to power firms at contract prices, which are far below market rates.

But in 2013, the government will lift the price ceiling as it expects coal to be in good supply.

Wang Zhixuan, Secretary general of China Electricity Council, said, "For both coal producers and power companies, an open and fair market is welcomed. We don't believe in unfair competition, like price monopolies. I believe the market rules are good for both sides of the market."

Power producers support the decision, but the reform may make them more exposed to volatile coal pricing.

Guo Wenzhen, power company manager, said, "Electricity companies are concerned about the right pricing mechanism. If supply is tight, coal prices may spike, and power companies may not be able to handle it."

Coal producers say the new regulation will allow them to ink long-term deals with power companies instead of setting short-term fixed prices, and terms will be adjusted more often to better reflect market needs.

But it won't be easy.

Bu Changsen, coal company manager, said, "All in all, the lack of coal demand, the fight with power companies, were results of the huge gap between coal's market price and government set price level. The more coal we sold to power companies, the less we earned, for power companies, they might find the more power they generated, the more losses they racked up. Though the government wanted us to cooperate, it was hard to coordinate our interests."

Given the difference in interests of coal miners and power plants, analysts are calling for follow-up rules to prevent abuse of the freer pricing regulation.