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In response to tight power supplies and slowing inflation, China's National Development and Reform Commission (NDRC) has increased business's electricity prices effective 1st December 2011 by up to 0.03 yuan per kWh.
The increases are 0.03 yuan per kilowatt hour and 0.026 yuan per kilowatt hour for on grid electricity. This equates to increases of 5% and 6.8% respectively and will impact heavy power users like Ferro Silicon producers. Electricity costs account for approximately 40% of Ferro Alloys production costs and it is expected that metals prices will increase accordingly.
In October 2011, China's State Electricity Regulatory Commission revealed a possible shortfall of 26 million kilowatts this winter due to falling hydropower output and coal shortages, so government action was expected. Market analysts also point out that the battle to control inflation has prevented any increase on domestic users for over 2 years and margins at many power generation companies were under pressure. Consequently, in conjunction with higher coal prices there was little appetite to expand or increase output.
Therefore, this first increase in wholesale power prices for over 2 years marks a significant change in policy as China moves away from battling inflation to boost growth, avoid power shortages and stimulate increased domestic demand. The NDRC also revealed that although residential users will not be affected , it plans to introduce a charging system that raises prices to the top 20% of residential users. The NRDC is a centralised agency under the Chinese state council which aims to manage the economic system which includes measures for control and regulation of fuel and power markets.
Meanwhile, China's October inflation of 5.5% was reduced from September's 6.1% rise and is predicted to reduce in the next few months. Economists will be hoping they are right if China is to be successful in boosting growth.
