Inter-provincial joint venture better taps resource allocation

The recent news that several State-owned coal, electricity and investment companies from Shanxi and Jiangsu provinces will establish a joint venture has drawn wide attention and applause from China's coal-fired electric power community.

The equity agreement of the joint venture was signed on Monday, with a total equity capital of 6 billion yuan ($948.6 million). The planned venture will operate in coal, gas and electricity trade and investment, and will "buy in a bunch" coal-fired electricity generated in Shanxi province to "sell in a bunch" to Jiangsu province, according to its news release.

"Such a joint venture is a big step forward to coordinate inter-region resource allocation and optimize industry productiveness, underlining the nation's strategy on supply-side structural reform and coordinating regional development," said Ye Chun, deputy director with Department of Industrial Planning, Environment and Resource with China Electricity Council, which is the largest industry organization of China's electricity enterprises and institutions.

Though the economy of Shanxi province relies too heavily on the coal industry, it consumes far less coal-fired electricity than it produces, leading to resource waste. On the contrary, densely populated Jiangsu province, China's second-largest provincial economy, needs far more electric power than it produces to meet demand for its economic growth, Ye said.

The joint venture serves as an effective solution for both provinces, Ye said.

It will also help meet the central government's determination to protect the environment and control pollution, as it will help optimize coal and electricity resource allocation on a national level, and improve China's West-East electricity transmission channel utilization, Ye said.

Zeng Ming, head of the Internet of Energy Research Center at North China Electric Power University, said the joint venture is an innovation driven by China's reform of the electricity supply, transmission and demand chain, and an achievement by the market mechanism.

"The electricity supply from Shanxi to Jiangsu in the past was carried out through one contract and another, and was easily influenced by any factor. "The joint venture makes it feasible for the supply and demand ends to coordinate supply and demand in the same system, making the cooperation more efficient and steady," Zeng said.

It is common for electricity suppliers and consumers to form a joint venture within a single province, but this is the first time that has been accomplished on an inter-provincial level, Zeng added.

The two experts predicted similar joint ventures will probably emerge, although it is very difficult for numerous parties involved to achieve an agreement.