Price strategies that will matter

Clearly, China has made great efforts to reform energy prices. However, such reforms are far from complete. While the new pricing mechanism for petroleum products is one step towards a more market-oriented pricing mechanism, it is still not enough.

Petroleum product prices fluctuate with global crude oil prices, and are hence decoupled from the domestic market. Reforms should also take domestic factors into account, so that petroleum product prices can better reflect the relationship between domestic supply and demand.

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The pilot scheme in Guangdong and Guangxi provides the right direction to establish a market-oriented natural gas pricing mechanism.

China also needs to draw on the lessons learned from the two pilot schemes and examine what kinds of adjustments and improvements are needed regarding the choice of alternative fuels, the selection of the pricing reference point and the creation of netback market value pricing formula in order to implement the reforms on a nationwide basis.

While China has been reforming the electricity industry structure since 2002, transmission, distribution and sale of electricity is undertaken by two main grid companies, State Grid and China Southern Power Grid, and several local grid companies, such as Inner Mongolia Grid and Shaanxi Grid. As the designated sole buyers of electricity from generators and distributors and sellers of electricity, they hold monopolies in their respective areas. Their monopoly power and the lack of competition in the electricity market has often drawn criticism.

However, separation of transmission and distribution is not a viable option. The feasible approach should be to set up a power trading market. In this regard, direct purchase of power for major electricity users, as per the pilot program in Yunnan province, should be promoted. That will help to infer the actual cost of electricity transmission and its effective distribution and help the government to set the appropriate level of the grid's transmission and distribution charges in future electricity power structure reform.