Mass industrial electricity price may continue to decline in China

On 30 June 2016, the National Development and Reform Commission (NDRC) issued the “Notice on improving the implementation method of the basic price of two-part electricity price users,” which will further reduce the industrial electricity price. pv magazine has noticed the fact that, with the continued decline in industrial electricity prices, the so called “power-full-sales” mode may gradually become the preferred choice for investors in terms of industrial enterprises’ distributed projects.

In China, the electric power with electric transformers’ total capacity under 315kVA is referred to as ‘general industrial electricity.’ The transformers’ capacity at 315kVA and above is called ‘mass industrial power electricity.’ Mass industrial electricity adopts a two-part pricing system, including basic price and meter price. The basic price uses the enterprise’s transformer capacity or maximum demand (the maximum value of average load per 15 or 30 minutes within one month) as bases for calculation. An agreement is signed between the power supply utility and the electricity user to cap the supply amount, and fees are collected monthly at a fixed amount, unaffected by the inflation of actual consumption, whereas the meter price is the tariff calculated based on the user’s actual power consumption.

An industry insider commented, “In May, the comprehensive weighted electricity price in Shangdong province reduced around 7 cents to 0.66 Yuan/kWh. It is the general practice that distributed PV power users can get 10% discount, thus the actual income per kWh is the sum of the discounted price and the state subsidy at 0.42 Yuan/kWh. The combined income per kWh is a bit higher than the benchmark price of 0.98 Yuan/kWh. If the industrial electricity price continues to decline, a shift for industrial distributed projects to power-full-sale mode might take place.”

According to this insider, in order to facilitate the transfer of industrial distributed projects to “power-full-sale” mode at any time without any problems, “the industrial distributed projects our company is currently constructing have generally taken into account of 10KV grid-connection.” If the installed capacity of a distributed project is large enough, there will be no need to build extra external connection lines when changing to “power-full-sale” mode later on.

Libin Peng, Executive Director of Beijing Junyang Investment Co., Ltd., says that since 2016, all the industrial and commercial distributed projects that his company invested in and constructed would not consider the ‘selling to grid after self-consumption’ mode. Peng believes that "the main risk existing within the selling to grid after self-consumption mode of distributed projects is the tariff.” Before that, he had also mentioned, “in terms of selecting distributed projects, it is widely thought that the rooftop owners have large power demand, and the projects with high local basic price are the best investment choice. However, the actual situation, in my opinion is a bit tricky. The trick is associated with electricity reform.”

“According to the forecast, due to the serious surplus of power generation after the electricity reform, the first battle in the electricity market shall be the price war. This in turn, can cause the mass users’ basic electricity price to plummet. When we select PV investment projects, we usually adopt discounted price method. Once the electricity price declines, the PV power price in the original model will also decline sharply. Such a scenario has already occurred in our company. This year in our Shangdong Weihai project, the original contracted comprehensive price was 1.19 Yuan, and due to the electricity price declining, the current settlement price is 1.10 Yuan, and we are expecting further price declines.”

Peng added, "For example, if a user’s price is 0.80 Yuan, and what we offer is 0.70 Yuan. Taking the subsidy of 0.42 Yuan into account, the final price is 1.12 Yuan. However, what if in the process of electricity reform, the price offered by the utility becomes 0.60 Yuan, what can you do? You can only float downward to a certain extent based on this 0.60 Yuan. If the price you offer is 0.50 Yuan, you will only get 0.92 Yuan with the 0.42 Yuan subsidy added. The financial model will collapse at that time."

A report from 21st Century Business Herald notes that since the beginning of 2016 the state has reduced industrial and commercial electricity prices twice. The first one happened in January, when the coal-fired FIT and general industrial and commercial electricity price decreased an average of 3 cents per kWh through the implementation of the Coal & Electricity Prices Linkage mechanism. It helped industrial and commercial enterprises to save around 30 billion Yuan in electricity bills.

The other one is within the policy that is currently being rolled out. The overall utilization and cancellation of fertilizer discounted within the tariff scheme enables space for price reduction. In the 21 provinces involved, the general industrial and commercial electricity price reduced 1.05 cents on average, and for mass electricity, the average reduction has been 1.1 cent, which can save businesses 17 billion Yuan from their electricity bills. These two price cutoffs have helped to save around 47 billion Yuan in electricity expenditure for these industrial and commercial enterprises.

At the same time, Manying Zhang, the Inspector from NDRC’s Pricing Department disclosed that, according to the new revision within the Coal & Electricity Price Linkage mechanism, the coal-fired FIT and sales price will change again on January 1, 2017.

So, if the economy continues to fall back, the electricity price might be further reduced. However, there is still enthusiasm for industrial and commercial distributed project investment among those people that pv magazine interviewed.