transparency and cross-subsidies due to monopolistic pricing are the main reasons why effective
supervision is difficult to deliver. Some energy
sources and links in the energy value chain
completely lack cost and price regulation,
resulting in a hardened price monopoly in natural
monopolies like power grids and oil and gas
pipeline networks.
Fourth, the disconnect in energy pricing
results in intermittent price transmission and
obvious contradictions between pricing in different links of the energy value chain, which
affects the ability of the market to allocate energy
resources effectively. This phenomenon is especially evident in the power sector, for example in
the disconnect between the sales price and cost of
generation, and between the power transmission
and distribution tariffs and the feed-in tariff. In
addition, the links with international and
domestic market pricing are weak. Government
pricing does not respond promptly to market
dynamics, and China also lacks a voice in
international energy pricing.
Fifth, separating production volumes and
price amplifies the shortcomings in China’s
energy pricing system. Energy planning and
balancing supply and demand are mainly the
responsibility of the NEA, and energy pricing
and administration are the responsibility of the
NDRC. This administrative system, which separates production volume and price, is the major
cause of China’s energy pricing problems. When
supply is tight, the effects of the separation are
not obvious, but in the context of diversified
energy supply and demand, especially during the
transition to market-oriented energy pricing, the
administrative separation is increasingly
ill-adapted to the requirements of energy
development.
(2) Deregulation of upstream pricing is
gradual, but government intervention
continues
Pricing in China’s upstream energy sector has
gradually been deregulated. The deregulation of
pricing in the coal and oil industries has been
implemented in phases: upstream coal pricing
has been deregulated for years, and the crude oil
price is independently determined and based on
the international oil price. The implementation of
netback pricing has made the upstream natural
gas wellhead price redundant. Power generation
pricing has evolved from a price based on each
generating unit to a benchmark price, and government interventions are gradually decreasing.
Government intervention still occurs in
downstream energy, especially in the pricing of
major end-use energy products. Natural gas and
electricity end-user prices in particular are still
controlled by local government, due to the reliance of these two energy sources on natural
monopoly networks and facilities and the public
service attribute associated with them.
(3) Pricing reform in the oil and coal sectors is
completed, but hurdles remain in electricity and gas
Oil pricing has become market oriented. China’s
crude oil prices are now negotiated or independently determined by oil-producing enterprises,
based on the international oil price. The price of
crude oil supplied by national oil companies is
negotiated by the buyer and seller on the principle that the cost of delivering domestic onshore
crude oil to refineries should be equivalent to the
cost of delivering imported crude oil from
international markets to refineries. The price of
crude oil supplied to local refineries from
national oil companies is set by referring to the
price of mutually supplied crude oil between two
oil groups. The price of crude oil produced by
CNOOC and other companies is independently
determined by the corresponding producer with
reference to the international oil price.
The pricing of oil products is linked to international oil prices, but a degree of government
intervention remains. Having connected the
government-guided moving-average price with
the international oil price, the government can
influence end-user oil prices more through tax
policies. In March 2013, the government
announced an improved oil product pricing
mechanism, whereby the price adjustment cycle
of oil products would be shortened from 22 to 10
Special Report 4: China’s Energy System Revolution
439
supervision is difficult to deliver. Some energy
sources and links in the energy value chain
completely lack cost and price regulation,
resulting in a hardened price monopoly in natural
monopolies like power grids and oil and gas
pipeline networks.
Fourth, the disconnect in energy pricing
results in intermittent price transmission and
obvious contradictions between pricing in different links of the energy value chain, which
affects the ability of the market to allocate energy
resources effectively. This phenomenon is especially evident in the power sector, for example in
the disconnect between the sales price and cost of
generation, and between the power transmission
and distribution tariffs and the feed-in tariff. In
addition, the links with international and
domestic market pricing are weak. Government
pricing does not respond promptly to market
dynamics, and China also lacks a voice in
international energy pricing.
Fifth, separating production volumes and
price amplifies the shortcomings in China’s
energy pricing system. Energy planning and
balancing supply and demand are mainly the
responsibility of the NEA, and energy pricing
and administration are the responsibility of the
NDRC. This administrative system, which separates production volume and price, is the major
cause of China’s energy pricing problems. When
supply is tight, the effects of the separation are
not obvious, but in the context of diversified
energy supply and demand, especially during the
transition to market-oriented energy pricing, the
administrative separation is increasingly
ill-adapted to the requirements of energy
development.
(2) Deregulation of upstream pricing is
gradual, but government intervention
continues
Pricing in China’s upstream energy sector has
gradually been deregulated. The deregulation of
pricing in the coal and oil industries has been
implemented in phases: upstream coal pricing
has been deregulated for years, and the crude oil
price is independently determined and based on
the international oil price. The implementation of
netback pricing has made the upstream natural
gas wellhead price redundant. Power generation
pricing has evolved from a price based on each
generating unit to a benchmark price, and government interventions are gradually decreasing.
Government intervention still occurs in
downstream energy, especially in the pricing of
major end-use energy products. Natural gas and
electricity end-user prices in particular are still
controlled by local government, due to the reliance of these two energy sources on natural
monopoly networks and facilities and the public
service attribute associated with them.
(3) Pricing reform in the oil and coal sectors is
completed, but hurdles remain in electricity and gas
Oil pricing has become market oriented. China’s
crude oil prices are now negotiated or independently determined by oil-producing enterprises,
based on the international oil price. The price of
crude oil supplied by national oil companies is
negotiated by the buyer and seller on the principle that the cost of delivering domestic onshore
crude oil to refineries should be equivalent to the
cost of delivering imported crude oil from
international markets to refineries. The price of
crude oil supplied to local refineries from
national oil companies is set by referring to the
price of mutually supplied crude oil between two
oil groups. The price of crude oil produced by
CNOOC and other companies is independently
determined by the corresponding producer with
reference to the international oil price.
The pricing of oil products is linked to international oil prices, but a degree of government
intervention remains. Having connected the
government-guided moving-average price with
the international oil price, the government can
influence end-user oil prices more through tax
policies. In March 2013, the government
announced an improved oil product pricing
mechanism, whereby the price adjustment cycle
of oil products would be shortened from 22 to 10
Special Report 4: China’s Energy System Revolution
439