(1) Transparency and timeliness in the oil
product pricing system
Despite the quasi-market-oriented nature of oil
product pricing, the contradiction between operating a transparent pricing system and allowing
for delayed price adjustments has not been
solved. The risk-free arbitrage behaviour that this
gap allows clearly generates instability in market
supply, which in turn has an impact on the stability of the oil product market, especially when
oil prices fluctuate wildly. A market-based oil
product pricing mechanism will address these
problems and allow the government to still
intervene through tax and other means.
(2) There is no market-oriented gas pricing
mechanism; the price of gas does not
reflect its actual value
There is no market-oriented gas pricing mechanism, and the difference in gas price between
regions is unjustified. In general, the price of gas
does not properly reflect the attributes of natural
gas as a commodity. Gas pricing reform can be
completed independently, but it should be coordinated with pipeline network reform.
The price determined by netback pricing is
unreasonable—it is obviously too high, and the
ceiling city-gate gas price defined by current
policies has become the de facto gas source price
in each province. As research indicates, this price
level is about 30% higher than the total cost of
gas, so there is a great amount of profit built in.
However, the high price squeezes the profit
margin of downstream industries and discourages
any significant increase in gas’s share of total
energy consumption.
Gas price adjustment policies are incomplete
and the residential gas price is low. The gas price
adjustment policies introduced in Beijing, Hebei
and Shanghai in 2011 do not affect the residential
gas price, allowing it to stay at a low level. This
results in an underlying expectation among residents that low-cost gas will be available. In
contrast, the price of industrial gas is higher than
that of residential gas.
The gas pricing system is incomplete and
distorted. There is no clear pricing mechanism
and no administrative system that differentiates
between peak and off-peak consumption, gas
prices that allow supply cut-off at any time and
tiered gas prices. There are no specific requirements on how to calculate cost and price or to
determine who is responsible for supervision,
which makes it difficult to set prices.
(3) Electricity pricing is a major problem in
energy pricing reform
Electricity pricing reform is dependent on electricity system reform. Two main problems need
to be addressed.
The first problem is the arbitrary pricing
mechanism. On the grid connection side, the
feed-in tariff is decided by the government.
Without market competition, it is difficult to
motivate power enterprises. On the power
transmission and distribution side, power grid
operators do not decide transmission and distribution tariffs; their revenue is generated by the
difference between the power wholesale price
and the feed-in tariff. On the sales side, wholesale
prices do not reflect user demands and result in
limited options for consumers. Cross-provincial
power supply lacks a mechanism that can motivate both the supplier and the buyer. In general,
electricity prices in China are decided by
administrative bodies and do not reflect the real
supply and demand relationship and production
costs. A scientifically based pricing mechanism
has yet to be established.
The second problem is the large
cross-subsidies. On the grid connection side, the
hydropower feed-in tariff is significantly higher
than that for other types of power generation. On
the wholesale side, the subsidies for different
types of use overlap. For instance, urban areas
subsidise rural areas, industrial and commercial
users subsidise residential and agricultural users,
users of high voltage subsidise users of low
voltage, and consumers of large loads subsidise
those of low loads. As a result, the electricity
retail price does not reflect the true cost of power
Special Report 4: China’s Energy System Revolution
441
product pricing system
Despite the quasi-market-oriented nature of oil
product pricing, the contradiction between operating a transparent pricing system and allowing
for delayed price adjustments has not been
solved. The risk-free arbitrage behaviour that this
gap allows clearly generates instability in market
supply, which in turn has an impact on the stability of the oil product market, especially when
oil prices fluctuate wildly. A market-based oil
product pricing mechanism will address these
problems and allow the government to still
intervene through tax and other means.
(2) There is no market-oriented gas pricing
mechanism; the price of gas does not
reflect its actual value
There is no market-oriented gas pricing mechanism, and the difference in gas price between
regions is unjustified. In general, the price of gas
does not properly reflect the attributes of natural
gas as a commodity. Gas pricing reform can be
completed independently, but it should be coordinated with pipeline network reform.
The price determined by netback pricing is
unreasonable—it is obviously too high, and the
ceiling city-gate gas price defined by current
policies has become the de facto gas source price
in each province. As research indicates, this price
level is about 30% higher than the total cost of
gas, so there is a great amount of profit built in.
However, the high price squeezes the profit
margin of downstream industries and discourages
any significant increase in gas’s share of total
energy consumption.
Gas price adjustment policies are incomplete
and the residential gas price is low. The gas price
adjustment policies introduced in Beijing, Hebei
and Shanghai in 2011 do not affect the residential
gas price, allowing it to stay at a low level. This
results in an underlying expectation among residents that low-cost gas will be available. In
contrast, the price of industrial gas is higher than
that of residential gas.
The gas pricing system is incomplete and
distorted. There is no clear pricing mechanism
and no administrative system that differentiates
between peak and off-peak consumption, gas
prices that allow supply cut-off at any time and
tiered gas prices. There are no specific requirements on how to calculate cost and price or to
determine who is responsible for supervision,
which makes it difficult to set prices.
(3) Electricity pricing is a major problem in
energy pricing reform
Electricity pricing reform is dependent on electricity system reform. Two main problems need
to be addressed.
The first problem is the arbitrary pricing
mechanism. On the grid connection side, the
feed-in tariff is decided by the government.
Without market competition, it is difficult to
motivate power enterprises. On the power
transmission and distribution side, power grid
operators do not decide transmission and distribution tariffs; their revenue is generated by the
difference between the power wholesale price
and the feed-in tariff. On the sales side, wholesale
prices do not reflect user demands and result in
limited options for consumers. Cross-provincial
power supply lacks a mechanism that can motivate both the supplier and the buyer. In general,
electricity prices in China are decided by
administrative bodies and do not reflect the real
supply and demand relationship and production
costs. A scientifically based pricing mechanism
has yet to be established.
The second problem is the large
cross-subsidies. On the grid connection side, the
hydropower feed-in tariff is significantly higher
than that for other types of power generation. On
the wholesale side, the subsidies for different
types of use overlap. For instance, urban areas
subsidise rural areas, industrial and commercial
users subsidise residential and agricultural users,
users of high voltage subsidise users of low
voltage, and consumers of large loads subsidise
those of low loads. As a result, the electricity
retail price does not reflect the true cost of power
Special Report 4: China’s Energy System Revolution
441