China's power industry may incur losses this year as rising coal prices may take the sheen off the 9 percent growth in consumption, said an industry association.

Coal prices have risen sharply since the fourth quarter of last year, and are eating into the profits of power plants, China Electricity Council (CEC) said in a report.

Coal-fired power plants and even the whole power industry will go into red if coal and electricity price hikes are not controlled, it said.

The country should also look at adopting the coal electricity pricing linkage mechanism, according to CEC.

The Chinese government decided to approve a mechanism linking coal and power prices at the end of 2004. Under the linkage, electricity prices will move in tandem with coal price hikes.

If coal prices rise by more than 5 percent over a six-month period, the government will adjust electricity prices.

However, the government has utilized this mechanism only twice untill now.

The power industry has already incurred losses in February, said Liu Nanchang, an official with State-owned Assets Supervision and Administration Commission of the State Council (SASAC).

Central government owned power companies have a debt-to-asset ratio of more than 80 percent, which exposes them to severe risks in the event of a credit tightening, he said.

"This year will be tough for coal-fired power plants, although it is still hard to estimate by how much coal prices will go up this year," said Xue Jing, director of the statistics and information department under the CEC.

"Despite making profits in 2009, domestic power companies are likely to incur losses this year," she added.

Coal-fired power accounts for around 70 percent of China's total power generation, and rising fuel prices have always been a headache for power generators.

In 2008, due to the sharp rise in coal prices, domestic power companies incurred huge losses in their generation business. But last year because of the relatively softer coal prices, many power companies saw rapid growth in their profits.

Supply imbalance

China may see an overall balance between power demand and supply this year, but some regions will still suffer temporary blackouts, the CEC said.

The regions include Zhejiang, Hubei, Hunan, Jiangsu, Jiangxi and Sichuan provinces, as well as Chongqing and Shanghai municipalities.

Installed power capacity is expected to reach 950 gigawatts by the end of this year. The nation will spend 330 billion yuan (US$48.35 billion) to set up power plants and a similar amount for power grids, the CEC said.

As part of the efforts to build a green economy, China will continue to keep the investment proportion of coal-fired power to the total electricity output below 50 percent and increase the proportion of hydroelectricity and nuclear power investments.

China is expected to import around 100 million tons of coal this year. The country's coal consumption is expected to be around 4 billion tons of coal this year, Huang Li, an official with the National Energy Administration, has said.

(China Daily April 1, 2010)