IN order to boost regional industrial activities which had been hurt by the economic slowdown, China's northern Inner Mongolia Autonomous Region has moved to temporarily cut power tariffs for industrial users.

While the move could be meaningful to the reform of China's highly regulated energy pricing and be copied by other provinces, some market watchers cast doubt on the effectiveness of the policy.

Inner Mongolia is to cut electricity prices by 0.045 yuan (US$0.0066) to 0.08 yuan a kilowatt hour for users in sectors such as ferroalloy and polycrystalline silicon to help struggling enterprises which have cut output. In a trial program, local government, grid operators, power companies and coal producers will absorb the costs of the tariff cuts. For example, power plants are being told to absorb 0.03 yuan of the 0.08-yuan price cut.

"It's too much and will hurt coal-fired plants in Inner Mongolia, one of the areas already with the lowest power tariffs nationwide," said Orient Securities analyst Zhang Zhonghua. He estimated that 0.03 yuan accounts for more than 10 percent of local on-grid prices, charged by coal-fired power plants to grid companies.

Coal companies operating in Inner Mongolia, including China's largest, Shenhua Energy Co, have participated in the program to help industrial companies through the current tough times, Xinhua news agency said. The local government is urging more coal and power firms to join.

On its Website, the regional government said the cut was aimed at boosting power consumption, increasing local factories' competitiveness, and keeping provincial economic growth fast.

The reduction, approved by the China Power Regulatory Commission, would last until February 17 and could be extended if necessary.

Inner Mongolia's gross domestic product advanced 18.7 percent in the first three quarters this year, topping other provinces and municipalities. Banking on industrial, agricultural and farming business, the region's GDP growth has been the fastest for six consecutive years since 2002.

But power load has dropped sharply since October in Inner Mongolia, with some areas suffering a drop of around 80 percent, according to media reports, further evidence of a national slowdown.

China's industrial output fell to a seven-year low last month and power demand has slowed down since late summer, with power generation falling in October for the first time in a non-holiday month for a decade, according to the China Electricity Council.

But Zhang said the new policy may not help such energy-intensive industries that much, as the main problems that are challenging the industrial manufacturers, many with high-level inventories, are weak demand and excess capacity.

Low power prices could also harm energy conservation, Zhang added.

The regional government said only companies that meet state industry policies and environmental protection requirements would enjoy the lower tariffs.

"A name list would be announced later after assessment," an official at Inner Mongolia's economic commission said.

Still, the market sees the price cut as a positive move in the push for pricing reform in China's energy sector. The Xinhua news agency, quoting an unnamed industry expert, called Inner Mongolia's tariff reduction the nation's first step toward market-oriented power prices.

Under the new policy, power generators and users are supposed to fix prices directly in a more flexible way.

Donghai Securities analyst Gao Dong said other provinces may follow suit while the tariff cut means there's imbalance between power supply and demand.

China has raised electricity tariffs this year to aid power plants hit by soaring coal prices. With declining power demand, domestic thermal coal prices have been falling which helps generators to cut costs.

(Shanghai Daily, Nov 20, 2008)