The sharp decline in coal prices since late 2011 has led to a general reduction in on-grid electricity tariffs across most provinces, with an average decrease of approximately 1.5 cents per kilowatt-hour. However, this reduction is offset by increased renewable energy subsidies and other environmental protection measures. The retail electricity price, which directly affects end consumers, remains unchanged. As a result, the cost-saving benefits from lower on-grid tariffs have not translated into real economic relief for businesses or households.
In the upper part of the power supply chain, the coal industry has yet to see significant demand growth despite the drop in electricity prices. This suggests that the full impact of lower energy costs has not yet reached the broader economy.
A new coal-electricity linkage mechanism was introduced at the start of 2013, which triggers price adjustments when coal prices change by 5%. The adjustment cycle is based on a calendar year, meaning that any changes are spread throughout the year. However, this long cycle may become increasingly difficult to manage as market conditions continue to evolve rapidly.
Looking at 2013, coal prices across all regions dropped between 20% and 30%. Considering that coal accounts for roughly 80% of the cost of electricity, and with an efficiency level of about 300 grams of standard coal per kilowatt-hour, electricity prices should theoretically be reduced by 6 to 10 cents. After accounting for previous price adjustments, a further one-time cut of 5 to 8 cents is still needed. This reduction should be fully reflected in the final retail electricity price.
Lowering electricity prices is a natural outcome of a functioning price mechanism and is essential for reducing the overall energy burden on both households and businesses.
Currently, electricity prices in China are not low compared to international standards. There is a clear need to reduce the financial pressure on residents and enterprises. The fundamental logic behind this is that prices act as signals, and their significance lies in their relative position rather than absolute numbers.
When comparing energy costs to income levels, Chinese consumers earn significantly less than their counterparts in Europe or the U.S. Despite this, electricity prices in China are already comparable to those in developed countries. This leads to high energy expenditures that squeeze other consumer spending, becoming a major burden on household welfare.
For industries and businesses, especially those involved in global trade, competitiveness is key. From an exchange rate perspective, current industrial and commercial electricity prices in China are 30% to 40% higher than in the U.S., and even higher than in neighboring Asian countries like South Korea. This disparity negatively impacts the country’s ability to compete globally.
The tax component included in the final electricity price can serve as a benchmark for comparing how different governments tax energy consumption. In many European countries, tax rates on energy range from 30% to 50%. A tax-exempt electricity price reflects the actual revenue available to producers. If costs are similar, it also indicates the efficiency of the market.
Reducing electricity prices can immediately ease the financial burden on both households and businesses. If the government believes that low electricity prices conflict with energy conservation or environmental goals, it could instead increase taxes and use the revenue to fund green initiatives, achieving a dual benefit of improving competitiveness and supporting sustainable development.
It's misleading to assume that lower electricity prices will lead to a rebound in high-energy consumption. Industries such as steel, chemicals, and non-ferrous metals have historically been targeted for restrictions due to their environmental impact. However, these restrictions should be based on improving environmental standards rather than simply limiting electricity prices. If high energy use is considered to have negative externalities, the solution lies in adjusting prices through taxation, not in suppressing general electricity price reductions.
In the past, so-called "punitive electricity pricing" policies were used to restrict high-energy sectors. However, there was often confusion between the price mechanism and policy tools. Whether these higher charges subsidized affected groups remains unclear and needs greater transparency.
Electricity price cross-subsidies, where residential users pay less than commercial users, have been gradually reduced with the introduction of tiered pricing. While this helps some low-income groups, it doesn’t necessarily lower overall household energy costs, as higher commercial rates are passed on to consumers through goods and services. It also misleads consumer behavior and fails to promote energy savings.
Eliminating these cross-subsidies is crucial for building a fair and unified electricity market. If residential electricity prices rise by 50%, industrial and commercial rates could fall by 10%, bringing China’s electricity prices closer to U.S. levels. This change would signal a more realistic energy cost to consumers and significantly boost the competitiveness of local industries.
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