Hike power prices for businesses, not families

China electricity price hike reflects NDRC's tiered tariff from 87 kWh, rising with usage; coal costs, CPI pressure, Beijing surcharges, and peak-load pricing plans push energy efficiency for households, businesses, and government.

There has been a flurry of price hikes of basic commodities and services lately that greatly impact the livelihood of ordinary people.

Gasoline prices at the pump have increased by about 8 percent. A cab ride in Beijing now costs an extra one yuan (15 US cents) with a fuel surcharge.

The 50 yuan airfare fuel surcharge has now come back. Natural gas is in such short supply that a significant price hike reportedly will come into effect in January.

Water service in 13 cities, including Beijing and Nanjing, has increased by more than 45 percent.

The latest bad news for thrifty folks concerns increased cost of electric utilities, with utility rates surging across many regions, which will have a more profound impact on the economy.

According to some reports from industry analysts, the National Development and Reform Commission (NDRC) is expected to introduce a multipart tariff rate plan, with the basic electricity usage starting at 87 kWh. Beyond that, unit price is said to increase as the usage increases.

But this complicated pricing scheme is just the beginning of price increases for power, and mirrors Hong Kong rate increases seen recently across the region.

There are widespread views on the Internet that the basic electricity consumption set at 87 kWh is simply too low. According to the Beijing Bureau of Statistics, low-income households and middle-to-lower income households in the city consume a monthly average of 101 kWh, and 142 kWh respectively.

If taking into account high-income families, the average household power consumption in Beijing amounts to 222 kWh.

The position of the electric supply side is that the price increase is inevitable as power generation companies have run deficits for years due to the run away price of coal, China's most important source of electricity generation. And power companies would like to compare the stagnant electricity price with rising consumer price index (CPI).

There might be some truth in this argument, but on the other hand, well-known facts about the bloated bureaucratic organization structure and high administrative/overhead costs at these companies also make me reluctant to endorse their price hike argument.

Take labor cost as an example. Statistics from the State Electricity Regulatory Commission (SERC) show that the average employee salary at major state-owned electric utility companies has increased on average by 15 percent every year since 2003.

Labor costs now represent 18 percent of the total cost of every kWh of electricity. In fact, with China's low labor cost and abundant supply of coal, you would expect the electricity price in China to be relatively low.

No, not so. Electricity in Shanghai is actually more expensive than that in Canada, and just a little bit cheaper than in the U.S. household bills on average.

On the other hand, inefficient energy usage and waste in China is notoriously rampant. According to the SERC, China ranked 104th out of 200 countries in the world in terms of efficiency in energy supply.

The electricity transmission loss rate in China is an average of 7 per cent, 1.5 times that of Republic of Korea and Japan.

Furthermore, businesses and government agencies are more inefficient in energy usage and waste more than residential households.

Data from the Beijing Statistics Bureau shows household electric consumption has been modestly decreasing as demand declines since 2004, most prominently among low-income households and middle-to-lower income households.

Average power consumption by government agencies however, is much higher than that of average households.

According to the Beijing Construction Commission, per capita annual power consumption of civil employees in the city is 3,072 kWh, seven times more than the per capita average consumption by residential households.

So my alternative proposal is that the electricity price hike should apply to businesses and government agencies through targeted nonresidential rate hikes that focus on heavy users, as there is more room for improving energy efficiency in these organizations.

Peak-load pricing, often discussed alongside rolling blackouts during shortages, may also be considered by the NDRC.

Fossil fuel-generated electricity has the unique feature that the generators cannot be shut down during the night when demand declines. Therefore, as much as 30 percent of the energy generated at night is wasted.

Introducing different prices for night and day can potentially motivate people to adjust their electricity consumption patterns to alleviate the peak and trough demand pattern.

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