The state-owned Assets Supervision and Administration Commission of the State Council is drafting its funding plan for the 12th Five-Year Plan (2011-15) period and proposing to subsidize five energy companies and two power grid companies.
It will not be the first time that the electrical power industry has received such a financial subsidy. But the question is: can such cash injections really contribute to the development of China’s power industry?
The losses from the thermal power generation business of the five state-owned electricity enterprises in the first seven months of 2011 were more than 18 billion yuan ($2.85 billion), a significant jump from the annual loss of 13.7 billion yuan in 2010.
But it is not the power generators’ fault that they suffer such enormous losses. The growing deficit is a result of the rising cost of coal allied to the fact that the price of electricity for industry use has not increased proportionally and the price for residential use has remained stable because of government control.
If the authority can lift the control over electricity prices, the thermal power industry will naturally turn losses into gain.
However, the authority is understandably concerned that raising the price of electricity for industrial use may increase the cost of “made-in-China” and intensify inflation pressures.
But keeping power prices artificially low by providing subsidies cannot be a long-term strategy to promote structural transformation.
There is no escaping the fact that export-oriented manufacturing industries are going to feel some pain, such as increased electricity prices, as the country transforms its economic structure and improves the quality of economic growth.
Yet higher power prices will help boost the industrial upgrading of manufacturing industries. Outdated machinery will be replaced by more energy-efficient and economical technology. And although the speed of economic growth may be affected for a while, it will be good for China’s economy in the long run.
Ending the unproductive subsidies for the thermal power companies and lifting the overdue control of electricity prices are necessary if we are to transform China’s economic structure for the benefit of all in the future.
