As Shenhua Coal, China's largest coal producer, gears up for a $1.5 billion international listing , smaller domestic players are taking the opportunity created by a renewed focus on the sector to voice their complaints.
They claim a two-tier pricing system favouring large coal producers such as Shenhua, consumers, and a handful of publicly listed, well-connected IPPs such as Huaneng, Datang and Huadian Power, is creating a skewed market.
While the smaller power producers have to buy coal at the market price, the big three power producers are able to suck up coal at price levels far below the market price.
"The biggest, publicly-listed IPPs buy coal at a price negotiated once a year between them and the government, specifically, the Ministry of Coal - it's the old command economy syndrome," says one American executive at a smaller IPP.
The close links between the government-owned and government-run IPPs gives them an important advantage over the much smaller players dotted around China's provinces they say. Former premier Li Peng's family, for example, is heavily involved in a publicly-listed IPP.
In contrast, the smaller Chinese and foreign producers buy coal under the market system, where prices have gone up by 50% in the last year - and with no end in sight.
At the same time, when the smaller players want to put up end-user tariffs to counter the price in coal, they run into fierce opposition from the provincial governments. The promotion prospects of many of these officials depends on generating continued GDP growth and most are unwilling to jeopardize growth and alienate consumers with higher prices.
Coal is the key source of energy in China, and fuels 75% of China power plants. Yet supply levels have been squeezed by surging demand and tighter enforcement of safety standards leading to frequent closures of dangerous mines.
The basic problem is that coal prices have been liberalized at a much faster pace than the power market, says one European executive of a leading utility based in Beijing.
"The smaller IPPs are being squeezed between a deregulated coal market, where prices are rising on the back of huge demand - and a heavily politicised power industry," he comments. "The biggest IPPs are unconcerned about flat tariffs since they get coal much more cheaply, and powerful provincial interests are also not keen to alienate the population and local business interests with anything more than very minimal power rises."
Smaller power companies play an important role in China. They produce steam energy for local manufacturing, while also heating whole villages and smaller towns. That concentration makes it easier to control emissions, say experts, since the source of the problem is concentrated in one place rather than in individual houses.
"At one of our plants, we have seen our gross margin fall from 50% to 25% while at others it's fallen from 65% to 45%," says the US power executive.
"You just can not run a capital-intensive plant, or company with a gross margin at those reduced numbers," he warns. "If this continues, the wheels will indeed come off the second-largest power market in the world."
At provincial level, power producers have attempted to influence the government to allow the end-user tariffs to go up.
In coastal Jiangsu and Zhejiang rovinces, power producers requested that their respective local governments increase the end-user tariff by Rmb 0.01RMB for every 10 RMB increase in the coal price for small power producers and by 0.01 RMB per 25 RMB increase for large scale producers.
But as one Chinese IPP executive based in Jiangsu points out, "Although the Zhejiang government went ahead with a rational tariff rise, in Jiangsu, the increase was clawed back shortly after being introduced."
Producers also complain that the Jiangsu government will not allow power plants to stop running even they are losing money because of high raw material prices.
"The provincial government has made it clear they will jail the legal representative of the power plant and make him or her take all the consequences of stopping the plant," the Chinese executive adds.
Problems in the power industry are rife. Last year, it is estimated that two thirds of China's 31 provinces suffered power shortages of various lengths. One major provincial city had to go on a three-day on, one-day off rota to try to conserve energy.
Even the biggest coal producing province in China, northern Shanxi, suffered power cuts.
"The new GDP target is to double present day GDP by 2020, just as we doubled the GDP we had in 1980 by 2000," says on mainland thinktank official in Beijing. "So the situation is just getting more serious."
Indeed, by 2020, China's energy requirements will rise to 2.5 billion tons of standard coal, 90% higher than the amount of used in 2002. More demanding estimates indicate the amount of coal used in 2020 could be 152% of what was used in 2003.
In 2004, China's energy deficit will also grow, with the coal deficit predicted to grow from 10 million tons to a staggering 140 million tons.
The current situation could mean that instead of attracting vitally needed foreign and domestic power investments to continue fuelling China's economic miracle, these will stay away.
The Amercian executive concludes that foreign investors are more likely to be looking at Indonesia, India and Sri Lanka, rather than the second biggest power market in the world.
"Siemens is selling its interest in a large plant in Hebei Province and power company Intergen is selling its interest in the Meixuwan Project in Fujian Province. El Paso and, possibly the Lippo Group are also sellers," he concludes, adding that the only companies with a major remaining presence are Hong Kong's CLP and France's EDF.
