Improve the Price-Setting Mechanism of the Thermal Coal Market and Accelerate the Collaboration Between Coal and Power Generation Industries

An Interpretation of the “Notice on Further Improving the Thermal Coal Market Price-Setting Mechanism” issued by the National Development and Reform Commission (NDRC)

February 25, 2022 /CEC/ - Recently, the National Development and Reform Commission issued the “Notice on Further Improving the Coal Market Price-Setting Mechanism”(hereinafter referred to as the “Notice”) on the basis of in-depth researches and opinions. After the unexpected rapid rise in coal prices in 2021, it is the time to further improve the price-setting mechanism of the coal market. The “Notice” clarified the direction for the long-term stable operation of the coal market and accelerate the collaboration between the upstream and downstream sectors in coal and power generation industries.

1. The establishment of the long-term stable demand-supply relationship between the coal and power generation industries would ensure the security of the nation’s energy and power supply

Coal and coal-fired power were the basic energy and power sources in China, and played important roles in ensuring the energy and power security and maintaining the stable operation of the nation’s economy. The coal industry and the coal-fired power generation industry were interdependent, especially in the process of achieving the nation’s carbon peak and carbon neutrality goals, and would continue to serve as the ballast stones for nation’s energy security and the stabilizer to support the rapid development of the renewable energy.

The coal industry and the coal-fired power generation industry, as closely related upstream and downstream partners, should spontaneously form a long-term and stable cooperative relationship of "Risk and Benefit Sharing" while competing in the market. By further improving the thermal coal market price-setting mechanism, thermal coal prices will  be within a reasonable range, thus to help coal production, circulation, and consumption remain stable. And the establishment of the long-term and stable coordinated and strategic cooperation between the coal and coal-fired power generation industries would ensure the energy and power security of China.

2. Stable market expectations and reasonable price would accelerate the synergistic cooperation between the coal and the power industries

In recent years, the price of the thermal coal kept at a high level, and most of the coal-fired power generation enterprises suffered serious losses. Especially after July 2021, the price of the thermal coal soared to a record high, and the market mechanism failed. This situation not only brought high pressure to the coal-fired power generation enterprises, but also seriously affected the security of the nation’s energy and power supply. Subsequently, the government urgently took a series of measures to ensure the power supply and maintain an acceptable price of the thermal coal. The "Notice" guided the thermal coal prices to operate within a reasonable range.

The reasonable range of the coal prices proposed in the "Notice" fully took into account the costs, profits, social affordability and other factors of the enterprises in the coal and power industries, and also considered the mechanism for timely evaluation and improvement in the future.

3. Gradually improve the coal price-setting mechanism and give full play to the role of the market and the government

According to the historical statistics, the coal prices maintained stable for a long time, but fluctuated greatly in a short period. Improving the coal price-setting mechanism and limiting the mid- and long-term contract price of the thermal coal within a certain range would help to maintain the stability of the thermal coal market. What happened in 2021 showed that in the case of the market failure and the unexpected rapid rise in thermal coal prices, only by giving better play to the role of the government and the market, the thermal coal prices could be guided back to a reasonable range.

4. Further improvement of the price-setting mechanism would accelerate the market reform of the power industry

The "Notice" not only strengthened the regulation of the thermal coal market, but also emphasized improving the coal and electricity price transmission mechanism.

When the medium and long-term transaction price of the thermal coal maintains within a reasonable range, the coal-fired power generation enterprises could fully transmit the fluctuation in the fuel costs to the end consumer groups. And it is encouraged in the Notice to reasonably set up the clauses linking the feed-in electricity price with the medium and long-term coal transaction price in the contracts.

On the one hand, the coal-fired power generation enterprises could effectively transmit out the fluctuations in fuel procurement costs and ease the pressure on their operations. On the other hand, it would help to further restore the commodity attributes of electricity, establish a price response and transmission mechanism to cost and give full play to the role of the market mechanism in resource allocation.

To sum up, improving the thermal coal market price-setting mechanism would help:

- Stabilize the market expectations and clarify the market positioning of the thermal coal prices in a timely manner. Promote the signing and implementation of medium and long-term contracts for thermal coal to prevent coal speculation and price fluctuations.

- Stabilize the thermal coal supply and the stable operation of the coal-fired generation enterprises. Give full play to the role of coal-fired power as a basic energy source in the New Type Power System and maintain the nation’s energy security.

- Stabilize the country's economy and guide the coal price back to reasonable range， to reduce the cost of the coal-fired power generation enterprises.