How China's Energy Reforms Will Raise Costs but Spur Investment

TAIPEI, Taiwan (TheStreet) -- China's latest effort to let market forces determine energy rates is expected to raise costs for manufacturers but be a boon for foreign companies that provide power generation.

Beijing began lifting government price controls on electricity prices and power transmission on April 30, the state-controlled Xinhua News Agency said. The move is part of a series of energy-price reforms rolled out in 2013.

Operators of coal-fired power generators and operators of the electricity grid will now be free to charge as much as customers are willing to pay.

"They're talking about energy price reform as a key area of reform that's taking root this year, and they're typically serious," said Tim Condon, head of Asia research at ING Financial Markets in Singapore. "There's definitely a pickup in energy pricing reform."

China used 4 billion short tons of coal in 2011 and ranks as both the world's top energy producer and consumer, the U.S. Energy Information Administration said last year.

The country had been known as a global factory until 2011 when the Communist leadership stepped up a retooling of the economy that favors consumption and nonmanufacturing investment.

Oil and gas have taken a lead in free-market pricing reforms to date, analysts say, leaving electricity as the next major target.

Sino-foreign power generation ventures are rare today, but China eventually will make them easier to set up, the U.S. EIA forecasts. The country wants to improve efficiency and find new investors in its grids, it says.

Stronger revenue for power providers also would fuel expansion, attracting contractors from other countries.

But price reforms could raise the cost of business for manufacturers, adding to increased labor and land costs as a new frustration for investors such as Volkswagen (VLKAY), which makes half a million cars in China each year, or steelmakers including South Korea's NYSE-listed POSCO (PKX). Neither firm would comment.

Chinese energy prices that are now about 15% less than those in the U.S. will rise with the free market, causing foreign firms to feel "a bit of a pinch" but not an "unmanageable price rise," said Matthieu David-Experton, chief executive officer of Daxue Consulting in Beijing and Shanghai.

The 2015 reforms also call for more use of green energy, meaning companies that help China clean its notoriously polluted air will see a boom in business and may qualify for subsidies.

Pressure on factories to emit less pollution should increase orders to firms such as NYSE-listed China Ming Yang Wind Power (MY), the largest non-state owned wind turbine manufacturer in China in 2013, and solar panel maker Yingli Green Energy (YGE), which also has shares that trade on the NYSE.

Manufacturers that conserve energy or install pollution controls may also get breaks from the government.

"The government is encouraging consumers not to waste energy [and] to use green energy," said Zhao Xijun, international finance professor at People's University of China in Beijing. "If you do that, you may qualify for a subsidy."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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