OREANDA-NEWS. January 21, 2015. The central government has for the first time set up an electricity tariff setting mechanism for natural-gas-fired power plants, which would enhance transparency of price setting and stability of returns for power producers using the cleaner-burning fuel.

Energy industry regulator National Development and Reform Commission has issued a circular announcing the system, which was posted on a website run by the China Electric Power Promotion Council, which is backed by the nation’s largest power generators and distributors.

The circular, which took effect on January 1, said a mechanism will be set up to link gas-fired power prices and natural gas costs, and provincial-level governments will be in charge of its implementation.

Previously, prices were set based on negotiation with local governments on a plant-by-plant basis.

As gas prices fluctuate significantly, the on-grid power price charged by generators needs to be adjusted accordingly. But the maximum power price cannot be more than 0.35 yuan per kilo-watt-hour (kWh) higher than the local benchmark coal-fired power tariffs or the average local on-grid power price, it added.

The new mechanism would “promote healthy and orderly development” of the gas-fired power generation industry, the circular said.

“The aim is to promote more gas-fired power generation,” said Pierre Lau, Citi’s head of Asia utilities research in a research note, adding it would improve profit predictability of the sector that at times is hurt by lagging power price increases after gas prices are raised.

An investor relations official at Hong Kong-listed Beijing Jingneng Clean Energy, the largest natural-gas-fired power generation firm in the capital, said the power price ceiling in the circular has no immediate impact on the firm since the tariffs sanctioned by the local government, which provides some price subsidies, already exceed the ceiling.

“It should benefit power generators in eastern and southern China, not us,” she said.

Lau said Jingneng’s current total tariffs range between 0.75 and 0.85 yuan per kWh, which are 0.35 to 0.45 yuan per kWh above the local coal-fired power tariff.

Hong Kong-listed Amber Energy, which operates gas-fired power plants in Zhejiang province, suffered a profit squeeze in 2013 as power price increases could not offset gas price increases.

Jingneng’s share price rose up to 4.5 per cent on Wednesday before closing 1.8 per cent higher at HK\\$3.42. No Amber shares changed hands. They last traded at 84 HK cents.