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By Chen Aizhu, Emily Chow and Andrew Hayley
SINGAPORE/BEIJING (Reuters) - Policy reform in China will boost profit for city-gas distributors by letting them raise prices for residential sales above costs, after years of selling piped gas to households at a loss, according to utility officials and analysts.
The scheme, which allows retail residential tariffs to be adjusted twice a year in line with gas procurement costs, will inject billions of dollars in revenue into companies like ENN Energy Holdings, China Gas Holdings and China Resources Gas, utility officials said.
Higher households tariffs - as much as 20% higher in certain cities - should also help alleviate some of the pain distributors felt last year, when China's gas use declined for the first time in two decades as COVID hammered the economy and lofty global liquefied natural gas (LNG) prices hurt imports.
Regional piped gas distributors like Shanghai Gas, Chongqing Gas and Changchun Gas and other gas utilities suffered steep declines in profit or outright losses in 2022 as they were unable to pass on more of their costs to a sector accounting for over 20% of China's gas consumption.
The new market-based pricing system will also encourage distributors like ENN and China Gas that are expanding into global gas trading to look at importing LNG.
"The policy will help the whole (gas) distribution sector and restore utilities' profitability," said Tan Yuwei, general manager of capital management at China Gas Holdings.
The privately controlled firm, one of China's largest gas distributors with residential customers making up 36% of its gas sales, expects the initial price hike this year to generate 3.2 billion yuan ($444 million) in gross margin, Tan said.
A second major distributor estimated the policy will lift its gross margin by more than 10% and anticipated further improvement in 2024 as China's economy recovers, said an official who declined to be named due to company policy.
Shares for listed gas utility companies briefly reversed this year's trend downwards after the policy was announced, but they remain under pressure from lacklustre industrial demand and China's struggling economy.
PHASING IN PRICE HIKES
State planner the National Development and Reform Commission (NDRC) announced the policy last month, after the China Gas Association had lobbied in March for reform saying heavy losses at utilities could cause supply disruptions, officials with direct knowledge of the matter told Reuters.
Since then more than 30 cities - including Qingdao and Nanjing in the east, Shijiangzhuang in the north and Lanzhou in the northwest - and the provinces of Hubei, Guizhou and Shaanxi have hiked residential tariffs by between 6% and 20%, according to local governments and utility sources.