China will review on-grid power tariffs annually and adjust them if thermal coal prices fluctuate by more than 5 percent a year, the government said on Tuesday, marking a small step towards broader market-oriented energy pricing reforms. China's power tariffs are heavily regulated and are set by the government. Fixed tariffs have in the past saddled many thermal power plants with heavy losses and forced them to cut generation as they struggle with soaring coal prices.

Under the new mechanism, when average coal prices rise by more than 5 percent within a year, 90 percent of that increase will be passed through to end-users via a hike in on-grid tariffs. Power producers will bear the remaining 10 percent of the coal price increase, China's State Council, or cabinet, said. Under the current system, reviews are not conducted on a regular basis and utilities must shoulder 30 percent of the burden of higher coal costs.

The move will allow domestic power tariffs to better reflect fuel prices and comes after the government said it would scrap a regulation that caps spot thermal coal prices and would no longer intervene in annual coal price negotiations. China has vowed to reform its energy and resource pricing system to encourage users to be more economical with their energy use.

Copyright Reuters, 2012