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In May 2021, China's National Development and Reform Commission
issued the "Notice on the Action Plan for Deepening Reform on
Pricing Mechanisms in the 14th Five-Year Plan Period" (the Action
Plan). The Action Plan targets that, to achieve high-quality
development, by 2025, the prices in competitive markets across the
entire economy will mainly be market-based and natural monopoly
segments will follow well-established regulated pricing mechanisms.
The Action Plan is a continuation of the 2015 "Opinions on
Advancing Pricing System Reform" which set a 2020 target for
transparent and market-based pricing systems across the entire
economy, though progress lagged partially owing to the disruptions
created by COVID-19.
Related to the natural gas market, the Action Plan specifically
states to steadily advance price reform under the "control the
middle, liberalize the two ends" philosophy. The goal of this
approach is to have upstream wellhead, citygate, and retail prices
set by the market while pipeline tariff regulations will continue
to follow a cost-plus basis with cost supervision and scheduled
adjustment cycles. New aspects in the Action Plan include the plan
to establish new midstream tariff-setting methods and gradually
introduce cost-control measures.
The Action Plan indicates the general policy direction to create
a competitive retail gas market but in a cautious manner—to
"promote" the fair opening of the citygas distribution network and
"explore to promote" retail price deregulation. City gas
distribution pipeline network is a natural monopoly business, but
retail gas could be a competitive market if the distribution
network opens access to third parties. The measured approach
reflects the challenges for distribution opening and retail
competition for most gas consuming sectors where there are over
1,000 citygas distributors and hundreds of millions of users across
sectors. Furthermore, retail competition can help balance the
market by providing price signal but leave small players exposed to
price volatility and supply risk.
The Action Plan emphasizes the importance of seeking progress on
price reform while maintaining stability to ensure that the overall
price levels remain within a reasonable range. The Action Plan does
not define what constitutes "a reasonable range" but states the
needs to strengthen price tracking and analysis of commodities,
including natural gas, to timely propose measures to stabilize
prices. As a result, policies will likely continue to influence
market-based pricing in China to control price level and
volatility. For natural gas, the price level will need to maintain
a delicate balance between supply security—gas prices high
enough for gas suppliers to make adequate profits—and demand
growth—gas prices low enough that end-users can accept.
