China will launch a pilot program in the country’s western regions to merge the assets of state-owned coal producers and reduce overcapacity, Shanghai Securities News reported Tuesday.

Five state-owned coal-fired power producers are expected to take the lead under the three-year scheme, which will consolidate energy resources in the regions of Gansu, Shaanxi, Xinjiang, Qinghai, and Ningxia. The pilot regions’ total coal-fired power generation capacity is expected to be reduced by as much as one-third by the end of 2021, according to the report.

The plan, initiated by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), aims to “eliminate outdated capacity,” “improve operational efficiency,” and solve some of the financial problems facing the companies.

A now-deleted leaked document of the SASAC’s pilot plan seen by Sixth Tone claims that coal-fired power companies have been struggling financially, or even saddled with debt, because of rising coal prices, overcapacity, and increased market competition. Half of the 30 regions with investments from the state-owned coal-fired power producers — mostly in China’s northeast, southwest, and northwest — have suffered financial losses.

The total liabilities of the country’s five leading state-owned power enterprises — China Huaneng Group, China Datang Corporation, China Huadian Corporation, State Power Investment Corporation, and China Energy Investment Corporation — amount to 1.1 trillion yuan ($156 billion), compared with their combined asset value of 1.5 trillion yuan, according to the leaked report. Altogether, the five companies have 474 coal-fired power plants able to produce 520 gigawatts of electricity, accounting for nearly half of the country’s installed thermal power capacity.

Experts worry the scheme to consolidate the companies and mitigate their fraught financial figures could lead to monopolistic behavior and price controls.

Yuan Jiahai, a professor at North China Electric Power University, confirmed that the state-owned companies account for 50% of the country’s coal power market share and said the merger would allow them to set a price for each region — either based on full market competition or unchecked monopoly.

“By means of assets consolidation instead of a market mechanism … the state-owned enterprises would share the burden of state assets and human resources after the mergers,” Yuan told Sixth Tone. “The corporations would ‘price benchmark’ so as to ensure a roughly normal profit for thermal power.”

According to Yuan, the issue of coal-fired power overcapacity, especially in the country’s western regions, has been a significant one since 2016, and the rapid development of renewable energy in China’s northwest has further impacted market shares. The consolidation, he said, can only pose risks to the coal power market.

“The more important thing our country ought to consider is what caused the overcapacity, and why our competition focuses on expansion rather than benefit,” Yuan said. “(They) didn’t consider the perspective of systemic issues and working toward accelerating market competition. Instead, we have done the opposite to save coal-fired electricity. It obviously does not benefit the market.”

Officials at the SASAC’s publicity department declined Sixth Tone’s request for comment.

Editor: Bibek Bhandari.

(Header image: An aerial view of a power plant in Taizhou, Jiangsu province, May 12, 2016. VCG)