What you should know about the proposed Shenzhen power grid scheme

It provides further earnings stability support.

China's National Development and Reform Commission of a regulated revenue scheme for Shenzhen's power grid includes a mechanism to smooth out under- and over-recoveries.

According to a release from Fitch Ratings, this further supports earnings stability for grid operators.

The proposed framework attempts to align the grid companies' compensation to those found in developed markets in Europe, Singapore, Hong Kong and Australia.

In these places, transmission and distribution companies are less exposed to volume variation and costs of electricity channelled through their networks.

Here's more from Fitch Ratings:

The regulators' purpose of changing the mechanism is to clearly separate the power transmission tariff from the retail and on-grid tariffs.

Under the existing mechanism, the on-grid and retail tariff adjustments are subject to various market factors, including coal price, environmental subsidies and inflation; the transmission and distribution costs cannot be clearly identified in the final tariff paid by consumers.

The lack of a clear transmission tariff is an obstacle to further power tariff reforms. By separating grid companies' revenue and profit from the value chain and auditing the actual transmission costs, the regulators hope to gradually work out a clear and transparent formula.

This will also encourage large electricity consumers to directly negotiate with power suppliers, which has been allowed since 2009 but not gained much traction yet.