Huaihua, Hunan (Platts)--27Dec2012/1221 pm EST/1721 GMT

A new coal pricing system in China will replace the National Development and Reforms Commission-set annual key coal contracts with mid- or long-term contracts negotiated between miners and power generation companies, the State Council said in a statement on Tuesday.

Under the new system, the settlement prices will be negotiated by suppliers and users without government intervention. The central government will also stop allocating railway capacity to the coal sector, which means suppliers and power companies will need to negotiate with the railway bureau directly based on their actual railing demand.

Coal miners will be encouraged to ink mid- or long-term contracts with power generation companies, the State Council statement said. The China National Coal Association will coordinate the supply contracts, it added.

The State Council also promised to improve the coal-electricity price linkage mechanism from 2013.

Under the new coal and electricity pricing scheme, the linkage period will be one year instead of six months in the old system set up by the NDRC in December 2004.

If thermal coal prices change by 5% or more in the period, adjustments can be made accordingly to on-grid electricity prices in the next linkage period. Power generation companies will have to absorb 10% of the production costs incurred due to hike in coal prices instead of 30% earlier.

--Reggie Le, newsdesk@platts.com --Edited by E Shailaja Nair, shailaja_nair@platts.com