The government will halt its control of the coal market next year and lift regulations on contracts with power generation companies in order to push forward reform of the power industry.

From next year, coal producers and power generation companies will negotiate coal prices themselves instead of signing contracts at an annual meeting held by the National Development and Reform Commission, the country's top economic planning body, and coal industry association, the State Council, China's cabinet, said on Tuesday.

The council said the government will continue to have a hand in the power pricing system, by raising electricity prices annually when coal prices rise by more than 5 percent. However, power prices will not be raised this year as contract coal prices are currently at a similar level to spot coal prices.

Analysts said the new regulations have taken into account the difficulties power generation companies are facing, adding that the lifting of regulations will help ease their losses.

Since 1996, domestic coal producers have been required to sell a certain amount of thermal coal to generators at prices below market rate as the government tried to ensure power supply and make electricity prices stable.

Because coal prices have soared since 2008, selling the coal at spot prices instead of via term contracts will bring huge profits to the coal producers.

The term contracts have meant the coal producers had to sell the coal to power plants at a rate lower than the spot prices, which made them reluctant to fulfill contracts with power plants, resulting in continuous deficits in the generators caused by rising coal prices and government-controlled electricity prices.

"The new policy will help ease the burden on the power generators in the long term," said Dai Bing, director of the coal industry information department at JYD Online Co Ltd, a Beijing-based bulk commodity consultancy.

The power generation sector has suffered a total loss of 8.1 billion yuan ($1.3 billion) so far this year, according to Wang Zhixuan, secretary-general of the China Electricity Council.

He said the council supports the government's market-oriented reform of the power and coal pricing system, and there is more to be done to solve the contradiction between coal and power, including increasing coal inventories and establishing coal trading logistics bases.

The economic slowdown and lower power consumption have led to coal prices falling this year, which means it is a good time to carry out the new policy. "The country's power demand in 2013 will grow slightly," said Wang.

"The discrepancy between coal and power will be gradually eased while oversupply might occur." He also estimated that the annual growth rate of China's power demand during the years 2010 to 2020 will be around 7.5 percent.

According to JYD, up to 90 percent of power companies have signed medium- and long-term contracts with coal suppliers at average spot prices.

Dai said the reform is a trend, and more effective supervision of the industry is needed. Coal takes up 70 percent of China's primary energy output and consumption and thermal coal is a major part of coal resources.