The deal strengthens the strategic partnership established last August between Shenhua and Huanneng Power International and will bring a degree of stability to China’s troubled power generation sector.

About 75% of China's electricity is coal-fired and the country is currently experiencing a serious power shortage as global coal prices meet record levels and China's coal stockpile remains tight. Reforms to China's coal pricing system are anticipated, though whether this latest deal came about as a result of these reforms is unclear.

The National Development Reform Commission is considering doing away with the favourable coal prices enjoyed by power plants, set lower than the domestic and international spot markets.

The growing gap between contract prices and thermal coal prices on the international spot market has ended up with many coal mines refusing to honour contracts and selling on the spot market.

China Daily reported Huangneng will buy 9 million tons of high-quality coal from Shenhua in 2005, 10.5 million tons in 2006 and 11 million tons in 2007.

A basic coal price has been agreed which will tolerate a 5% window either up or down.

"It is a win-win deal for both companies," Shenhua president Chen Biting told China Daily. "We have secured a big customer and Huaneng has found stable resources."

This was also the first time Huaneng bought coal as a group on behalf of its subsidiary plants, substantially adding to its bargaining power.

Huaneng’s total power generation increased by 18.8% in the first half of this year and it has plans to expand its production capacity by at least two-thirds by the end of 2008.

In other Chinese news the China Coal and Geology Corporation announced the discovery of a new deposit of an estimated 1.4 billion tonnes of coal in China's major coal-producing province of Shanxi.