China May Face Power Glut

Generating surplus may follow slower economic growth.
An analysis by Michael Lelyveld
2013-01-21
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Steam rises from a power station in Beijing on Dec. 5, 2012.
AFP

As its economic growth slows and air quality declines, China may be building more power plants than it needs.

During 2012, China increased its generating capacity far more than its power consumption growth, according to official reports.

After years of power shortages, the trends suggest a major shift that could soon burden the electricity sector with generating surpluses and under-utilized power plants.

"There's a probability of it, almost a certainty of it," said Philip Andrews-Speed, principal fellow in the East Asia program at the National University of Singapore's Energy Studies Institute.

"The question is, is this a bad thing?" Andrews-Speed said.

Last year, China power production rose 4.5 percent, the State Electricity Regulatory Commission (SERC) reported. Power consumption grew 5.5 percent, far less than 11.7-percent rate in 2011, the National Energy Administration (NEA) said.

But installed generation capacity climbed 7.5 percent to at least 1,140 gigawatts (GW), according to the NEA. Previously released figures for 2011 suggest growth was actually over 8 percent.

The numbers mean that China is adding power plants at a rate 77 percent faster than it is using them and 45 percent faster than growth in demand.

The gap is the result of last year's slower economic growth in the midst of a longer-term buildup of capacity, which was designed to keep pace with double-digit growth rates.

Capacity

China nearly doubled its generating capacity between 2005 and 2010, making plans to double it again by 2020. Under the 12th Five-Year Plan, China's installed capacity would reach 1,400 GW, implying continued annual growth of about 8 percent.

If the government sticks to that track and slower economic growth persists, overcapacity in the power sector seems set to expand.

Last year, China's gross domestic product—the main measure of a country's economic activity and growth—rose 7.8 percent, the National Bureau of Statistics (NBS) reported. The rate fell far short of 9.3-percent pace in 2011 and the 10.4-percent growth of 2010.

Experts cited by the official Xinhua news agency expect lower growth in power demand to become the norm.

"A deceleration in electricity consumption is an inevitable trend in the future, as China has vowed to
optimize and upgrade its industrial structures in the 12th Five-Year Plan," said Zhang Zhibin, an analyst with Broad Consultancy Agencies.

Lag behind

Zhang predicts power consumption growth of about 6.5 percent this year, which would still lag behind the planned increase in generating capacity.

Electricity surpluses were last seen as a problem in 1998-2002, when the Asia currency crisis slowed China's economy, prompting the government to halt power projects, Andrews-Speed said.

So far, there is no sign that the government plans to do so again.

Starting in 2003, faster economic growth began to give China the opposite problem with power shortages that forced cuts in service and drove factories to run diesel generators.

But despite warnings, major power shortages have largely failed to materialize since 2010, while capacity expansion rates have stayed about the same.

Andrews-Speed said a moderate surplus would not necessarily be a problem.

"If you have overcapacity of 10 percent or so, then you're more able to deal with crises of different types," he said.

Drought has been a periodic problem for hydro-electricity production, for example. Hydropower accounts for 21.8 percent of China's generating capacity, according to the NEA.

Reforms

Surplus capacity could also help if the government is serious about promoting reforms in the power industry.

"If they wish to go ahead and start to introduce some form of real competition in the power sector, then you need excess capacity. If you don't have excess capacity, you can't have competition," said Andrews-Speed.

But the problems with overcapacity may be under-utilization of power plants by dispatch centers and insufficient return on investment.

"Some power companies are going to find themselves losing money," Andrews-Speed said. "They're going to find that some power stations are not dispatched, or they're going to have to sell at a lower price."

For years, China five big state-owned power companies have reported heavy losses on thermal generating, mostly from high-polluting coal, as a result of government-controlled electricity rates.

But overcapacity could turn the tables on the situation, since the risk of losses may be because rates are too high rather than too low.

Instead of scrambling for power wherever they can get it, regulators may be called upon to choose which electricity supplies to dispatch into China's grids.

Decisions could be based on price, environmental impact or local political interests.

Choices

Whatever the criteria, capacity surpluses may present the government with choices it has not had to deal with in years.

"It's an interesting moment," Andrews-Speed said. "The government will have to make decisions either to reinforce the administrative measures or to move toward more economic dispatch."

Last week, SERC predicted that power consumption will pick up this year, reaching 9-percent growth. But that pace would still be slower than the 2011 rate.

SERC cited a strong 10.7-percent increase in household electricity use last year. But consumption in the industrial sector rose only 3.9 percent, the NEA said.