Policies Strain Power Supplies

Electricity cuts affect 20 provinces as China's government stalls reforms.
By Michael Lelyveld
china-energy-lines-305.gif Traffic passes below power lines in Beijing, July 20, 2010.

Despite widespread power shortages for the second year in a row, China's government has shown few signs of changing its energy policies.

Power problems that cropped up in coastal areas have now stretched into some 20 provinces, autonomous regions and municipalities since the start of the year, the National Development and Reform Commission (NDRC) said on May 3.

Electricity rationing, rotating blackouts and sporadic cuts have darkened businesses long before summer when air conditioning strains the country's generators, the official Xinhua news agency said.

The recent shortages are different from the outages that were imposed by provinces in 2010 as they tried to meet the government's five-year energy efficiency goals.

This year, consumption has been sparked by economic growth, while inflation has kept the government from raising rates to curb electricity demand. Rising coal costs have pinched profits, giving power companies little incentive to buy more fuel.

While the causes are different, the effects on consumers are likely to be the same. When summer comes, the country may suffer a power shortage of 30 million kilowatts or more, the China Electricity Council warned.

Curiously, China's shortage was also about 30 million kilowatts during its power crisis in 2004, although generating capacity has jumped by two-and-a-half times since then.

Price freeze

With capacity now reaching 960 million kilowatts, the size of the power industry is no longer the primary problem. But China's price freeze has blocked the forces of supply and demand, so that the link between consumption and cost has been lost.

"I don't think you can build your way out of it," said David Pumphrey, deputy director of the energy and national security program at the Center for Strategic and International Studies in Washington.

"You're going to have to have the right price signals built in," he said. "The command and control approach can take you a way toward that, but it will really take market- based pricing to guide your activities."

Part of China's policy dilemma stems from inflations rates that hit a 32-month high of 5.4 percent in March, giving the government less room to unleash higher power rates now.

But under its mixed system for coal, the government has ordered a price freeze on sales under annual contracts to power producers, while prices are rising for supplies when they have to buy more.

On May 4, the official English-language China Daily reported that benchmark coal prices have risen 5 percent since the first quarter to 815 yuan ($125.50) per ton, the highest in two and a half years.

In central and southern China, generators have only nine days of coal reserves on hand, Xinhua said.

Fearing the unknown

The trend toward tighter supplies is just the opposite of the boom in building new power plants.

In 2004, the government projected it would hit 950 million kilowatts of capacity by 2020, a level the country reached by the end of last year. Capacity is now expected to nearly double again by 2020 to 1.885 billion kilowatts.

But building new plants has proved easier than making decisions on pricing reforms.

"I think they fear the unknown that comes with shifting to a totally market-based rather than a much more command and control system," said Pumphrey. Whether China would be better off with decontrolled pricing remains a question for the government, he said.

Similar problems of the mixed system have led to fuel shortages as delayed price changes have resulted in losses for refiners, who have to buy oil on world markets.

On May 3, the Economic Observer Weekly reported that Sinopec and China National Petroleum Corp. (CNPC) have urged the government to cut taxes on fuel because of losses this year.

"Big bang"

Complications of the mixed system raise the question of whether the government will consider a "big bang" of total price decontrol to restore the relation between energy supply and demand.

Edward Chow, senior fellow at the CSIS energy and national security program, said the decision could have political consequences, since the succession of China's leadership in party and government posts is due in 2012-2013.

The current leadership is unlikely to test a new pricing system during its remaining time in office or leave the uncertainty as an early problem for its successors, said Chow.

"I just don't see it in the next two years. I don't think they're going to address it," he said. "They just have enough things to tackle."

The government will also be concerned about maintaining social stability, said Chow, citing recent protests against fuel costs and fees by truckers at Shanghai port facilities.

David Pumphrey agrees that the government is likely to take a more gradual approach, even if losses and power problems persist.

"It's probably going to be a choppy transition toward a more market-based pricing system," he said. "Internal unrest is probably the most scary thing that they see in it."

But the growing problems raise the question of which will pose the greater risk for social stability -- higher prices or power shortages?

"I think they're both a risk," said Pumphrey. "And that's why you see an effort to move toward some market pricing while tolerating some power outages," he said.

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