Seeking Power Relief

China's rate hike is too small to avert a blackout risk, experts say.
By Michael Lelyveld
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Electricians mount power lines in China's eastern Anhui province, May 27, 2011.
Electricians mount power lines in China's eastern Anhui province, May 27, 2011.

China has raised power prices slightly to ease pressure from shortages, but analysts say modest measures are unlikely to work.

On May 30, the National Development and Reform Commission (NDRC) announced it would increase nonresidential electricity rates in 15 provinces and municipalities by an average of 0.0167 yuan, or about a quarter of 1 U.S. cent, per kilowatt-hour.

The price hike, effective June 1, came in response to China's worst power shortages since 2004. Generating companies complain they have already lost 10.5 billion yuan (U.S. $1.6 billion) due to high coal prices in the first four months of this year.

Experts say the 3-percent increase may help to reduce losses, but it is hardly enough to ensure ample power supplies.

"It closes the gap slightly and probably buys a little time," said David Pumphrey, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington.

But the rate hike may only be the first of more to come, Pumphrey said.

The NDRC has been struggling to steer between the threat of blackouts on the one hand and inflation on the other as consumer price growth continues to climb over 5 percent.

The government seems to have picked a rate figure somewhere in the middle, hoping to reduce power company losses without sparking more inflation.

The small increase may do little to promote conservation of electricity, however.

"I think it has more to do with the loss side because they're not doing enough to encourage efficiency," Pumphrey said.

'Comprehensive measures'

On June 1, the NDRC said it would adopt "comprehensive measures" to address the power problems by boosting energy supplies and curbing excess demand, the official Xinhua news agency reported. But the statement provided few specifics and no new plans.

The rate hike could only embolden coal producers to raise prices further as power companies increase orders to meet demand, Reuters said. Electricity use jumped 12.7 percent in the first quarter from a year earlier, the National Energy Administration reported.

Coal prices have already climbed to their highest level since October 2008, Bloomberg News said on May 30. The NDRC has called for more coal imports, although the domestic industry is already producing over 3 billion tons a year.

This year's power squeeze has been worsened by drought, sapping hydropower supplies that accounted for as much as 21 percent of China's generating capacity last year, according to official data.

On June 3, the NDRC also announced modest increases in rates that hydropower producers can charge to grid operators, China Securities Journal reported. The rate hikes range from 0.0019 to 0.256 yuan (U.S. $0.0003 cents to $0.04 cents) per kilowatt hour.

Jeremy Carl, research fellow at Stanford University's energy and sustainable development program, said the biggest problem is the policy of leaving power prices fixed after coal has been partially decontrolled.

"They're really trying to fight the market and I don't think that's ultimately going to be successful," Carl said.

'A political solution'

The NDRC rate hike exempted not only households but also coastal exporting provinces like Guangdong, where energy-intensive businesses operate, Carl noted. Also left off the list were eastern industrial provinces like Zhejiang, where power shortages have been severe all year.

"They're trying to do a political solution to what is fundamentally an economic problem," said Carl. "That doesn't make me optimistic that they're going to solve it over the long term."

The increase could be intended to signal a shift in the government's policies after months of resisting any retail price rise. But it is unlikely to change any of the conditions that have brought the crisis about.

"The Chinese government has done something that may be little more than symbolic," said Carl. "It's pretty marginal in the grand scheme of things."

Under pressure from losses, some generating companies have effectively defied government orders to produce more power by scheduling more downtime to maintain their coal-fired plants.

Carl said the government may now turn its attention to coal companies by ordering them to supply more at fixed prices. If that happens, the companies are likely to respond with a similar "corporate sick-out" to avoid losses, he said.

On June 5, the NDRC said it would punish coal producers for raising prices with fines of up to five times their increased revenues, Xinhua reported.





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