Experts Say Chinas Power Price Controls Wont Work


As electricity shortages threaten China's economic success, the government is fighting to keep power prices low and inflation in check. But experts told RFA in a series of recent interviews that low prices will only promote more power consumption, leading to more blackouts and factory closures.

"It doesn't work. If you want to influence demand, and in the Chinese context that means slowing the growth in demand down, you don't put on price controls," Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, told RFA.

"You've got to give the consumer an incentive for him to save, and you do that via price. Price will tell you whether you need to cut or not," Ebel said.

The State Development and Reform Commission (SDRC) recently ordered local authorities not to raise power prices because of inflation concerns, official media reported May 1, prompted by concerns over China's shortages of electricity and fuel.

Electricity carried by the overburdened State Grid rose by 15.6 percent last year as China's economy grew by 9.1 percent. In the southern economic boomtown of Guangzhou, 4,000 enterprises were ordered in April alone to turn off their electricity for two days a week. Others were told to reduce daily consumption by 10 to 20 percent.

Similar restrictions are likely in major cities across China during the summer season, when demand for power peaks with the use of air conditioners. Shanghai authorities have yet to give factory managers a schedule of electricity shutdowns, but the city will charge more for power during peak daytime periods and may close all schools and universities during the summer break.

"What's happened this time is that it's not only the old state companies. It's the foreign-invested enterprises, too," said Philip Andews-Speed, China energy analyst at the University of Dundee.

"And if the word gets out, as it is already, that if you invest in a factory in China, you may not be able to operate all week, every week, then people are going to start to look for other places to invest. So, I think there are some very serious implications here that the government can't ignore."

Jason Feer, Singapore bureau chief with the international energy information group Petroleum Argus, said the government's response to the power crisis was a result of a continuing conflict between free-market principles and the old command-style system that survives as a relic of central economic planning.

"For the Chinese, for a number of reasons, it makes more sense to impose either restrictions on use or other command measures rather than unleashing market forces which, I think, from the Chinese perspective runs the risk of triggering inflation," Feer said.

Ebel agreed that the political specter of inflation was behind the government's approach. "I suspect that they realize that allowing prices to float to balance out supply and demand, while it might be financially acceptable, from a government point of view politically it would not be do-able," he said.

Part of the problem lies with the fact that much of China's economy, especially rail transportation and coal, is also kept artificially low, Feer said. "If they start raising the prices of power, then the generators are going to need to be able to pass that cost along somehow. They're going to have restructure the whole system that they have in place of rail prices, coal prices, and they're not in a position to pass those costs through to the economy right now."


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