China on brink of electricity shortfall

China on brink of electricity shortfall
By Jamil Anderlini and Geoff Dyer in Beijing
Published: July 16 2008 19:40 Last updated: July 16 2008 19:40

China faces its worst power shortage in at least four years as soaring coal prices and government-set electricity tariffs force dozens of small power plants to shut down rather than face mounting losses.
Nearly half of China’s provinces have started to ration electricity as the country enters the peak summer season, facing what analysts describe as its worst coal shortage.
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Analysts warn that this year’s electricity shortfall could be more severe than in 2004, when the country was affected by its worst power shortage in decades because of soaring demand for power as the economy boomed.
China’s problems mirror those of other Asian countries, where the rising price of fuel and other commodities has had an impact on governments that traditionally subsidise everything from the cooking kerosene used by the poor to the electricity used by industry. Companies in Indonesia, for example, have complained of rolling blackouts and action by the government to force them to shift factory production to weekends.
The emerging power shortages have important implications for both inflation and growth, about which Beijing is to publish fresh figures on Thursday. Second-quarter GDP growth is forecast to have dropped to 10.1 per cent from 10.6 per cent in the first quarter.
Consumer price inflation is expected to have fallen in June to 7.1 per cent from 7.7 per cent in May, but problems in the power sector indicate inflation remains entrenched in the Chinese economy as the result of electricity price controls.
Late last month, the government raised fixed electricity tariffs by about 5 per cent but prices are still 30 per cent lower than the current coal price would imply, BNP Paribas estimates.
Coal prices in China have doubled since the start of the year. Beijing last month imposed price controls on thermal coal bought directly from mines but spot market prices continued to rise.
About 38 per cent of China’s coal supply last year came from small-scale operations. Many of these have since been closed by the government in an attempt to improve safety conditions in the country’s notoriously dangerous mining sector.
In spite of new orders from Beijing to reopen small mines that meet basic safety standards, industry executives say most local officials are reluctant to risk career-ending mine accidents in their jurisdictions.
“Large state-owned power companies have no choice but to keep operating and we have seen strong power generation growth from them so far this year despite the high coal prices,” said Daisy Zhang, an analyst with BNP Paribas in Shanghai. “But smaller power plants have been shutting down because the more they operate, the more [money] they lose.”
Power demand has doubled during the past five years, a trend that most analysts agree is unsustainable since China relies on coal for about 80 per cent of its power generation.
China has been struggling with petrol and diesel shortages as rocketing global oil prices forced small domestic refineries out of business. Large state-owned companies also cut production in an attempt to stem huge losses caused by government-set prices at the pump.