China’s Power Shortages Set To Persist

The drought in southwestern China is now not only leaving farmland parched but it is also starting to hit industry hard. Officials say a lack of water to drive hydroelectric power plants will cause electricity shortages not just this autumn, as has become the seasonal norm, but through the winter .

Water levels in the drought affected areas are down 30-40% from last year, with only limited replenishment from rains expected this autumn. The hydro-caused shortages are been exacerbated by coal-fired power plants also falling short of output goals. Coal prices are rising but utilities can’t raise prices to end-consumers by anything like as much, so they are cutting back production and taking plants off-line for ‘maintenance’ rather than suffer increased losses by generating power.

Difficulties in shipping coal to the power plants has only made matters worse, while the lack of a national grid means that regions with surplus power, notably Inner Mongolia, can’t export it to the rest of the country. Industrial plants in Shanghai and elsewhere on the eastern seaboard have been subject to intermittent power rationing since the summer, as have those in some other parts of the country, such as Guizhou, Qinghai, Gansu and Shanxi. Commercial users have been leaned on to reduce their demand by closing down operations at times of peak demand.

Earlier this year, officials anticipated a nationwide shortage equivalent to a generating capacity of 40 gigaWatts, or 4% of national capacity. The persistent drought in the south and southwest has probably made that number an underestimate. The power shortages are said to be the worse since 2004.

Demand has also been boosted by the boom in sales of white goods over the past couple of years and the property bubble, which has seen badly insulated buildings thrown up by the acre. On some estimates four out of five new homes built since 2008 are thermally inefficient.

With an installed power generation capacity of more than 1,000 GW, China has the largest power system in the world after the U.S. but demand is growing at more than 10% per year. Meeting it requires investment along a rickety supply chain that runs from antiquated coal mines to power plants and on to end-users.

Getting more market based pricing for electricity would go a long way to sorting out the problem. Wholesale electricity prices were raised in parts of the country in May and some commercial and industrial users saw higher tariffs in June, but it is politically difficult to raise prices for residential consumers while consumer price inflation remains so stubbornly high. In truth, China’s energy sector is stuck half way between state and market. As a result, there are incoherent signals about what is the necessary level of supply and investment, and over the incentives for energy saving, despite the much touted development of green energy technologies to make the economy less energy intensive.