17-09-04

This summer, 24 out of China's 31 provincial-level jurisdictions have been suffering from power shortages. Factories have been forced to suspend production while government offices; hotels and shopping malls have had to turn down their air-conditioning.

Tourist agencies in Beijing and Shanghai are busy serving a great many new customers having holidays as their heavy-power-consuming employers were requested to close to avoid the power consumption peak. However, in two or three years, the situation will probably be the opposite, with dozens of newly-operated power plants expected to be begging for customers.

In the early 1990s, surging industrial demand created power shortages and a tidal wave of investment in new capacity. But the growth in electricity consumption began to slow in the mid-1990s, leading to a power glut, renegotiated power-purchase contracts and a lack of new installations.
Now, like the early 1990s, we are seeing severe power shortages and overflowing catch-up investment. Experts predict that after 2006, we are very likely to see overcapacity again? The reasons for the situation lie in poor planning and pricing.

In the next two years, China aims to build 144 new power plants, adding 75 GW in installed capacity. This would balance the country's demand. Meanwhile, additional plants with an installed capacity over 250 GW are awaiting government approval.

Forecasting power demand in a large and fast developing nation is never an easy task. China's Tenth Five-Year Plan drafted in 2000 to cover the 2001-2005 period had forecasted annual consumption growth of 6 %, the same growth rate as the 1995-1999 period. However, the actual growth seen during the first three years of the plan was almost double at 11.8 % per year.

Planners fail to take the volatility of power consumption into consideration. Industrial consumption accounts for three quarters of China's power demand. At the same time, one quarter of all consumption comes from only four sectors, namely steel, aluminium, chemical and construction, all of which are dominated by big state-owned enterprises.

The data indicates that the main driver of power demand is the volatile state-sector investment cycle, rather than the more stable growth in individual consumer demand.

The other problem is the messy electricity pricing regime, which is strictly controlled by the central government. In China, the National Development and Reform Commission (NDRC) sets both the power prices charged to end users and the wholesale prices that electricity distributors pay to power plants.
Provincial governments have the authority to approve variations, which usually arise in wholesale contracts between generators and distributors. Residential electricity prices are normally kept low, heavily subsidized by a tax on industrial consumers.

The problem arises when demand for power soars, and generators have no right to lift prices without government consent. The NDRC has authorized a minor increase this year, but it is hardly effective as they are even not enough to stimulate consumers to reduce consumption.

In a normal market economy, generators earn large profits from the higher prices when demand is high. Later, in glut years, they can use those profits to finance the construction of the new plants required when demand hits a peak again.

In China, generators cannot profit from the good times (and have even been running at a loss in some cases).

They also have to preserve their cash flow by shutting down unused capacity in the lean years, instead of building capacity in preparation for the next upturn. The new plants get built only when disaster has struck.

Source: PetroEnergy Information Network