China Aims to Curb Power Shortages

By SHAI OSTER and DAVID WINNING
January 24, 2008; Page A8

BEIJING -- China is facing widespread, temporary power shortages that could affect global energy markets if they aren't resolved soon. The shortages stem from a number of factors, but at their core is a pricing and distribution system that is having trouble keeping up with the country's rising demand for electricity.

Regulators said yesterday that 13 provinces and major regions, including the industrial-and-export hub of Guangdong in the south, will experience a total shortfall of about 70 gigawatts of electricity-generating capacity -- roughly one-tenth of China's total and nearly the entire capacity of the United Kingdom -- and are facing electricity rationing. Coal stockpiles have fallen to less than half typical levels, analysts said.

The National Development and Reform Commission, China's top economic-policy planner, announced yesterday the formation of a task force to handle the mounting problem and urged power producers and coal distributors to try to ease the shortages, without specifying how. China gets the majority of its electricity from coal-fired power plants.

China has been racing to feed its surging demand for power, last year adding 100 gigawatts of generating capacity, a pace of roughly one new power station each week. But it still needs hundreds more, according to projections.

Analysts and industry insiders say the electricity shortages will ease once cold winter temperatures rise and thermostats are lowered. But the summer will bring another jump in demand when China's emerging middle class crank up air conditioners. Unless the broader, systemic problems are resolved, that could strain China's power grid again.

A sustained power crunch in China may affect global energy markets. In 2004, China's appetite for oil rose nearly 16%, startling global markets and helping to fuel a huge rise in international oil prices. The surge in demand was caused in large part by widespread electrical-power shortages, which forced many factories to use diesel generators to keep operating.

With the world struggling with the widening impact of a U.S. credit crunch and oil prices backing off their highs of $100 a barrel, a big jump in China's oil demand could push oil prices back to uncomfortable levels.

It is unclear how bad this year's power shortages will be. But this time there is an additional worry: China is becoming a big coal importer. The world's biggest consumer and producer of coal, China relies on coal for 78% of its electricity. After years of mining enough coal to have a surplus, China now needs to import it -- especially for consumers in the south, which are far away from the coal-producing centers in the north. Economic growth has outpaced China's transportation infrastructure: It lacks trains, ports or power-transmission lines to evenly distribute power to where it is needed most.

That could drive up coal prices from exporters such as Australia, Indonesia and South Africa and could affect energy costs -- and possibly exacerbate inflationary pressure -- among customers as far away as Europe.

The worst snows in 15 years in Central China have toppled major transmission lines, and a drought has lowered electricity output at China's thousands of dams, which account for 16% of China's electricity.

Analysts largely blame the power shortages on price controls. The government has begun to overhaul the state-owned power grid and supply. Starting in 2006, coal prices were liberalized, allowing them to rise 10% each year after. But at the same time, electricity tariffs have been kept flat or lowered by government officials worried about inflation and social unrest if prices rise too high.

That has squeezed the profit margins of power producers and distributors.

--Renya Peng contributed to this article