China’s Looming Power Shortages: Blackouts, or Blackmail?

The Financial Times’ beyondbrics blog peers behind recent warnings of power shortages in China in the coming months:

[Is] this a real threat? Or is it just sabre-rattling by power companies keen to secure from the authorities increase in state-controlled electricity prices to compensate for rising world coal costs? It’s probably just talk, but nobody can be quite sure.

During the hot summer months ahead, China’s power producers are going to get squeezed by record prices for thermal coal. Because electricity prices, which are set by the state, haven’t risen, thermal power stations are increasingly being run at a loss.

According to analyst Nate Taplin at Gavekal Dragonomics, a financial services firm, China’s thermal power plants lost Rmb33bn last year because of this price squeeze and are reluctant to continue producing power at a loss. As he explains in a recent note:

The problem is not that China produces too little electricity. The warnings of blackouts are instead best understood as a form of blackmail: power producers want the government to raise the prices they get for electricity ….

Taplin predicts private manufacturers may start drawing electricity from diesel generators as rationing becomes more widespread. “Without price hikes to address the structural problem, outages will probably be significant and lead to a bump in diesel demand,” he writes.

Warnings of power shortages were reported by Reuters last week:

Liu Tienan, the head of the energy administration, said supplies of coal, oil, natural gas and power in the first quarter had been steady, the official Xinhua news agency reported late on Monday. But Liu warned the peak summer season was likely to bring strains.

“Owing to excessively heady demand, even with production and supply growth in the double digits, supplies of coal, power and oil in some regions are still tightening, and future trends give no grounds for optimism,” Liu told an official meeting on Monday, according to Xinhua ….

Liu’s comments echoed a warning from the National Energy Administration last week, when it said power demand would grow faster than it previously thought.

The central provinces of Hunan, Jiangxi and Chongqing have introduced power use curbs since March, and Hubei province is also likely to impose restrictions, with low coal stocks at power plants and low water levels for hydropower generation.

China Daily, meanwhile, reported similar measures in Zhejiang, which has become reliant on electricity from neighbouring provinces to meet industrial energy demands.

Dai Yan, deputy director of the electricity dispatching center at the Zhejiang branch of the National Grid, said the province is facing severe shortages. Dai said Zhejiang has been buying electricity from neighboring provinces since the start of the year to quench its thirst.

“The demand for electricity intensified after Spring Festival and the shortage has been about 2 to 3 million kilowatts each day,” Dai was quoted as saying by China National Radio. “We have bought all of the available electricity from other provinces.”

He said more than 10 million kilowatt-hours of electricity was being sucked in from neighboring provinces each day in a bid to meet the demands of the province.

The provincial government has been trying to deal with the problem and has been rationing electrical power since early this year.

During the first quarter of the year, more than 500,000 enterprises in the province were operating according to a rotating electricity supply schedule ….

In some energy-hungry industries – such as chemical and non-ferrous metal manufacturing – demand has shot up by as much as 20 percent compared to last year.

A recent study from the Lawrence Berkeley National Lab, cited in the beyondbrics post, predicts with relative optimism that China’s energy demands will start to level off in 15 years, but even so will not peak until mid-century.