Power vs. Profit

YIYANG, China - It is a power struggle that is causing a power shortage one that has begun to slow Chinas mighty economic growth engine.
News Editor
News Editor - Bisnis.com 27 Mei 2011  |  10:06 WIB

YIYANG, China - It is a power struggle that is causing a power shortage one that has begun to slow Chinas mighty economic growth engine.

Balking at the high price of coal that fuels much of Chinas electricity grid, the nations state-owned utility companies are defying government economic planners by deliberately reducing the amount of electricity they produce.

The power companies say they face financial ruin if the government continues to tightly limit the prices they can charge customers, even as strong demand is sending coal prices to record levels. The chairwoman of one giant utility, China Power International, recently warned that one-fifth of Chinas 436 coal-fired power plants could face bankruptcy if the utilities cannot raise rates.

The utilities go-slow tactics include curtailing the planned expansion and construction of power plants, and running plants for fewer hours a day. And in a notable act of passive defiance, the power companies have scheduled an unusually large number of plants to close for maintenance this summer right when air-conditioning season will reach its peak.

So far there have been no public confrontations between Beijing officials and utility executives. But the dispute indicates that Chinas unique marriage of market competition and government oversight may be starting to fray after three decades of phenomenal economic success.

The Chinese electricity companies are firing a shot across the bow, and essentially saying theyre not going to just sit there and take massive losses, said Jeremy C. Carl, a Stanford University researcher on Chinese energy issues. Its almost the equivalent of a corporate sick-out.

The official Xinhua news agency reported late Monday that the countrys main electricity distribution company, the State Grid, had warned that power shortages this year could be worse than in 2004, when China had its worst blackouts in decades. That year, the problem involved railroad bottlenecks in getting coal to power plants an issue largely resolved with the subsequent investments in more rail lines.

This time, the impasse between government and industry is not the only cause of Chinas electricity shortages. Surging electricity demand is also a factor.

Chinas 700 million rural residents have been on a two-year buying spree of electric devices, purchasing hundreds of millions of air-conditioners and other energy-hungry appliances with government subsidies aimed at narrowing the gap in living standards between cities and rural areas.

In a little-noticed milestone, the latest data from Beijing and Washington shows that China passed the United States last year as the worlds largest consumer of electricity.

Since March, responding to the power shortages, government officials in six provinces have begun rationing electricity, including here in Hunan province. At least five more provinces are preparing to do so, according to official reports.

In Yiyang, a town of 360,000 in south-central China, electricity shortages are so severe this spring that many homes and businesses receive power only one day in three. Even gasoline stations in this region are silent more days than not, because the pumps lack electricity.

Meanwhile, blackouts are starting to slow the nations torrid growth of energy-intensive industries like steel, cement and chemicals. Unlike garment makers and other small manufacturers, the big factories cannot easily switch to backyard diesel generators.

To accommodate businesses that do use diesel back-ups, China last week banned exports of diesel fuel to conserve scarce supplies.

The power cuts are a reason the year-on-year growth rate of Chinas industrial production dipped last month to 13.4 percent in April, down from 14.8 percent in March and seems to be continuing to fall.

The lower productivity of factories, plus high diesel costs for those using generators, is likely to further raise average prices of American imports from China. Prices of Chinese exports are already up 2.8 percent in the last 12 months, after years of gradual decline that helped restrain inflation in the United States.

As power-deprived factories in China have less demand for raw materials, the impact has rippled around the world among Chinas suppliers as well, contributing to 10 percent declines in global prices for commodities like iron ore and copper. That is impinging on the economies of countries like Australia and Brazil, for which China is a big customer of natural resources.

Looking ahead, China has placed big bets on wind turbines for generating electricity. And despite Japans recent nuclear travails, China is also cautiously proceeding with plans to lead the world in the construction of nuclear power plants in the coming decade.

But coal is still king in China. The country has nearly half of the worlds total coal-fired capacity, and coal plants currently represent 73 percent of this nations total generating capacity.

Hydroelectric power, at 22 percent, is a distant second and has been hampered by droughts this year.

If Beijing and the utilities can resolve their differences, China plans to build even more coal-powered plants. Doing so would produce another big surge in emissions of greenhouse gases, of which China is already the worlds largest emitter.

Only coal can provide new capacity in the time and scale needed, said David Fridley, a China energy expert at the University of California, Berkeley.

The idea of recalcitrant utilities balking at Beijings dictates might seem to contradict the popular perception of Chinas government-guided economy. But while the electric utilities are majority-owned by the government, they are also profit-motivated companies accountable to the other holders of their publicly traded stock. So the power companies incentives are not necessarily aligned with those of central planners in Beijing.

The government, for its part, has imposed an array of price controls, including on electricity rates, as it struggles to insulate the Chinese public from inflation. Consumer prices are rising 5.3 percent a year according to official figures, and Chinese and Western economists say the true rate may be nearly double that.

But coal prices, which the government deregulated in 2008, are rising even faster in China, which is a net importer of coal despite having its own extensive mining operations.

Huaneng, Chinas biggest electric utility, said last month that electricity rates it charges customers should have been 13 percent higher last year to match the increase in coal prices. But regulators held utility rates essentially flat.

Spot coal prices in China have surged an additional 20 percent this year to a record $125 a metric ton for top grades partly because of floods in Australias and Indonesias coal fields and partly because Japan is buying more from the global market to offset its lower nuclear power output.

But Chinese regulators have let electricity prices climb only 2.5 percent this spring. Residential users in Chinas cities pay 8.2 cents a kilowatt-hour. That compares to a national average of 11 cents in the United States and 15 cents in the heavily urban mid-Atlantic region. Chinese industrial users in cities are supposed to pay 12 cents a kilowatt-hour, although politically connected businesses receive discounts; the average industrial rate in the United States is 7 cents, and 9 cents in the mid-Atlantic region.

Big power generators like Huaneng buy nearly half their coal on the spot market and the rest on long-term contracts with prices that rise more slowly.

The government has put pressure on Chinas coal mines, also largely state-owned, to continue supplying power companies with coal at below-market prices under long-term contracts. But the mines, which are also profit-oriented operations, have responded with their own form of passive resistance by sending their cheapest, lowest-quality coal with the most polluting sulfur.

As a result, many power plants are now paying penalties to yet another arm of the government environmental regulators for burning the sulfur-spewing coal. That has further added to the utilities cost of doing business, said Howard Au, the chief executive of Petrocom Energy, a Hong Kong company that builds coal-blending facilities.

Trying to help utilities reduce those environmentally and financially costly emissions, Petrocom has built a series of gray silos and red conveyor belts at Lianyungang port in northern China to dilute high-sulfur Chinese coal with low-sulfur imported coal.

Blackouts appear to be the worst in smaller towns like Yiyang here in Hunan, one of Chinas largest and most populous provinces. The power shortages are threatening to curb the explosive growth the province has experienced since the opening in late 2009 of a high-speed electric train link to prosperous Guangdong province to the south, which helped companies tap Hunans cheaper land and labor force.

In rationing electricity, Hunan officials have given priority to big cities like Changsha, the provincial capital. Even there, though, industrial districts are blacked out one day in three.

In Yiyang, meanwhile, multiday blackouts have ruined a tiny restaurant run by Xu Zhanyun, 48, who now must cook meals over lumps of coal instead of his electric stove. I have so much food in my refrigerators that all went bad, he said.

There is running water only every other day because the pumping station requires electricity. And so he must haul water from a well as he did as a boy, before Chinas economy surged.

In other cities, factories require employees to work at odd hours when electricity is available.

They shut down the electricity for a day every three days, said Jin Jianping, manager of an umbrella factory in Ningbo, in east-central China. We just arrange night shifts for everyone.

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