Thursday, May 26, 2011

Power struggle fuels China's power crunch

YIYANG (China): In Yiyang, a town of 360,000 people in the south-central province of Hunan, power shortages have been so severe this spring that many homes and businesses receive electricity only one day in three.

Tussle between utilities and govt comes at time of surging demand

Many petrol stations have closed and the water taps often run dry because the pumps lack electricity, forcing residents to haul water from wells - as they used to do long before China's economy surged.

The multi-day blackouts have ruined small businesses like Mr Xu Zhanyun's tiny restaurant. He now cooks meals over coal lumps instead of an electric stove. 'I had so much food in my refrigerators that all went bad,' he said.

And it is not just Hunan - China is facing its worst power shortage in years as a combination of insufficient supply and soaring demand takes hold.

And what is causing the power shortages, ironically, is a power struggle.

Baulking at the high price of coal that fuels much of the electricity grid, China's 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 limit the prices they can charge customers, even as strong demand is sending coal prices to record levels.

One giant utility, China Power International, recently warned that a fifth of the country's 436 coal-fired power plants could face bankruptcy.

The tussle could not come at a worse time: China is grappling with its worst power crunch since 2004, as a drought has hit hydroelectric generation just as the hot summer is seeing many people rush to their air-conditioners.

The shortage is not only hitting the country's energy-starved industries, but is also threatening to slow China's mighty economic growth engine.

At the core of the battle between the utilities and the authorities are the prices of coal and electricity.

Deregulated since 2008, coal prices have been rising partly because of floods in Australia and Indonesia's coal fields and partly because Japan is buying more from the global market to offset its lower nuclear power output.

This has put the squeeze on China's utility companies, three-quarters of which depend on coal to generate power. But they cannot raise electricity prices because the government holds utility rates essentially flat as part of a growing array of price controls to insulate the Chinese public from inflation.

Residential users in China's cities pay the equivalent of 10.25 Singapore cents a kilowatt-hour - less than half the 25.5 cents that homes in Singapore pay.

So the utilities have resorted to go-slow tactics, such as curtailing expansion and construction of power plants, and running plants for fewer hours a day. In a notable act of passive defiance, many have also scheduled an unusually large number of plants to close for maintenance.

While there have been no public confrontations between Beijing officials and utility executives so far, the power struggle is showing up cracks in China's unique marriage of government oversight and market competition, which has helped build three decades of phenomenal economic success.

The country's electric utilities are majority-owned by the government but are also profit-motivated, accountable to other holders of their publicly traded stock.

'The Chinese electricity companies are firing a shot across the bow, and essentially saying they're not going to just sit there and take massive losses,' said Mr Jeremy Carl, a Stanford University researcher on Chinese energy issues.

The Chinese government is now putting pressure on local mines to continue supplying coal at below-market prices - though these profit-oriented operations have responded with their own form of passive resistance by sending their cheapest, lowest-quality coal.

The blackouts, meanwhile, are starting to threaten China's burgeoning growth - and could have an impact on the world's economy.

As energy-intensive industries such as steel, cement and chemicals slow down, hitting the nation's production, their reduced demand for raw materials is also rippling around the world, hitting China's suppliers and contributing to 10 per cent declines in global prices for commodities like iron ore and copper.

Back at Hunan and other provinces, homes and businesses are still struggling to adapt to the constant blackouts.

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