Critical time for the power sector
The mainland's electricity shortages are in some measure attributable to the brisk pace of economic growth. But they also stem from the top-down, centrally planned way in which the power market is run. The challenge for the country's leaders will be to smooth out supply and demand in the short term and to extricate the government from the industry completely in the longer term.
Shortages and power rationing were prevalent last year and are expected to continue this year. And the unpleasant truth is that because the government has pledged that power supplies to home users will take precedence over supplies to businesses, the power situation will become a limiting factor in the nation's industrial development.
In response, the government has stepped in to hasten the construction of new power plants, discourage waste and liberalise pricing. This last measure is important. The government now sets both the price of coal - the major source of fuel used to generate electricity - and the tariffs for electricity, and it is this practice that has hastened the present crisis.
Prices have been kept artificially low on both ends, but restrictions on the price of coal have been loosened far more quickly than those on what power producers can charge their customers. The result has been an acute coal shortage and disruptions in supplies to electricity plants. The latest announcements on allowing some companies to raise their tariffs are to be welcomed, but considering that rapid rate increases raise the risk of social unrest, no one should expect this problem to be resolved quickly.
On the supply side, China is moving aggressively to expand capacity. New hydropower and nuclear plants are being planned, and coal-fired plants are still a big part of the mix. The need to keep the lights on in homes and factories is urgent, but the dangers of a headlong rush into building more power plants should not be ignored. For one thing, environmental and industrial safety should not be compromised - and China should not forget its commitment to reducing its reliance on coal-burning power plants, a major source of carbon gases that lead to global warming. Also, state planners who have under-forecast present demand may just as easily over-estimate future demand.
Giving private investment a prominent role in new projects could put them on a more solid economic footing, as well as set the stage for the government's eventual and necessary withdrawal from the market.
Power shortages in the economically important eastern and southern regions are set to continue this year. In the meantime, it is crucial to pursue price deregulation and lay the groundwork for the private sector to take the leading role in the industry. The sooner these fundamental issues are addressed, the better.