Power play just drama?
As the nation witnessed images of dried-up lakes and cracked river beds in central China earlier this month, state media warned that a major energy crisis was looming this summer, complete with drops in hydropower, rationing at factories, and widespread financial losses for power-generating companies.
But do such drought conditions really result in epic power shortages?
'We believe the power shortage is exaggerated,' economist Lu Ting at Bank of America-Merrill Lynch China writes in a research note. 'And it is unlikely that China will see a major disruption in power supply.'
As Lu and some other analysts see it, the power pessimists have failed to account for increases in China's power capacity since 2004, when the nation sweltered through its worst-ever power shortage. Yes, power supplies will probably fall short of demand, they say, but not as severely as some forecasts show. And any shortages are likely to be limited to certain areas and certain times of day.
'It isn't appropriate to exaggerate the impact of the shortage, or even to call it a national power-supply crisis,' says the China Electricity Council, which represents generating firms. 'This kind of deficiency is different from the nationwide, sustained blackout seen in the past.'
The council's data show that China's power capacity has more than doubled in the past six years. In percentage terms, the council said, this summer's shortage may be half that of 2004.
Sounding a more dire warning is the State Grid Corporation, the largest power-distribution firm.
'This year's power supply is set to be the tightest in recent years,' Shuai Junqing, the firm's deputy general manager told a televised press conference last month. 'The deficiency may exceed that in 2004 when the nation suffered the worst-ever power shortage.' Shuai said generating-capacity shortage during peak consumption periods this summer could amount to 30 GW to 40 GW, with eastern China getting hit harder than northern and central parts of the country. The total shortfall could rise to 49 GW next year, and to 70 GW in 2013 if planned high-capacity long-distance power transmission lines can't be completed on time.
One GW of capacity is enough to meet the demand of 831,000 households for a year.
By the company's calculations, the shortfall could rise from 3.6 per cent this year to 4.7 per cent next year and up to 6.2 per cent in 2013.
The warning quickly made headlines in state media, which said the nation could face the worst power shortage ever this summer.
Some market analysts took those predictions of power shortages and coupled them with Beijing's moves to tighten bank lending and tame runaway property prices and inflation. Their conclusion: the mainland economy risks a 'hard landing,' or sharp decline.
Cooler heads, however, have pointed to the increase in China's power-generating capacity since 2004: it has risen 117 per cent. Factor that in, and this summer's shortage may be half that of 2004.
It is true that some regions, including Jiangsu, Jiangxi and Shaanxi, have already seen some power rationing in the past two months, primarily in energy-intensive industries, the critics note. But power production growth has not slowed.
'Despite all those media noises and despite the drought, power output was up 11.7 per cent year-on-year in April, which is significantly above the ongoing gross domestic product growth rate, at around 9.5 per cent,' wrote Lu.
Hydropower accounted for just 16 per cent of the mainland's total power generation last year, according to the council's data, with 81 per cent coming from coal-fired power plants.
Instead of declining, hydropower output actually jumped 25 per cent year-on-year in this year's first four months, thanks partly to an 11.5 per cent ballooning of installed capacity at hydro plants this year through April.
Analysts also note the impact of a five-year building binge in power plants by state-owned firms: Utilisation rates of the mainland's power plants have dropped. The rate was 62 per cent in 2004 and 2005. It was 53.2 per cent last year.
'Compared with the utilisation peak in 2005, China's power industry remains oversupplied,' Dave Dai, Daiwa Capital Markets' head of utilities research, wrote in a research report. 'With our forecast for 8 per cent capacity growth this year, we do not expect to see a major rise in overall utilisation, and therefore no nationwide shortage should occur.'
So is State Grid Corporation scaremongering with its shortage predictions for next year and 2013?
Gary Chiu Wing-fai, head of Asian utilities research at Samsung Securities, said the shortage projections might look more credible if Beijing continued to drag its feet in raising power prices to help tame inflation.
As Chiu sees it, State Grid may be sending a message to Beijing: If power-industry profitability isn't restored to normal, pre-2008 levels, there's a risk that the industry will slow its construction of new infrastructure. Then the occasional power shortages seen now could become widespread
'The profit of State Grid was already low,' Chiu said. 'If the distributors' profits continue to be squeezed, where will they find the money to fund the ambitious power-grid expansion program to relieve the power-grid bottlenecks?'
According to Shuai, State Grid's deputy general manager, the nation's northeastern and northwestern regions will produce 27 GW of surplus power-generating capacity this year. If that surplus is channelled to central and coastal regions suffering from power shortages, it could relieve most of the 30 GW to 40 GW of shortages nationwide.
But this requires long-distance, high-capacity power grids.
State Grid plans to raise its investment in power-grid construction to 2.5 trillion yuan (HK$2.98 trillion) between this year and 2015 - an average of 510 billion yuan a year, up 68 per cent from the 1.5 trillion yuan spent from 2006 to 2010, Xinhua reported in April.
Some 500 billion yuan of the total investment will go to construction of ultra-high voltage (UHV) power transmission lines, which typically span more than 1,000 kilometres.
Three north-to-south UHV lines, three west-to-east ones and a triangular one in eastern China are planned to be completed by next year and 2013. They will have a combined annual transmission capacity of 60 GW, according to a Daiwa Securities research report.
Their on-time completion will be key to preventing a worsening of the power shortage predicted by Shuai.
State Grid said last month in a circular for potential bond investors that it posted a loss of 1.7 billion yuan in 2009, the only losing year from 2008 through the first nine months of last year. That loss prompted the firm to cut last year's power-grid investment by 12.5 per cent from the year before.
Under the latest power price adjustments, power plants in 15 provinces have been allowed to raise prices charged to distributors by an average of 5.18 per cent. Distributors can charge end-users only 2.6 per cent more, according to calculations by Citi, based on power-price hikes announced late last month. This implies another round of profit margin squeeze for State Grid this year.
Instead of using market forces - raising power prices - to eliminate excessive power demand from energy-intensive industries, local governments have so far been relying on administrative means - power rationing - to manage demand and supply.
The industrial sector, which accounts for three-quarters of the mainland's total power consumption, is the prime target for policymakers.
There is a sign that power-price reform is starting to gain traction in Beijing. The State Council last week ordered the National Development and Reform Commission to study ways to deepen reform of the pricing system and 'fundamentally' resolve price conflicts between the coal and power sectors, the official Shanghai Securities News quoted unnamed government officials as saying.
It remains to be seen whether this will lead to more market-oriented power and coal prices, which are either set by the government or subject to its intervention.
'Artificially depressing energy prices would result in shortages, which will increase operating costs on the economy and add to inflation, albeit indirectly,' said Professor Lin Boqiang the director of Xiamen University's centre for energy economics. 'Having a long-term, transparent energy pricing system is very important to solving the current energy predicament.'