If your economy is expanding at a 10 per cent annual rate but your electricity production is growing at only 8 per cent, sooner or later you are going to run into trouble - unless, that is, you are getting much more efficient at how you use power. Well, China is getting more efficient but progress is agonisingly slow. According to official figures, last year the mainland burned the equivalent of 1.16 tonnes of coal to produce every 10,000 yuan (HK$11,456) worth of economic output. That compares with 1.2 tonnes in 2006. By way of comparison, the United States is more than three times as efficient in its energy use, and Japan eight times. This inefficiency is largely the unintended result of China's energy price controls and the market distortions they create are causing big problems. This summer, the mainland is facing an electricity shortage variously estimated at anything between 10 and 30 gigawatts. That probably doesn't mean much to most of us, so to put it into perspective, 20 GW would be the electricity needed to power one light bulb in every single home across the nation. In other words, the lights will be going out all over the mainland this summer. The root of the problem is China's history of tightly controlled and subsidised electricity prices. While coal prices have more than doubled over the last four years in line with international price increases, electricity tariffs have gone up only about 20 per cent. According to specialist research company Urandaline Investments, last month it cost Shanxi-based coal-fired power stations about 450 yuan to generate a megawatt of electricity, yet they earned only 350 yuan. As a result, power generators are bleeding money and cannot afford the investment in new capacity needed to keep pace with the economy's blistering pace of growth. The 5 per cent increase in the retail price of power and the coal price freeze announced last month will make little difference. Even worse, although headline electricity tariffs for industrial users are similar to those in European countries, provincial governments frequently subsidise power for favoured users, especially in energy-intensive industries such as aluminium and steel production. According to a US study published this year, China's iron and steel industry benefits from electricity subsidies worth in excess of 3 billion yuan annually. These handouts only encourage inefficiency, with mainland mills using 20 to 40 per cent more electricity to produce each tonne of steel than their counterparts in Europe. The solution, free market purists say, is simple: scrap all subsidies and price controls, and allow supply and demand to determine electricity output and prices. Wasteful users would either have to improve their energy efficiency or be forced out of business. China is slowly moving in that direction, but there will be no rapid liberalisation. Beijing is far too concerned about the industrial upheavals and job losses that would follow if businesses were suddenly required to pay market prices for their electricity. Instead, we will see incremental deregulation and administrative measures such as restrictions on coal exports - and, of course, more power cuts.