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For hundreds of millions of Chinese, this summer may be the hottest in years - 16 provinces, nearly half the country, are suffering constant power failures as the annual sweltering temperatures begin to rise across the nation.

The yearly shortage of electricity has occurred throughout the 54-year history of the People's Republic, but, interestingly enough, China has little reason to be starved of energy - it boasts the world's greatest hydropower potential and richest coal reserves.

It is difficult to comprehend, not to mention explain, why a country recording more than two decades of consecutively high GDP growth and rapidly increasing national economic strength could have left the problem unsolved.

Electricity generation capacity has long lagged behind demand, while escalating conflicts between electricity and coal producers over coal prices have complicated the problem.

And behind all of this looms the invisible hand of administrative interference.

The electric power industry, the last stronghold of the planned economy, is the country's most complicated sector, with hundreds of varying sales prices all set by the government according to different producers and consumption purposes.

The central government, after marketizing almost all other industries, has made big strides towards reforming the electricity sector since last year, including the establishment of the China Electricity Regulatory Commission this March. Industry insiders, however, say the sector will only fully embrace market rules in seven or eight years.

Reformers may have missed a golden opportunity during 1997-98 when China enjoyed a rare electricity surplus. Since then, the return of the shortage, which is worsening, makes reform a very difficult target to achieve.

Yet it must be achieved, Beijing-based power experts warn. The electricity bottleneck, if not dealt with in a careful and timely manner, may stop the national economic engine from steaming forward.

Inadequate capacity

The State Grid Corp of China has estimated that national electricity demand will reach 1,784 billion kilowatt hours this year, up 8.9 per cent. Meanwhile, newly installed generation capacity is expected to grow by only 4.3 per cent.

Renowned power expert Zhu Chengzhang blames the 10th Five-Year Plan (2001-05) for the slow growth.

The plan underestimated the sharp rise in demand because of a low national electricity elastic coefficient (the growth of electricity supply versus GDP growth) in 1997 and 1998 when the plan was drafted.

According to the plan, electricity demand should grow 4.8 per cent annually to 1,730 billion kilowatt hours in 2005, while the generation capacity should rise 3 per cent every year to reach 370 million kilowatts. Last year, the two figures already stood at 1,450 billion kilowatt hours and 356 million kilowatts, respectively.

Sharp demand hikes, however, eventually forced the central government to urgently adjust construction plans for the 2003-05 period, so that an annual 30 million kilowatts will be added to a total of 110 million kilowatts of new capacity by 2005.

The construction of 30 new power stations, with a combined generation capacity of 22.48 million kilowatts, has been approved this year.

But the electricity shortage is expected to continue for years, as large thermal power plants normally take four years to construct, while hydroelectric power plants can take seven to eight years to build.

Fuel fight

The escalating clashes between coal and electricity producers are further complicating the serious power shortages.

Coal-fired electricity accounts for more than 70 per cent of China's electricity generation capacity, and thermal power plants consume more than 60 per cent of the country's coal production.

War broke out between electricity and coal producers at the end of last year when all the major players from the two sectors gathered in Changsha, capital of Hunan Province, to negotiate orders for 240 million tons of coal for 2003.

Coal producers intended to hike the price of ordinary coal by 5 yuan (60 US cents) per ton and some rarer coal varieties by 10 to 20 yuan (US$1.20-2.40). Electricity producers, however, refused to accept the price increases.

As a result, only 90 million tons of coal was ordered, at 2002 prices, from coal producers outside the major production base of Shanxi Province.

Shortly thereafter, news of power blackouts hit the headlines.

Henan Province started to cut its electricity supply in January. All major thermal power stations in Shaanxi Province closed some of their generators in March. The six major power plants, even in coal-producing Shanxi Province, also cried foul at the end of March over the dearth of coal.

Meanwhile, coal production has continued to rise sharply, creating huge stockpiles.

The battle is between market rules and the planning mechanism, explains Qian Pingfan, a researcher with the State Council Development and Research Centre.

Coal prices were partially opened to market rules in 1993. At that time, the annual supply of 650 million tons of coal for electric power plants was divided into two categories: 250 million tons was to be supplied under prices fixed by the central government, with prices for the rest set by market demand.

Then in 2001, the central government stopped setting coal prices but continued to dictate supply plans. Disputes thus surfaced over the prices for the newly deregulated 250 million tons of coal.

Electricity producers argued that coal prices should not be hiked since they were not able to increase electricity prices, which are still set by the government today, accordingly.

The extra money electricity producers paid to buy increasingly more expensive coal from the market has resulted in an extra cost of tens of billions of yuan in the last few years, and it is difficult for them to digest the price rises of the government-set supplies.

Coal producers, on the other hand, claimed that government-set electricity prices have become a convenient excuse for power producers that often refuse to buy coal at government-set prices when market prices are lower.

Besides, they said, the government-set electricity prices have witnessed sharp increases since 1996.

According to statistics provided by the Shanxi Coal Sales Office, electricity prices have increased by 30 per cent for industrial users and 70 per cent for household users since 1997.

The supply of cheap coal under government orders, the prices of which were 30-40 yuan (US$3.60-4.80) per ton lower than market prices last year, has created heavy losses for coal producers. Such losses accounted for half of the total losses of State-owned industrial enterprises in Shanxi Province.

To solve the disputes, the State Development and Reform Commission issued an announcement early last month to increase the prices of ordinary coal by 2 yuan (24 US cents) per ton and those of special kinds of coal by 8 yuan (96 US cents) per ton, and ordered all contracts to be signed before the end of last month.

Experts, however, expect the forced truce to be short-lived. Next year's battle could be even more fierce, as administrative interference has shown it cannot entirely conquer the problems.

Feng Fei, a senior researcher with the State Council Development and Research Centre, says the only way to end the dilemma is to open up both sectors completely to market rules and allow diversified investors, including foreign and private capital, into the two industries.

Power pricing

At the root of the disagreements is the government pricing system, the most complicated of its kind in the world. Hundreds of different end prices coexist, determined according to the types of consumers, including residents, industries, commercial firms, and farms. In some areas, power prices for sugar refineries are different from those for chemical fertilizer manufacturers.

Despite the fact that industrial usage is more economical than residential usage, prices for the latter are lower in many places as the government takes into consideration the burden on private spending.

In addition, power plants have to charge different prices to put their electricity on the power grid in accordance with production dates and investor requirements.

The government started to reform the pricing system by announcing a comprehensive plan in April 2002. At the end of last year, the State Power Corp of China's monopoly over national electricity production and transmission was broken down into five power production groups and two power grid companies.

By separating the producers from the transmission companies, the central government hopes to introduce competition, meaning that those producers offering the lowest prices will be able to get their electricity on the grid. Power producers will also be compelled to cut costs to make their prices more competitive.

Last month, the State Electricity Regulatory Commission started piloting the reforms in East China and Northeast China.

But insiders say nationwide implementation of the reforms will take at least another three years, and there is a long way to go before producers will be allowed to freely compete to supply electricity directly to end users.

A ray of hope

Bing Fengshan, secretary general of the China Hydro Power Engineering Association, says the electricity sector will undoubtedly focus on tapping alternative hydroelectric power resources in future as the industry is too reliant upon coal-fired power plants, which now provide 76 per cent of the national electricity supply.

Bing says the central government should alter discriminative taxation polices on hydroelectric power producers, which are taxed 17 per cent compared with the 6 per cent levied on coal-fired plants.

Insiders also urge the government to initiate preferential polices to encourage investors to put their capital into hydropower production.

The four large stations planned for the Jingsha River alone will require total investment on a par with the 180 billion yuan (US$21.69 billion) that went into the Three Gorges project. The State government, however, facing mounting pressures from the expansive fiscal polices it initiated in 1997 and the issuance of a substantial number of State Treasury bonds, is not able to finance new giant projects like the Three Gorges.

All in all, say insiders, the government will have to relinquish its role in the power industry before blackouts become a dim memory. The 26 consecutive years of national power shortages from 1970-96 and their reappearance last year clearly indicate that government tinkering will never catch up with market changes.

(HK Edition 07/11/2003 page1)

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