Drought in China Hits the Energy Sector

Hydroelectric power shortages mount in southwestern China

"Another reminder of the very tight water supply" facing the mainland

It's the worst drought to hit China in a century. In five southwestern provinces, severe rain shortages since October have left 25 million people and 16 million livestock without adequate drinking water and damaged 19 million acres of crops. In Yunnan, the worst-hit province, 8 million Chinese lack sufficient grain, and 5 million have been reduced to taking handouts from the government. Rivers are running dry, and reservoirs stand half-empty.

The drought highlights the risks of China's growing dependence on hydroelectric power. China is the world's biggest producer of hydropower, which supplies some 15% of the country's electricity. Beijing plans to almost double output, to 300 gigawatts of installed capacity, by 2020; the rivers of southwestern China, which feed the giant Mekong system, are an essential part of the planned power grid. Low water levels are already causing brownouts. "This drought has seriously affected hydropower," says Ma Jun, director of the nonprofit Institute of Public & Environmental Affairs in Beijing. "Some rationing of power to factories has been adopted."

If the drought is prolonged, China may have to increase its reliance on coal, which still supplies about 80% of its electricity—and produces much of its air pollution. "The southwest drought will drive demand for coal [and] increase prices," predicts Laby Wu, chief financial officer of Shanxi-based Puda Coal. Shares in U.S.-listed Puda have risen by almost 40% this year.

China's pell-mell development has worsened the situation, since widespread deforestation has depleted the southwest's groundwater. Says Ma: "This is another reminder of the very tight water supply facing all of China."

The bottom line: China's effort to expand hydroelectric power may be threatened by water shortages, and use of polluting coal will likely rise.

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