China's Power Outages Come Early and Often

Every summer for the past decade, China has had to endure power shortages in its most heavily industrialized provinces, as air conditioning use drove electricity consumption sharply upward. This year the government started rationing power in April. All told, China could face an electricity shortfall of 30 million kilowatts this summer, warned the China Electricity Council, the industry group for operators of power plants and utilities, on Apr. 28.

Companies are starting to feel the pain. Shane Lou, a small factory operator in Zhejiang province, now has to suspend operations every Thursday and Friday. He says he may have to shutter his plant for good.

Things are dire because coal prices in China are at a more than two-year high, in part because of flooding in Queensland, Australia, a top supplier. (Coal still generates about 80 percent of power in China.) Repairs on the railway from coal-rich Shanxi province in central China are not complete, and demand for electricity rose 13 percent in the first quarter. Worst of all, power-generating plants are running at only about half of capacity because of financial pressures, estimates Xizhou Zhou, the head of China energy at the Beijing office of IHS Cambridge Energy Research Associates (IHS). "It's not as if these plants are maxed out," he says.

China's half-liberalized energy market is responsible for the mess. While power-generating companies have to buy coal at market rates, they still must sell power to utilities at regulated prices that don't cover costs. Losses among China's five big state-controlled power producers, including China Huaneng, China Datang, and China Guodian, totaled 13 billion yuan ($2 billion) last year, says Nate Taplin, an energy analyst at economic consultants GaveKal Dragonomics in Beijing. Not surprisingly, the power companies won't produce more, since that will just increase losses. Neither the electricity council nor the five big power companies responded to faxed questions.

The obvious remedy is to let the power companies charge more. Yet officials fear that pricier electricity would fan inflation, now at more than 5 percent, which would then increase the risk of social instability. "The government needs power, and it needs factories to run," says Dragonomics' Taplin. "But other than raising prices, there is very little else they can do." A recent small hike in the power price charged to grid operators was too little to make a difference, he adds.

The electricity council's warning of shortages was a clear message to regulators that they should hike power prices or face the consequences, both Taplin and Zhou say. "These power companies are totally reliant on the government to make money. But they can control the amount of coal they buy and the power they produce," says Taplin. "It's kind of a blackmail situation."

The bottom line: Power shortages in China have caused brownouts and pit power generators, who want to raise prices, against regulators.

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