January 23, 2008 / 4:20 AM / 12 years ago

UPDATE 3-Record power shortage hits China

(Adds oil, aluminium impact, 2004 details)

By Jim Bai and Judy Hua

BEIJING/HONG KONG, Jan 23 (Reuters) - China is facing its most severe power shortage ever as some plants struggle to secure increasingly costly coal and others shut down capacity rather than rack up losses by selling electricity at low rates.

The rebellion by power plant managers unwilling to generate at a loss is likely to worry policymakers still haunted by the nationwide diesel supply crisis last autumn, when refiners under similar pressure quietly curbed output and forced the government to make an unplanned and unwanted rise in fuel prices.

Beijing is battling high inflation and has promised not to raise energy prices in the short-term, so few analysts expect an immediate hike in power tariffs. But the shortages may prove a tricky test of the central government’s resolve and power.

Brownouts have hit at least 13 provinces, and at its peak nationwide demand outstripped supply by nearly 70 gigawatts, or the equivalent of most of Britain’s generating capacity, the official People’s Daily newspaper reported on Wednesday.

Many plants are being turned off or running at reduced rates as capped electricity tariffs combined with record coal costs demolish profits, traders and industry figures said. About 80 percent of China’s electricity is generated by burning coal.

A crackdown on unsafe mines, high global demand pushing up coal prices and a cold snap that shut roads and downed cables added to the problem, an official from the state regulator said.

But, at its core, analysts said the problem was largely the result of Beijing’s attempts to control inflation and avoid social unrest by controlling the price of some types of energy, like power, while allowing others like coal to be liberalised.

“The main reason behind the power shortages this time is rising coal prices,” said Henry Li, analyst at Core Pacific- Yamaichi, adding that power capacity is basically balanced.

“I don’t expect the government to raise power tariffs in the first half of this year, so the shortages will last till then.”

If brownouts do run that long, they will impact other markets. Aluminium Corp of China Ltd. has already shut down two plants because of the shortages.

During China’s biggest previous power crisis in the summer of 2004, when demand was around 40 GW above supply, a rush for individual generators and diesel to run them helped push up international oil markets.

But though China is anxious to ensure that things run smoothly ahead of the summer Olympics, it is reluctant to move on power prices as it struggles to damp down inflation that reached an 11 year-high near the end of last year.

Officials are caught between two policies — fixed power tariffs, and coal prices freed to float several years ago.

In theory the two are linked and tariffs should rise when coal prices climb more than a set amount, but Beijing has been reluctant to authorise increases.

“Power shortages may persist until the mechanism linking coal prices to electricity prices is reactivated,” said Li Jianwei, vice president of Shanxi Electric Power Association, a lobby group for power generators.

“Shanxi’s unusually low on-grid power price, coupled with rising coal costs has cornered many generating companies into a loss,” he told Reuters.

(For a factbox about the coal and power industries please click on [ID:PEK91521])

LOW SUPPLIES

Major generators like Huaneng Power International (0902.HK), Datang International Power (0991.HK) and Huadian Power International (1071.HK) have not yet commented on the shortages.

But stocks of coal are down nearly half from a year ago and only enough to cover eight days of generation, the official Xinhua agency said, quoting data from the State Grid.

“Limited transportation capacity and recent natural disasters including snow and sleet all contributed to coal shortages,” said an official with the State Electricity Regulatory Commission who asked for anonymity because he is not an authorised spokesman.

A drought has hit hydropower output and worsened the impact of the coal squeeze in central and southwestern provinces.

Beijing also cut coal production last year, even as international markets rose to record levels, by closing thousands of small, hazardous pits as part of a safety drive.

Now the government has warned miners against making “chaotic” price increases, ordered railways to find extra wagons to transport coal for power generation, and requested the re-opening of any closed mines that meet safety standards.

Additional reporting by Nao Nakanishi in Hong Kong, Writing by Emma Graham-Harrison

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