Wang Tao: Why Does China Reproduce The Electricity Shortage?

Over the past 10 years, China has seen several power shortages, usually after strong economic growth.

In 2004, coal pportation capacity and power generation capacity did not keep up with the growth of electricity demand brought by the strong growth of heavy industry. In 2008, the vigorous energy demand drove coal prices soaring, and the government's control of contract coal prices caused its supply to decrease, forcing thermal power enterprises to buy coal in the market.

However, the regulation of electricity price means that the fire power enterprises can not pfer the rising coal costs, resulting in the reduction of power generation to reduce losses.

What's going on this time?

Electricity price regulation and coal price intervention once again bring problems.

The price of coal has been rising since the end of 2009, which is now close to the high point of summer and autumn of 2008.

At the same time, the electricity price is about 10% higher than that in 2008.

For fear of inflation, the government again tried to lower the contract price of electricity coal this year and postponed the adjustment of electricity prices.

On the one hand, such a price intervention undoubtedly causes the decline of the contract performance rate of coal enterprises, and on the other hand, the power of the power plant to continue to generate electricity in a deficit situation also weakens.

At present, the overall utilization rate of the national fire power units is still relatively low, which confirms the regulation and price control from another aspect, which is a key factor in the current electricity shortage (see chart 2).

Compared with the same period last year, the utilization hours of power equipment in the first quarter of 2011 had hardly increased (see chart 3).

Regional power imbalance

Although the growth rate of installed capacity in the whole country has kept pace with the growth of electricity consumption, the installed capacity of the eastern region has been increasing slowly, because more and more power plants are built in the central and western provinces which are closer to the coal mines.

The growth of electricity demand in the eastern region is synchronized with the national level.

The government's plans to shut down or pfer some of the energy intensive industries in the eastern region did not seem to be a great success.

This has further worsened the imbalance between electricity supply and demand in the eastern region in recent years (see chart 4).

Nationwide, the use of power generation equipment in the central and western provinces decreased steadily, while the eastern region remained high and rising again, indicating the tight supply and demand of local electricity (see chart 5).

Another regional factor is part of the eastern and central provinces, such as Zhejiang, Fujian, Jiangxi and Hunan, which experienced a winter drought and the decline or low level of hydropower production in the first quarter, which further increased the demand for thermal power.

As shown in Figure 6, in some provinces that are reported to have electricity shortages, such as Zhejiang, Jiangxi, Anhui, Hainan and Fujian, the utilization of thermal power equipment is increasing at an hour and electricity consumption, indicating that local thermal power installed capacity is tight.

In some central and western provinces, the government's control over electricity prices and intervention in coal prices seem to have a greater impact.

According to the statistics of China Electric Power Enterprise Federation, the thermal power enterprises in the 6 central provinces are generally in a state of deficit.

This means that the power plant has the power to reduce the loss by limiting the amount of electricity generated.

We do send these provinces with "electricity shortage", such as Hubei and Hunan.

Strong growth in electricity demand is also an important factor.

The growth rate of electricity consumption slowed down significantly in the 4 months after 2010, mainly due to the local government's power cuts to achieve the goal of energy conservation and emission reduction in the year. With the implementation of power restriction measures weakened, electricity consumption rebounded sharply in the first quarter of 2011.

Electricity consumption in the first quarter increased by 13% compared with the same period last year, mainly due to the promotion of industrial electricity (see chart 7).

Especially in recent months, black and non-ferrous metals, cement, chemical raw materials and other electricity users are accelerating production.

More importantly, the growth of electricity consumption in the power shortage provinces is particularly rapid: Zhejiang (15% growth over the same period), Jiangxi (an increase of 24% over the same period), Fujian (an increase of 22% over the same period), Hainan (an increase of 18% over the same period), and Anhui (an increase of 15.4% over the same period).

Electricity consumption in Hunan and Hubei has been growing at a level comparable to that of the whole country, but its hydropower generation is relatively low.

What information do these graphs and data tell us?

The electricity shortage in some Eastern and central provinces is caused by the following reasons: (I) the power demand of heavy industries such as cement, nonferrous metals, iron and steel and chemical industry has increased strongly; (II) the installed capacity of thermal power in these areas is tight, and the low water power generation makes the situation worse; (III) the distance between the contract price of coal and the market price is widened, plus the electricity price regulation, which has affected the supply of contracted coal and restricted the purchase of power plants in the market.

It seems that with the coming of the rainy season, the hydropower generation will increase and the Datong Qinhuangdao line will resume normal operation. The power shortage is expected to be eased to a certain extent.

With the growth of the high energy consuming industry in the next few months, we believe that the risk of large scale and nationwide electricity shortage will be further reduced.

The above judgment is based on the fact that the inventory level of some high energy consuming industries, such as steel and copper, is already high, and its final demand will not continue to grow at a high speed.

Of course, the problem of regulation still exists: the government's control of contract coal price and electricity price impedes the supply of low cost coal, and also restricts the power plant's ability to purchase electricity coal in the market.

In addition, the installed capacity of thermal power in the eastern provinces has not increased rapidly in recent years.

To solve the problem of power shortage in these provinces, we must adjust the regulatory policy and / or take effective measures to pform the mode of economic growth.

The former needs to raise the price of the contract coal and allow the electricity price to be raised; the latter needs to reduce the growth rate of the high energy consuming industry.

But for the upcoming seasonal peak of electricity consumption, these two measures may be that far water can not save the near fire.

How will the policy be dealt with in the next few months?

If the electricity shortage continues or deteriorates further, the government can take measures: (1) the administrative requirements for large coal enterprises to increase the supply of coal at the contract price; the effect of this measure is usually relatively limited; (2) allow the price of contract coal to be increased and subsidize the thermal power enterprises with a loss; (3) limit or cut down some small and backward production capacity for the high energy consuming industries; (4) increase the grid price of the thermal power enterprises in the serious deficit provinces; (5) increase the electricity consumption of the high energy consuming industries.

Due to concerns about inflation, we do not think that the government will be willing to raise electricity prices or even contract coal prices in the short term.

On the contrary, the NDRC has promulgated the "orderly electricity consumption" guidelines.

If the CPI inflation rate declines significantly in the rest of this year, then the possibility of coal price and electricity price adjustment will increase.

What are the implications for economic growth?

For now, we do not think there will be any nationwide.

But in the short term, electricity shortage and power rationing will reduce the growth rate of heavy industries in some provinces, such as cement, non-ferrous metals, steel and chemicals.

Limited supply at the industry level may benefit local large enterprises and raise their product prices.

Small businesses in affected areas may use diesel generators to increase China's imports of diesel and fuel oil in the coming months.

In the two quarter, heavy industry production and supply constraints may make the ongoing inventory cycle adjustment process more stable.

For the metals and chemical industries that substantially increased inventories in the first quarter, the shortage of electricity and the consequent slowdown in production may make its inventory level closer to the more robust final demand.

This may help prevent excessive inventory replenishment after large inventory.

The power supply problem may also change the trend of economic growth this year.

We expect that the GDP growth rate in the two quarter may be slightly higher than the first quarter as a result of more investment demand, which is stable at 9.8%.

From the perspective of electricity shortage restricting the growth of industrial production, this may slow the growth of GDP in the two quarter.

As the problem of electricity shortage is resolved later this year, coupled with the rise in hydropower generation and / or the increase in coal and electricity prices, the release of demand for heavy industrial products may increase the economic growth rate of three and fourth quarter.

Finally, the renewed electricity shortage this year may help to make the government determined to finally push forward the reform of energy and resource prices, and to pform the economy into a low consumption growth mode under the guidance of market forces and market signals.

But whether such a result can be achieved remains to be seen.