China’s energy muddle

China’s government has got itself into a nasty twist over energy, meaning that investors should tread carefully in the sector and beware of bullish headlines about China’s expansion of alternatives to coal, which have fallen well below expectations.

As noted in my earlier blog, coal supplies cannot keep up with demand. Power generating companies are deterred from increasing supply when energy prices are kept down by government fiat. Li Xiaolin, Chairwoman of China Power International Development, warns that one-fifth of China’s 436 coal-fired plants could face bankruptcy if electricity prices are not allowed to rise in line with coal cost increases. Hot weather is increasing the use of air conditioners. The drive to close down energy-inefficient plants in H2/10 turns out to have been less effective than claimed at the time.

The result is a growing series of blackouts that is affecting heavy industry. Smaller factories are increasing their reliance on generators, meaning rising demand for diesel. This, in turn, has created unhappiness among road hauliers, as shown by the recent weekend strike by truckers in Shanghai. Some cities have started turning off some of their street lights. Grid companies are lobbying the government to speed up approval for transmission network construction and modernization.

My colleague Bo Zhuang points to the difficulty the government has had in formulating energy policy for the Five-Year Plan as a prime example of the problems in the sector. The National Development and Reform Commission (NDRC) had been scheduled to issue its Five-Year Plan plans covering coal, oil, gas, nuclear and renewable energy by March, but disagreements among policy makers mean that they have still not appeared. The finance ministry may not be keen on paying the higher subsidies that an expansion of renewables would require. Early this year the NDRC drew up a “Strategic Development Plan of New Emerging Energy Sectors” covering nuclear and renewables. But this was rejected by the State Council. Forecasts of nuclear capacity in the coming decade are being hedged while the government conducts a safety review during the current moratorium on building new reactors. A document covering only renewables has been redrafted and is being considered with groups of experts.

The slow dance of renewables

The development of renewables runs into opposition from powerful SOE lobbies in the coal, gas and the nuclear industry where development will resume after the current moratorium but will be adversely affected by a shortage of skilled workers and water issues (see our nuclear report).

A review of renewables with our partners the energy specialists at TrendsAsia concludes that:

Hydropower, which was supposed to take the lion’s share of clean energy production, has been hit by droughts along the Yangtze and in southwest China. Production at some hydropower plants in Yunnan and Guangxi last year was reduced to 10 per cent of capacity. Put simply the water supply just isn’t what it used to be in the days when Li Peng and his colleagues were so bullish about building dams while the cost of hydropower has turned out to be higher than anticipated.

Wind power is not what it seems from the figures. Capacity is well on target, but only half that capacity is hooked up to grids. The big expansion in the production of wind power turbines is plagued by a lack of experienced professionals, safety enforcement, quality and plain know-how while margins have slipped to the point where no one is making money turning them out.

Solar power has been another boom sector in terms of companies that have launched – China has more than 600 solar PV manufacturers compared to 200 a year ago. But they are very export-dependent: only five per cent of the PV modules made in China goes to the domestic market. Government subsidies through its Golden Sun programme are taken go mainly by big companies. The solar programme is due to be expanded from the current goal of 20 GW by 2020 with the development of roof-mounted photovoltaic power; but this is very much because other renewables have fallen so short.