China’s Power Squeeze Tightens

The power shortages I wrote about here earlier this month are getting worse. Demand for electricity is set to jump with use of air conditioners in what is forecast to be a hot summer. But it is also evident that the closure of energy inefficient plants in the second half of last year was, as we suspected at the time, only a temporary measure. Meanwhile, coal supplies are short. Though the NDRC has agreed to some increases in electricity prices these are marginal and restricted to a few provinces. The production incentive for coal and oil power plants continues to be reduced by government price controls on electricity at a time of rising input costs which have led thermal coal powered stations to cut back on stockpiles. In Hubei stocks are at a critical low. Coal mines have been told to suspend operations round Zhengzhou, capital of Henan, because of a rash of accidents, according to reports in Hong Kong. In Hunan reserves are sufficient for only four days generation.

Overall, the rise in electricity output fell in April compared to the first three months of this year. The current squeeze will strength the argument for ramping up the nuclear programme which we covered in a note this month and for speeding up expansion of use of natural gas.

Power cuts have been introduced for industry and urban facilities (such as street lighting) in Zhejiang, Guangdong, Jiangsu, Hunan, Hubei, Chongqing, Guizhou and Qinghai. In Zhejiang residential rationing has been introduced. The industrial cuts may have been responsible for the fall in the growth of industrial production from 14.8 per cent in March to 13.4 per cent in April.

Reports from several provinces suggest that at least some of these plants which were closed in the energy efficiency blitz last autumn have been reopened by local governments. Figures from the National Energy Administration show a significant rebound in energy use by steel mills and chemicals, construction materials and non-ferrous metal plants’ between them these four industries account for around one-third of national energy consumption.

The mismatch is hitting smaller factories outside the four sector cited above. That raises a question about the restructuring – as Capital Weekly put it ”China's power shortage highlights lies about economic restructuring”.