Could China be on the Verge of a Huge Power Shortage?

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The world’s fastest-growing major economy may be on the verge of a severe power crisis: a power shortage of 30 million kilowatts this summer. Some commentators have said that its the worst power shortage in China since 2004, while others have gone so far as to say it’s the worst in China’s history. Yet the China Electricity Council (CEC) denies that there is any power crisis in China at all. According to them this is merely a regional seasonal occasional shortage. They report that China's demand for electricity will increase by 12-14% this summer compared to last year and that the eastern and central provinces are likely to experience electricity shortage, but provinces in the north-east and the north-west will have a surplus. Unsurprisingly, electricity prices for industrial use rose by an average of RMB 0.0167 per kilowatt-hour on 1 June 2011, the first retail power price rise since 2009.

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Running out of power? 

Thermal power accounts for 75% of China's total installed power capacity and 82% of its generating capacity. China's newly added thermal power capacity stood at 10.01 million kilowatts in the first quarter of 2011, 2.68 million less than the same period last year. The reduced new capacity for thermal power this year is essentially occurring because thermal power companies are struggling financially. The overall deficits for China's five major thermal power plants have topped RMB 60 billion (USD 9.23 billion) since 2008. This in turn is being attributed to the rising price of coal. The average price of thermal coal at Qinhuangdao port is currently RMB 815 (USD 125) a ton, 5% higher than the price in the first quarter of this year. This figure is the highest price in the last two and a half years, according to the China Coal Transportation and Distribution Association. The power shortage also has a lot to do with the fact that investment in China's thermal power industry dipped to RMB 130 billion in 2010 from 200 billion five years ago. Moreover the shortage is expected to worsen as electricity demand rises during the peak summer months just when hydro power capacity has been hit by drought. The drought has left water in some of the country's biggest hydro power producing regions at critical level just when demand is at a peak.  

Unsustainable growth? 

China is growing rapidly, but in order to sustain this growth it needs a lot of power. Can China sustain 9% GDP growth while energy consumption is growing at 12% in 2011 so far? Power stations are struggling to keep up with demand, they do actually have capacity to produce more, but expensive production costs, as outlined above, are eating away at their profits. Hence on 10 May this year it was reported that China experienced a shortage of 18 million kilowatts, which is expected to reach 30 million kilowatts for the summer, as mentioned above. 

Implications: CPI, GDP  

According to some experts, this large power shortage could significantly hamper economic growth in China. One example of this view is Gao Shanwen, an economist at China Essence Securities. In Gao's view, the shortage will have a direct impact on industrial output, which he forecasts to fall by 0.5% in the second quarter. This could produce a drop in GDP of 0.2%.

The rise in the price of power will increase production costs, thus the Producer Price Index (PPI) is likely to go up in the short term, and this will put further pressure on CPI, obviously a sensitive issue in China right now. It could get tricky in the months ahead. 

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