China power crisis dims
production By Jayanthi
Iyengar
China has often been described as a
country of paradoxes. This could very well be true in
the country's power generation sector, which is likely
to yo-yo between surpluses, shortfalls and yet again
surpluses within the short span of the decade that began
in 2000.
And, the energy crisis seriously
affects foreign firms operating in China. Some, like
Sony and Volkswagen, have cut back on production.
Others have either left or are wary. Even many foreign
investors in power utilities have moved out. Taiwan
warns its investors to stay home, come home or invest
elsewhere in Asia because of China's energy crisis.
And sound advice to foreign, and Chinese firms:
Get your own independent energy supply until China
resolves its energy crisis in the next couple of years -
yes, there is light at the end of the tunnel. China may
yet become a nation of power surplus, making the second
half of the current decade critical for investors in
China's power sector and other fields.
The broad
consensus is that the power shortage will continue in
the near future due to China's economic growth, which is
being driven by the infrastructure and manufacturing
industries. These are pushing up electricity consumption
and putting a strain on energy resources. "While the
cooler months of winter may provide a reprieve as demand
for air-conditioning decreases, easing the electricity
shortage to a certain extent, the problem will continue.
Steps are being taken to rectify the problem such as
building new power plants across the country, but it
could be years before many of these are up and running,"
Xiaohu Ma, a partner at Morrison & Foerster LLP's
Hong Kong office, summarized the situation for Asia
Times Online.
Investors who have worked in China
for the last five years attest to how China veered from
a nation of power surpluses to one of shortfalls. The
shortages began in mid-2002. By late 2002, 12 provincial
grids had to resort to power-shedding during the torrid
summers and dry winters. By 2003, the figures had
escalated to 23 provincial grids. In 2004, the energy
crisis had spread further. At the end of the first half
of the current year, 24 provincial grids had resorted to
blackouts or power-cuts and rationing.
The
situation has been so severe and widespread that by one
estimate, there were 175,000 power cuts in China, with
the problem being more severe in the east and south.
There,over 10,000 manufacturing units had to live with
the reality of power rationing. Though the government
bent over backwards to accommodate foreign investors by
imposing lower levels of cuts and rationing - alternate
days as against four days a week for local units in many
areas - companies such as Volkswagen and Sony were
forced to cut production.
This raises some
tricky questions:
How severe is the power situation?
How long will it last?
What are the prospects for improvement?
What should investors, including foreign investors,
do in short and long term to protect their interests?
Severity of the situation Despite a
scorching summer just past and an economic slowdown on
the cards in the third and fourth quarters of the
current year, the consensus among independent experts
and top Chinese officials is that the rest of 2004 will
continue to see power shortages. However, it's possible
these shortages may not be as great as initially
predicted. Further, they say the shortages will ease in
2005, disappear by 2006 and by 2007, the Middle Kingdom
may actually shift gear once again from being a
power-deficient to a power-surplus nation.
All
these predictions are based on several calculations,
including the demand for and supply of power as well as
the rate of growth of the Chinese economy. The future
trend is of immense importance to investors, considering
that many of the authoritative projections about the
country, including the government's, have been proved
wrong, leaving existing and potential investors on
tenterhooks.
Points of agreement and
discord This August, China's department of
electricity estimated the shortfalls in 2004 would be in
the range of 20,000 megawatts. This is 10,000MW less
than what was originally projected, but a significant
shortfall all the same. The department, which is part of
the country's energy bureau under the National
Development and Reform Commission, further predicted the
situation would improve in 2005 and the shortages would
disappear by 2006.
Experts agree this is likely
to be the situation up to 2006, though there are
different opinions on what the situation will be like
after that. This is partially because estimates of
demand for power vary,though it is clear the Chinese
government is rapidly adding generation capacity, which
would ease supply constraints by 2006.
"With the
massive program of power station construction in
progress, the situation should start to improve in 2005
and resolved by 2006, provided sufficient and
appropriate transmission lines are put in place and
enough coal reaches the power stations," Dr Philip
Andrews-Speed, China energy expert and director of the
Centre for Energy, Petroleum and Mineral Law and Policy
at the University of Dundee, told Asia Times Online.
An energy analyst with a global market research
agency, who asked not to be named, seconds this
estimate. He calculated that the country is adding
35,000-40,000MW annually, which is the equivalent of
9-10% growth in the supply of electricity. "However, if
the demand for power continues to be above 10%, as was
the case this year, the supply tightness would persist,"
he said, adding that the shortfall will continue until
2006.
Steps under way
China had 380,000 MW of installed power
generating capacity by the end of 2003. The level is likely
to exceed 450,000 MW by 2005. It now has touched 400,000
MW, 680,000 MW by 2010 and around 1 million MW by 2020.
Meanwhile, power consumption is expected to touch 3.09
million Giga-Watt-hours (GWh) by 2010 and increase to 4.6
million GWh by 2020, according to Zhao Xizheng, president
of the state grid corporation of China World. This
clearly means that along with traditional thermal power
generation, China will have to explore other electricity
alternatives.
Genesis of the
problem The genesis of China's power shortages
lies in some policies it initiated in the late 1990s.
With market reforms gaining momentum, the country closed
down some of its inefficient public sector companies in
the late 1990s. These units were electricity guzzlers
and their closure created an oversupply.
Beijing
sought to tackle this oversupply by closing down some of
its small thermal power plants. It also regulated the
opening up of new units, with a few exceptions. The
measure had the desired effect: the supply adjusted
itself to the demand as the already approved projects in
the mid-1990s fed the enhanced demand for power untill
mid-2002.
However, the miscalculation occurred
since very few anticipated the kind of growth that China
would notch up since the turn of the century. The
Chinese government again tried to intervene and correct
the situation by lifting its ban on new units. However,
the dye had already been cast for the current round of
shortfalls. Power shortfall began to rear its ugly head
in mid-2002.
By 2003, the Chinese government was
approving power projects by the truckloads. Over 30
major new electric power projects were approved during
the year, with the potential of creating additional
power generation capacity amounting to around 22,000MW.
However, power projects take time to commission. For
this reason, experts say 2005 will see the easing of the
situation while 2006 is likely to render the country
power-sufficient - if not power-surplus - as many of the
projects cleared in 2002 go onstream and begin
commercial power generation.
Work in
progress Among the major projects commissioned
include the Three Gorges Dam. When completed in 2009, it
will include 26 separate 700MW generators churning out
18,200MW. Another large hydropower project involves a
series of dams on the upper portion of the Yellow River.
Shaanxi, Qinghai, and Gansu provinces have joined to
create the Yellow River Hydroelectric Development Corp,
which would construct 25 generating stations with a
combined installed capacity of 15,800MW.
Further, despite the costs, nuclear power
generation capacity is being promoted extensively. The
country's total installed capacity for nuclear power
generation has already increased from 2,100MW in the
beginning of 2002 to 8,700MW by June 2004. The Lingao
nuclear power plant in Guangdong province that began
commercial operation in May 2002 is currently generating
2,000MW. Another 1,200MW has been generated by the
Qinshan nuclear power plant in Zhejiang province since
December 2002. A new 6,000MW nuclear complex is set to
come up at Yangjiang in Guangdong province. This will go
on stream in 2010 while yet another facility has being
planned for Daya Bay. Since much of the energy produced
in China is from coal-fired units, steps have been taken
to modernize coal production as well and try and
minimize dependence on coal-based energy.
The coal situation China is the world's largest producer
and consumer of coal though its share in the overall
energy consumption is projected to fall in the coming
years. Like power, the country had coal surpluses in
late 1990s. It was then that the Chinese government
started to reform the coal-mining sector. In 1998, it
began the process of closing down the small and
unlicensed mines to improve the financial viability of
the large, loss-making, government-owned mines, perhaps
in preparation for privatization. This step, along with
exports to Japan and South Korea, was supposed to have
brought down the domestic availability of coal.
But as the Washington-based Energy Information
Administration (EIA) pointed out, "It has become clear,
however, through much anecdotal evidence, that not all
of the 'closed' mines have actually ceased operation."
Hence, coal availability is higher than what was
originally envisaged. However, the Chinese government is
alert to the fact that absolute demand for coal will go
up though in percentage terms, dependence on coal for
energy generation would fall from the current 67%. The
shift would be in favor of natural gas, with the change
being forced upon Beijing by growing environmental
concerns, particularly in the more advanced and
industrial coastal provinces, but it would still have to
keep pace with demand from the energy sector.
Hence, a conscious effort is being made to
enhance domestic coal availability, to modernize
existing units and to introduce clearer technologies
that would convert some of its traditional coal-fired
power utilities from smoke-belching monsters to more
environmental-friendly units.
To keep pace with
domestic demand for coal from thermal power units, 2004
has already seen a cut in exports. Foreign investments
have also been invited in the coal sector in recent
years. Foreign Direct Investments (FDI) have been sought
in areas requiring environment-friendly and cutting-edge
technologies such as coal liquefaction, coal bed methane
production and slurry pipeline transportation projects.
China's interest in new technologies in the coal
sector stems from its desire to reduce its dependence on
coal. For instance, the country now actively pursuing
coal liquefaction projects and fuel cell technologies
despite the costs, since it would like to develop
cost-effective coal substitutes to meet some of its
energy demand in the course of time.
In keeping
with this broad perspective, 2001 has seen BP,
ChevronTexaco and Virgin Oil being awarded a concession
for exploration for coal bed methane production in
Ningxia province. The country's first small-scale
project for coal gasification and a coal slurry pipeline
to the port of Qingdao have also been approved during
the period while the United States multinational Far
East Energy has received approval for an agreement with
ConocoPhillips in April 2004. Under this agreement, Far
East Energy has been permitted to undertake exploratory
drilling for coal bed methane in Shaanxi province, which
is near an west-east pipeline route. This ambitious
pipeline project is being commissioned to carry natural
gas from its largest reserves in western and north
central China to the eastern cities of Shanghai and
others.
The China National Coal Import and
Export Corporation is the primary partner for foreign
investors in the coal sector. The country also has
several projects on the anvil to upgrade the "coal by
wire" projects. These are the traditional coal-fired
power plants located adjacent to large mines. By the end
of 2005, to meet the funding requirements for the
modernization of the coal sector, the Middle Kingdom
will be following its oil sector model, whereby its
numerous coal mines would be amalgamated into seven
large corporations, similar to the crude oil sector
revamp of China National Petroleum Corporation (CNPC)
and China Petrochemical Corporation (Sinopec) into two
regional entities.
Prior to reorganization, CNPC
was an oil and gas exploration and production company
while Sinopec was involved in refining and distribution.
Now, while CNPC concentrates on the north and west,
Sinopec dominates the south. Product-wise, however,
CNPC's strengths lie in crude oil production and
Sinopec's tilt is toward refining. Both these companies
have tapped the international markets for expansion. The
mega-coal mining corporations would follow this growth
path once the reorganization is complete.
Despite these measures, experts like
Andrews-Speed point out that cost and timely delivery of
coal to thermal power utilities would continue to be the
key issue determining whether China would be able to
transform itself from a power-deficit to a power-surplus
nation by 2006.
Economic growth The
Chinese economy has been playing the maverick.
Unexpectedly, it has galloped at an unprecedented growth
rate of 9.1% in 2003, with the first quarter growth in
2004 peaking at 9.8%. Such frightening growth has
created shortfalls in many sectors, particularly in
demand for core inputs such as steel, coal and power.
To cope with the shortfalls and the consequent
inflation, the Chinese have tried to cool down the
overheated sectors. Investments in infrastructure are
being curtailed and non-intrusive monetary measures have
been adopted to correct the situation.
While
experts are divided over the efficacy of these measures,
the fallout of the constantly changing dynamics is
severe for the power sector. In the short term, relief
from the debilitating shortfalls may actually be at hand
for some. "On a nationwide basis, yes, a slowdown will
ease the power shortage. But for individual locations,
this will depend on whether the power stations are
receiving enough fuel (coal) and whether there are
sufficient and appropriate transmission and distribution
wires in place," said Andrews-Speed.
It is also
quite possible that the country may yet again enter an
era of power surpluses, making the second half of the
current decade as critical for investors in China's
power sector asthe first half has been for industries.
There could be issues of survival, particularly in an
era when electricity pricing according to market norms
would still be at a nascent stage.
The Chinese
government is currently in the process of reforming its
power sector by separating transmission from
distribution and strengthening the balance sheets of
distribution companies. Yet, even in the post-reforms
period, it has decided to regulate electricity pricing.
A 1995 law also needs to be replaced with a new one,
which would lay down the rules of the game in a new
reform era, one focused on cooling overheated sectors
and on rational, balanced growth.
"Foreign
investors in power utilities are aware of the
challenges, and that's why many have left. Those that
remain are doing well in this time of power shortage,
but when a surplus appears in two years, they may face a
tough time as there is currently no regulation," said
Andrews-Speed. This raises the question of what foreign
investors in China can do in the short term to protect
their interest. Andrews-Speed suggests that any foreign
investor, who can afford to, "should have stand-by power
generation facilities...Without that, they are at the
mercy of planned power cuts either just at peak time or
sometimes for whole days or weeks."
This is
exactly what has happened in many parts of Asia such as
power-deprived India, where industries have created
additional capacities on their own rather than rely on
public utilities. If companies in China also opt for
this route, it could again upset demand and supply
projections. Captive generation is almost like a
parallel power economy. Estimates of such generation are
often difficult to make, and then often inaccurate.
Another wild card in the scheme of things could
also be China's capricious and often inclement weather.
The sweltering summers of 2003 and 2004, marked by
scanty rainfall in many parts of the country, have
heightened the shortages during the sweltering summers
and dry winters in the last two years. If this
continues, it could further upset power demand
estimates.
Jayanthi Iyengar is a
senior business journalist from India who writes on a
range of subjects for several publications in Asia,
Britain and the United States. She may be contacted at
jayanthiiyengar1@hotmail.com.
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