FACTBOX-China's options to end its power shortage

July 30 Wed Jul 30, 2008 3:26am EDT

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July 30 (Reuters) - China is facing its worst summer power shortages in four years, because generators cannot source coal supplies or refuse to pay soaring fuel prices while they have to sell their power at unprofitable state-set tariffs.

The government has years of experience in trying to keep diesel and gasoline pump prices down while international crude markets soar, so it has a range of policy options to end the shortage -- but none of them promise an easy solution.

RAISE POWER TARIFFS, UNCAP COAL COSTS -- This would return loss-making plants to profitability, and encourage plants that have been struggling to look for coal more aggressively.

In the longer term, higher coal prices should encourage the mine investment China desperately needs to cut the death toll in its shafts and pits -- the most dangerous in the world.

But higher electricity prices risk feeding through into already substantial inflation and could cause social discontent.

They would also put extra pressure on manufacturing firms with slim margins already suffering from the U.S. economic slowdown and the rise of China's yuan currency.

TIGHTEN COAL EXPORT QUOTAS -- Miners may grumble and international trade partners will likely complain, but if Beijing tightens export controls to keep more coal at home, it might be easier for generators to get their hands on supplies.

Traders are eagerly awaiting the second batch of quotas for the year, and many have anticipated it will fall short of target.

However, this is only a temporary solution to more fundamental problem -- and the country's growing import bill shows that on its own it is unlikely to be enough.

(For a analysis of the challenges facing the industry, please click on [ID:nPEK18183])

Different from the oil sector where China needs to import half its needs, the country remains mostly a net coal exporter despite turning a net importer in some months since last year.

SUBSIDISE GENERATORS -- This would be costly and complicated, whether the subsidies were paid to end-users to compensate for higher prices, or to generators to make up from losses.

The sector is far more fragmented than the oil sector, where Beijing has to make handouts to only two firms and can make them promise smoother supplies in return.

By contrast, there are five major state-owned generating groups -- Huaneng Group, China Datang Corp, China Huadian Corp, China Power Investment Corp, and China Guodian Corp. These groups control over a dozen listed units. Meanwhile, there are some other big generators including China Resources power (0836.HK).

And small or independent firms, which are the ones most likely to cut output, provide nearly half of China's power compared with just around one-fifth of its refined oil products.

ALLOW SMALL MINES TO REOPEN - Beijing is pushing its provincial officials to complete safety checks and overhauls as fast as possible to allow small, private mines where most accidents take place to reopen if they can.

But local leaders still fear Beijing's wrath if they suffer high profile disasters on their patch. A total of 3,786 miners died in floods, explosions and other accidents last year.

If Beijing strengthens its message, however, it may be more willing to turn a blind eye to safety violations -- and given high coal prices many mine owners are keen to start excavating again, despite the potential human cost.

STRENGTHEN PRICE CONTROLS - This is the government's preferred tool, and one that it has already attempted to use.

But the more effective the price controls -- aimed at helping generators who are losing money -- the more likely the measures will choke off supply as miners lose their incentive to sell.

PROMOTE RENEWABLE ENERGY - More wind, solar and hydropower could help reduce the demand for coal, but this is only a long-term solution, and China is already trying to ramp up renewable generating capacity rapidly. (Reporting by Emma Graham-Harrison, additional reporting by Jim Bai; Editing by Ben Tan)

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