July 30 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
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
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
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
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
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
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)