China power crisis symptom of deep structural woes

BEIJING (Reuters) - China's power shortages may become more than a seasonal summer bugbear, as price controls complicate the search for investment to solve deep-rooted problems in the mining, transport and generating sectors.

Chinese firms have grown used to summers when electricity is rationed as air-conditioning strains the grid beyond capacity -- around half the country faces restrictions at present.

But in past years, when the weather cooled, easing power consumption relieved the strain. This time, analysts warn that the brownouts could roll on through the winter, because the main cause of the shortages has shifted.

The problem used to be simply that China did not build power stations fast enough to keep pace with its booming economy.

Now demand for coal, source of over four-fifths of the country's electricity, is growing faster than capacity to mine and ship it, while government price controls mean some generators that can access coal do not want to pay for it.

"After the summer, the load (on the grid) usually falls, but because of the coal supply problems, and because prices are so high, we may still see shortages," said Lisa Yue, a power analyst at the Beijing office of Cambridge Energy Research Associates.

A further worry is rising power consumption in winter -- traditionally a season when low hydropower output is offset by weaker demand -- from energy-guzzling plug-in heater units used to warm homes without central heating.

In June, China's power output rose at its slowest pace in over six years. While fast by most measures, the 8 percent rise was far slower than the double-digit pace needed in recent years to fuel the world's fastest-growing major economy.

At peak times demand may outpace supply by as much as 36 gigawatts, or nearly 5 percent of installed generation capacity, according to reports on shortages across at least 15 provinces. That's near the estimated 40 GW shortfall last seen in 2004 as China faced its worst power crisis in a generation.

COAL PRICE WOES

The Olympics may provide temporary respite as a swathe of factory shutdowns lessens pressure in the north from industrial users, but underlying problems are far more thorny.

To meet current demand growth, China needs to increase coal output by around 200 million tonnes each year -- equivalent to the entire Indonesian coal industry, said Stephen Oldfield, head of Asian Utilities Research at UBS in Hong Kong.

But this comes at a time when Beijing is pushing hard to improve safety standards in the world's deadliest mines, by shutting down the smallest and most primitive.

And even if it can extract millions of extra tonnes of coal a year while closing down thousands of mines, the government still has to wrestle with transporting the heavy fuel through an overstretched railway system or down overburdened roads.

"This is a long-term problem," said UBS' Oldfield.

"China faces the logistics of dealing with around 10 percent demand growth for an industry that's already producing over 2 billion tonnes of coal a year ... and you need the transport infrastructure to keep pace with that kind of growth."

Funding for that expansion should come from sales of coal, officially freed from government price controls and now soaring in value as the world seeks ways to avoid expensive crude CLc1.

PRICING DILEMMAS

But fixed power tariffs mean generators slumped into the red as coal costs rose, while their reluctance to pay more for fuel exacerbates supply problems by encouraging shipments abroad.

Beijing is wary of raising power prices at a time of global economic gloom when manufacturing costs are already soaring, and it fears fuelling inflation or social unrest.

So the government has responded by reverting to coal price controls and export quotas -- a retreat into its planned-economy habits that has been ignored by many miners and traders, but, where effective, is likely to worsen its energy woes.

"China is facing a quandary," said Yang Ming, an analyst with SYWG Research and Consulting, the research arm of Shenyin and Wangguo Securities, one of China's largest brokerages.

"Coal miners are in no mood to supply fuel to power plants due to price caps. But lifting curbs on coal prices will further hurt power producers that have been hit by soaring costs."

Optimistic observers see the controls as just a temporary measure to tide China over August when it hosts the Olympic Games. Ensuring they run smoothly is a matter of national pride.

"The controls certainly won't be long term," said CERA's Yue. "Coal prices have already been liberalized, they can't turn back."

But mine and transport expansions need time and money. And if in the meantime coal prices do not retreat, or China cannot build power plants efficient enough to curb demand growth, the country's coal and power supply problems will persist.

"They have to make the price reflect supply and demand, environmental costs etc, and only that way will they be able to ensure sufficient supply," said Nomura analyst Donovan Huang.

If not, the state's relationship with its power firms is at risk of echoing its troubled one with refiners -- struggling to encourage reluctant generators to fire up as it attempts to contain recurrent shortages caused by its pricing policy.

(Additional reporting by Jim Bai; Editing by Ben Tan and Jonathan Leff)