China power crisis symptom of deep structural woes

By Emma Graham-Harrison - Analysis

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.