Resolving China’s Power Shortage

1
Resolving China’s Power Shortage
(c)
Shanghai is China’s financial and business hub. In late July 2004, with daytime
temperatures reaching 37 degrees Celsius,the city’s electricity consumption
surged to a weekly record of 14.35 million kilowatt hours. The city authorities
resorted to asking 2,100 businesses to operate at night, and a further 3,000
others to adjust operating hours.
Even high-profile multinational companies were not spared. General
Motors and Volkswagen were ordered to suspend production for more than a
week each. Shanghai Volkswagen spokesman Lu Jun explained, “It's a rule. We
have to cut power for 10 days … We’ve cut power and so have had to stop
production. It's all over Shanghai”.
1
The Shanghai episode mirrored a nationwide shortage of electric power.
In Beijing, on July 22, 2004, the Municipal Power Supply Bureau imposed the
capital’s first brownout of the year, disrupting supply to suburban areas for 47
minutes in the afternoon.
The Chinese government has certainly been working tirelessly to resolve
the power crisis. Thermal coal is the principal fuel used to generate electric
power in China.
In July, Premier Wen Jiabao exhorted, “Railway departments should do
their utmost for the transport of coal for electricity generation”.
2
The Ministry of
Railways increased train speed and freight loads, and allocated 90% of freight
capacity to transport key materials. In the first half of 2004, Chinese railways
shipped 480 million tons of coal, up 12.2%over the same period last year.
The Ministry of Communications has also pitched in. It diverted ships from
overseas routes to domestic coal transport and approved emergency coal
transportation on various roads and waterways.
China is the world’s second-biggest coal exporter. In 2003, China
exported 93 million tons of coal, including 80.8 million tons of thermal coal. To
assure supplies to the electric power industry, the Chinese government has
limited coal exports to 80 million tons in 2004. China Coal Import & Export Vice
President Zhou Dongzhou predicted that exports of thermal coal would fall to 70
million tons.
3
(c)
August 2004, I.P.L. Png.
1
“Shanghai power crunch hits Volkswagen, others”, Reuters, 23 July 2004.
2
“Chinese premier stresses transport of coal, oil, fertilizer, grain”, Peoples Daily Online, English
Edition, 30 July 2004.
3
“Japanese utilities topay more for coal”, Shanghai Daily, 19 April 2004.
2
Since the 1960s, the Chinese government has regulated the supply of
thermal coal to electric power plants. It requires coal mines to supply power
plants with about one-quarter of coal purchases at a contract price.
The government regulates the supply of coal to support its regulation of
the electricity industry. In the late 1990s, the Chinese government dissolved the
Ministry of Electric Power, and divided its functions between the State Electricity
Regulatory Commission (SERC) and the State Power Corporation of China.
4
The State Power Corporation owns five of the six transmission grids
(Northwest, North, Northeast, Central, and East) and about half of the national
generating capacity. Regulation is necessary to ensure that the State Power
Corporation does not abuse its monopoly power.
The SERC regulates all aspects of the electricity industry, except pricing.
With regard to electricity pricing, the SERC’s role is to advise the National
Development Reform Commission (NDRC).
To ensure that electric power generation is economically viable, mines are
required to sell coal cheaply to power plants. Typically, the government sets the
contract price below the spot market price. For instance, between 2003-04,
while the spot market price of thermal coal rose by 25%, the contract price rose
by only 10%.
Many mines have ignored their contracts with power plants and sold coal
on the spot market to earn higher profits. Some power plants cut back
production, so exacerbating the national power shortage.
5
Some estimate that the nationwide power shortage will soon reach 30
million kilowatts, which is more than double Shanghai’s peak consumption.
With China headed for a power crisis, the government is under pressure to
increase electricity prices. In June 2004, following persistent rises in the cost of
fuel, the NDRC increased electricity pricesby an average of 2.2 fen per kilowatthour in the East, North, Central, and South grids.
But, apparently, this increase has not been sufficient. The threat of a
power crisis continues.
4
Xu Shaofeng, “The Reform of the Electricity Power Sector in China”, International Conference
on "Energy Market Reform: Issues & Problems",Hong Kong Baptist University, August 2003.
5
“NDRC mulls scrapping of coal price perk”, Peoples Daily Online, English Edition, 23 July 2004.
3
Discussion Questions
1. Explain how the impact of a price increase on electricity consumption
depends on the price elasticity of demand.
2. The price elasticity of the Indian demand for electricity has been estimated
to be -0.65 among residential users and -0.45 among industrial users. If
these elasticities apply to China aswell, how will the impact of a price
increase be spread between residential as compared with industrial
users?
3. Many Chinese organizations ignore the market system. For instance, they
borrow money from banks and refuse torepay, thus creating “bad debts”
for lenders. Likewise, they might consume electricity without bothering to
pay the power supplier. Do suchorganizations cause the demand for
electricity to be more or less price elastic?
4. Suppose that the Chinese governmentregulates the electricity industry
through marginal cost pricing.
a. How does the contract price of thermal coal affect an electric power
plant’s marginal cost?
b. If the contract price were raised to 99% of the spot market price,
how would that affect the electric power plant’s production?