China's latest power price increase for industrial and commercial users may help ease what could be the nation's worst energy shortages on record, but many analysts said it's far from a panacea for a persistent problem that's likely to bedevil the nation for years to come.
The government raised retail power prices for non-residential users in 15 provinces by about 3 percent this month - the first hike since November 2009 - to spur power production and curb demand from energy-guzzling industries.
The wholesale prices charged by generators to distributors were also raised an average 5 percent in three provinces after being pushed up in 12 other provinces in April, according to the National Development and Reform Commission, which sets energy prices in China.
The moderate price increases may spur the utilization rates of power plants but probably aren't enough to offset higher coal prices. Thermal power plants comprise more than 80 percent of China's electricity production, and many are deep in the red because of spikes in the global price of coal.
China's five major state power groups, including Huaneng and Guodian, lost more than 10 billion yuan (US$1.54 billion) in their thermal power businesses in the first four months of this year.
"The tariff increases will ease our operational pressure to some degree but cannot fundamentally reverse the serious impact of tight supply and increases in the price of coal," Changyuan Electric Power Corp said in a stock exchange statement.
The Shenzhen-listed unit of China Guodian said thermal coal prices have risen about 7.8 percent this year alone.
The situation highlights a dilemma for the government. Officials have to balance the need to control inflation while ensuring sufficient energy supply by safeguarding the profitability of power generators. Experts have said market pricing is the ultimate solution to preventing annual battles with power shortages.
Last week's power price hike didn't trigger major movements in energy stocks because expectations of increases were already priced into the shares. However, coal producers fell on speculation that the government may impose price controls. China Shenhua Energy Co and Yanzhou Coal Mining Co each tumbled more than 6 percent in Hong Kong trading last Friday.
Many reasons underpin this year's power shortage. It began in some provinces as early as March, well ahead of the peak consumption season. The reasons include rising demand, transmission problems and severe drought in some areas of China.
Limited capacity
However, the main reason for the shortages is the failure to maximize generation capacity amid rising global coal prices, said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University in Fujian Province.
"One short-term solution to ease shortages is to raise power tariffs and control coal prices," Lin wrote in a note. The government in 2008 did intervene in the spot coal market.
If tariff hikes threaten to stoke inflation, the government may have to resort to subsidies - as it did with the oil industry - to bail out power grid companies without adding pressure to end users.
China had granted huge handouts to Sinopec Corp and PetroChina Co, the nation's dominant refiners, to soften the blow of rising crude costs on the input end while keeping consumer price caps on the output end. In late 2008, the government was finally forced to introduce a cost pass-through mechanism tied to global crude prices.
A subsidy system for the thermal power industry would allow the government to continue to raise on-grid tariffs to encourage power production while at the same time freezing off-grid prices to shield consumers. It's more feasible to subsidize power distributors than power producers, given that China has two grid operators - both unlisted - and five main listed power producers, Lin said.
He said a mid-term solution to the energy crisis is still a cost pass-through mechanism, but the government first needs to make some changes in the coal sector.
In 2004, when the nation faced its worst power shortages in decades, China introduced a form of cost pass-through system. That allowed power producers to pass on 70 percent of cost increases if coal prices rose more than 5 percent annually over a six-month period. But the complicated system was poorly timed, implemented and monitored, with the result that it fanned inflationary pressures.
Lin suggests the government impose a windfall tax on coal mining when coal prices surge. That would prompt miners to sell more rather than wait for prices to rise further, he said. The tax revenue could be used to stabilize power tariffs.
This summer's peak power deficit could reach up to 40 gigawatts, worse than the situation in 2004, according to the State Grid Corp of China. The nation's power generation capacity was 960GW last year.
The prevailing shortage reflects price distortions more than capacity limits because actual surpluses in some parts of China cannot be channelled to energy-short areas due to poor transmission lines.
A Barclays report estimated China's northeastern and northwestern regions have generating surpluses of up to 14GW each. Grid construction between regions must be accelerated, it said, to help alleviate power shortages.
Alternative energy
The shortages could also boost development for alternative energy sources in China, analysts said, though coal-fired generation will still play a key role for many years.
"Coal-fired power is just way too important, and hydropower is now affected by drought, nuclear is not enough and other new energy sources are too small," said Armand Cao, senior energy and power consultant at Frost & Sullivan.
Stephen Oldfield, head of Asian utilities research at UBS, said more severe power shortages may occur in the next couple of years because it takes so long to build nuclear power or high-voltage power transmission lines.
Both UBS and Japanese brokerage Nomura are bullish about China's nuclear power sector despite the current suspension of new-plant approvals following the Fukushima Daiichi nuclear power plant disaster in Japan. Nuclear power remains for China an affordable and clean energy source amid limited alternatives.
Nomura predicted China's 80GW nuclear target by 2020 will be intact despite the temporary approval suspension. Oldfield puts his estimate at 90GW.
China's stated goal is for non-fossil fuels to account for 15 percent of primary energy consumption.
