China power: China has a problem with power. The world’s second biggest economy can’t produce enough of it, and some companies are being told to do without. Some officials say 2011 will be worse than 2004, when China faced brownouts and power rationing. This year’s episode is partly down to too-high commodity prices. But it is China’s reluctance to let markets do their work that has turned a problem into a crisis.
The rising cost of coal has wrought havoc on China’s energy producers. It fuels 80 per cent of China’s electricity, and local benchmark prices are at almost three-year highs, according to state media. That hits generators disproportionately hard, since the prices they can charge China’s state-owned grid companies — known as “feed-in tariffs” — are fixed. As more production leads to bigger losses, producers have little incentive to meet demand. Unlike 2004, when generators were running at full pelt, capacity is now greater than consumption.
Until now, the government has failed to raise electricity prices enough: they have risen just 15 per cent since 2007, while the cost of coal is up almost 75 per cent over the same period. True, China’s industrials aren’t getting a bargain. They pay 12.3 cents per kilowatt hour of electricity, compared to just 7 cents per kilowatt hour paid by US industrial companies. Yet that reflects different input costs. The United States is around half as reliant on coal as China, with the rest of its generation coming from cheap natural gas and nuclear power.
Higher prices would eventually shrink demand, but politicians are terrified of doing anything to fuel inflation, which hit 5.3 per cent in April. Moreover, large state-owned industrial firms, often among the least profitable and most energy-intensive, can twist local politicians' arms.
In the long term, higher prices would be good for China. For one, they would help the government meet its tough energy efficiency targets. The new five-year plan calls for less carbon and energy per unit of GDP. The power cuts likely to plague China will achieve that goal in the short term, but for sustainable energy savings, market-driven pricing surely beats pulling the plug.