Running to keep still

China may be installing power generating capacity at a faster clip than any other country in the world, but it is scarcely enough to keep up with demand. Meanwhile, little is being done to address the country's grave pollution problems.

China has 220,000MW of power capacity, and it is likely reach 275,000MW by 2000. This would be in line with China's low-growth scenario which has seen it add some 12,000-15,000MW a year of capacity for the best part of a decade. High-and medium-growth scenarios have all but been shelved (see table on next page). According to the most realistic plan, capacity could reach 420,000MW by 2010. But given the pace of China's economic growth, will this be enough?

Productive utilisation
A recent Barclays Bank study on China predicted that, during the second half of this decade, real gross domestic product will taper to an annual growth of around 9.5 per cent during the second half of this decade against a 12 per cent average in 1991-95. Consumer prices are likely to come into line with GDP growth figures after rising at nearly double the rate in the early 1990s. The trade surplus also shows little sign of flagging.

The downside is that the likely increase in power capacity will fall short of these healthy growth levels. Electricity shortages and blackouts remain common and are likely to remain so, so long as demand continues to outpace supply. The slow-growth capacity scenario, envisaged by Mr James Dorian of the Honolulu-based East-West Centre, sees power capacity climbing annually at 6.4 per cent in 1995-2000 and 4.8 per cent in 2001-2010.

Generation growth would advance by 5.7 per cent in the first period and 4.3 per cent in the second ? considerably lower than in the first half of the 1990s. The difference between capacity and generation is explained by the mix of power sources. While coal, for example, can operate consistently at full or near-full capacity, hydropower output tends to fluctuate markedly.

According to Barclays, there is also concern about the increase in China's foreign debt, which reached US$113bn last year and is likely to hit US$125bn by end-1998.

While the key debt indicators remain within manageable proportions, measures are being taken to monitor more effectively the growth of foreign debt and ensure the productive utilisation of foreign investment. Consequently, China's planning authorities took a decision several years ago to rethink its power project investment programme.

For example, out of the 103,000MW capacity the power ministry had hoped to add between 1995 and 2000, only 72,000MW may come from domestic resources.

It is against this identified foreign investment demand that the National People's Congress last April passed the first Electric Power Law. "Whilst providing for business regulation of foreign-funded plants and their integration into the national grid, the thorny issue of off take pricing was only addressed in principle," notes international law firm Clifford Chance. "Coping with tariffs unilaterally set by the Price Bureau for sales of electricity remains the constant challenge for those negotiating and documenting foreign-funded power projects."

Electricity prices in China are highly subsidised but the government is reluctant to impose price hikes for fear that they might overburden state enterprises, many of which are on the brink of bankruptcy. But unless the government pays an economic price for coal, many mines will be forced to close.

"The political need to continue subsidising the SOEs will continue to exert upward pressure on the rather large overall public sector so deficit of some eight per cent of GDP," says the Barclays report.

Reliance on coal
Some 75 per cent of all China's power generation is derived from coal. National coal production in 1995 was more than 1.2bn tonnes, easily the world's largest. Ironically, because of poor internal transport China is becoming a coal importer ? especially in the southern provinces. For example, two southern stations alone ? the 700MW Shajiao B and 1,980MW Shajiao C complexes on the Pearl River ? burned six million tonnes of coal last year.

One solution is to build power stations at the site of coal mines even if these are distant from major population centres and main power demand. But this, of course, means more money spent on power transmission projects.

Pollution is another problem. Power station upgrades to reduce pollution are already underway in some of the wealthier cities such as Shanghai. Gas-fired stations would also help. But apart from the Black Point complex in Hong Kong, which uses gas piped from Hainan Island, China lacks liquified natural gas (LNG) terminals to bring in the fuel.

Numerous proposals to build LNG terminals along the China coast are being considered by the State Planning Commission. But once again foreign investment will be required as well as foreign-supplied fuel. Total, Gaz de France and GEC Alsthom are bidding for a 3,000MW complex, which they hope will be included in the 2001-2005 five-year plan. The outlook for domestic gas is grim. Gas scarcely figures in China's energy production and consumption balance. "It is inconceivable… that oil and gas can make a major contribution to China's energy sector in the foreseeable future, despite the country's vaunted oil and gas reserves," says Mr Keun-Wook Paik, author of Gas and
Oil in Northeast Asia. "Without a substantial improvement in its stagnating oil production and poor gas production, economic development could be seriously restricted by oil and gas shortages."

The pollution problem extends to industrial boilers. The World Bank's Global Environmental Facility (GEF) is putting together a programme to upgrade China's boilers through its 'efficient industrial boilers project'. The project will cost US$101m, of which GEF's contribution will be around US$32m.

According to the GEF, the problem is grave and entrenched. A recent study showed that carbon dioxide emissions from energy consumption account for 80 per cent of China's greenhouse gas emissions. The largest single source is coal combustion in industrial boilers. The report says that small industrial boilers producing under 65 tonnes of steam per hour emitted around 715m tonnes of carbon dioxide ? or 30 per cent of total greenhouse gas emissions from all energy consumption.

Put another way, China is running hard to prevent the pollution problem from getting worse. Coal demand for electricity generation is expected to reach 615m tonnes by 2000 against 393m tonnes in 1993. Use of industrial boilers will rise to 300m tonnes from 214m tonnes, while coal demand for construction materials could reach 223m tonnes from 140m tonnes in 1993. The total demand for coal will be 1,550m tonnes by 2000, 40 per cent up on last year's figures.

Clean coal initiative
While the GEF is mobilising on one front to help China's pollution problems, the World Bank has launched a clean coal initiative aimed at helping the Chinese prepare the groundwork to develop a strategy for more efficient use of coal. The objective of the exercise is to reform and restructure the sector. It is doing this in conjunction with the State Planning Commission and the SPC's China Clean Coal Leader Group. The Bank acknowledges that this is a long-term prospect which will involve creating a framework for action, to be followed by the action itself.

Despite China's great efforts to add more electrical power and to gear up its electricity delivery systern, it is estimated that one-fifth of the population, mostly in the hinterlands, still lack access to adequate power supplies. The World Bank's Richard Stem, director of energy and private sector development, believes the basic problem is that rural customers often cannot obtain affordable credit. "That makes it difficult for them to pay the high start-up costs of improving their energy supplies," he says.

The Bank has noted that between 1970 and 1990, some 1.3 billion people in Asian developing countries were connected to electricity grids for the first time ? 500 million of them in rural areas and about half of them living in China. Given China's aggressive programme, says one official, it is running a little ahead of other countries, but it does not seem conceivable that China will ever have the same future per capita supply of electricity as OECD nations.