Power generation in China has gone from surplus to a surfeit that is limiting economic growth and dimming the lights across the east
2003 was a year of power shortages for China. The blackouts that affected the east of the country (particularly Shanghai) in the summer rolled on into the winter, causing disruption, slowdown and concern among foreign investors and local enterprises alike. For many foreign companies doing business in China this was their first experience of power shortages and came as something of a shock. But those with longer memories will recall that we have been here before.
A major problem with any centrally planned command economy, such as China's, is that when the calculations turn out to be wrong then the whole system starts to feel the strain. Last year it appeared that China's still loyal office of central planners had got their sums badly wrong in terms of energy use – there simply wasn't enough. Though marketization is a favorite word of the media in China, the fact that most industry is still dominated by state-owned enterprises (SOE) means central planning, and all that entails, remains.
Even in a relatively basic industrial economy, planning to the levels envisaged by the Soviet system, which China largely adopted and still uses, is impossible. Imagine being a central planner in Beijing trying to estimate the power usage of GM's Shanghai operations per annum. The best they could do is use an adjective like 'large' or substantial' – not much use in plans that have to have decimal points to look professional.
Weather was blamed for power shortages in 2003 but the fact was that this was now an endemic shortage. Stories ran in the press of boiling households with no air-con, factories on night shift only and government offices shutting at lunchtime. In the winter we were confronted with schoolchildren doing their homework by candlelight in Hunan and freezing shoppers in Shanghai where malls turned off the heating.
The basic problem is that power generation in China is designed to deliver large amounts of artificially cheap power to heavy industry, the backbone of the planned economy. In the West the majority of power is consumed by private households but in China private consumption makes up just a tenth of the total. During the credit binge in China in the early 1990s SOEs were running at full capacity. The planners in Beijing planned the nation's power needs accordingly. But, as with the auto industry, government macroeconomic policy was not totally in synch and when the boom was followed by austerity and a collapse of the state economy in 1994, electricity consumption growth fell from 10% per annum to under 3% by 1998. Even the most cautious projections of required additional power capacity, based on government statistics, were 50% out.
The government and potential foreign investors in the power sector were betting on rising private consumption to take up the slack. But the new capacity that was being added was priced at market rates rather than the traditional subsidy. Chinese consumers in the major cities ended up paying at least as much for their electricity as American consumers and in some cases substantially more, despite their considerably lower incomes (in some areas the price per Watt was five times that of New York!).
Private demand was curtailed through irrational pricing – in simple terms, when it got cold people put on a coat rather than an electric fire. Even if you could afford the absurdly high prices, the transmission system to private households was dated and had not been upgraded. New power stations went online financed by local bank loans mandated by the government but the wattage wasn't getting to households due to poor interconnectivity and massive power seepage from the dated transmission equipment.
This didn't deter the potential foreign investors. In 1994 alone, letters of intent between foreign investors and local authorities for power stations totaled US$15 billion. But Beijing saw power as politically sensitive and capped foreign investment in the sector at 12- 15%. The foreigners kept on coming despite the regulation, believing or hoping that deregulation was imminent. It wasn't and remains distant. The power deals with foreign firms mostly disappeared and electricity demand eased in the late 1990s as SOE output fell and new stations got up and running.
By 2003 the mismatch between power generating capacity and the renewed production binge was apparent. Many of the power saving measures introduced last year were ridiculous over anything but the short-term. Asking people to use their air-con less or heaters for fewer hours is nonsense and shifts an industrial problem onto the populace. And didn't the government spend the last two years encouraging manufacturers to make electrical appliances in order to propel the domestic consumer economy? Did no one make the equation that a massive growth in appliance ownership meant that at some point people would also want to plug them in?
For factories the shift to unsocial hours is an inconvenience, and only possible in a controlled economy like China's (it is hard to imagine trade unions in the West agreeing to 3am starts and no extra pay). At the end of the day we have to return to the, presumably now freezing cold, planner's office in Beijing. Wei Zhihong, an energy researcher at Tsinghua University blamed the energy shortages on the fact that "Many urban residents are moving from burning coal to using electricity, and that inevitably creates bottlenecks." Errr. Right, and how many people who have moved in to all the new high-rise apartment buildings of Beijing and Shanghai were having coal delivered? Adjusting the plan for changes like this is what planners are supposed to do, not make comments after the fact.
But private residential users are ultimately a secondary concern. In industry some sectors will suffer even more. Aluminum makers are highly dependant on electricity and the impact to parts of the chemical industry will be disastrous. The energy-hungry carmakers have found themselves having to cut back production hours while the steel industry is also having trouble scavenging for available wattage. Ye Yunshi, the general manager of the Nanjing plant of Elec & Eltek told the press that "We are really suffering. We just have to wait for the electricity to go back on. We can't move because the Yangtze River Delta is all the same."
Clearly the longer the situation persists the less attractive the region will be to foreign investors. By 2004-2005 when the planned new power stations come on stream – US$2. 27 billion invested in new capacity in Eastern China alone – China may find itself in surplus again and the story of glut and excess will just repeat itself once more.
Paul French is the Shanghai-based publishing director of business intelligence provider Access Asia