Not 3 days after I posted about the showdown between Beijing and China’s State Owned power producers over price ceilings, Beijing announces a 3% increase for some industrial customers. That doesn’t seem like much, but check out the quote below from Reuters, who broke the news.
China said on Monday it would raise electricity prices for some users by about 3 percent, the first increase since 2009 as it tackles its worst power shortage in seven years.
The power price rise affects industrial, commercial and agricultural users in 15 provinces, state media said after a briefing by the National Development and Reform Commission (NDRC), China’s top economic planning agency.
But authorities in the world’s second biggest economy may have already played one of their strongest cards to combat the shortages as the NDRC revealed power companies in 13 of the 15 provinces have been paid higher prices for their electricity since April 10. [Emphasis added]
China’s electricity demand is running so far ahead of supply that it is expected to be short of 30-40 gigawatts of power capacity this summer, twice the deficit caused in Japan by the earthquake and tsunami on March 11.
As famous China Bear Gordon Chang puts it, that’s about the size of Argentina’s entire operational power grid. But Argentina’s population is 3% of China’s (really), so take his context with salt.
News of the 3% increase buries what I find the most interesting: many provinces have been raising rates for industrial customers for nearly 2 months which does not appear to have had a major effect on shortages, since Coal prices were also rising.
If you take a look at the power shortages over the past month, you can see that the hike had no significant impact on the current power shortages,” said Wang Wei, senior analyst at Guotai Junan Securities. “Actually, it didn’t have the impact it should have because after the on-grid power price hike in April, coal prices rose again, eroding the power price hike.
“Coal imports could rise after the power rise hike as coal producers and trading companies are likely to raise coal prices, triggering more coal imports. Every 0.01 yuan rise in power price could offset an increase of 50 yuan in coal prices,” he said.
At an average of 0.02 yuan per kilowatt hour, that would add 100 yuan ($15.43) to a tonne of coal, which was trading around 850 yuan per tonne on May 20. [COAL/CHINA]
That’s a huge price gap. This coal problem will not be changing any time soon. Analysts project Chinese coal imports to double by 2015.
To anchor this new information into the previous discussion, this is what has changed:
- China’s central government started addressing the power price ceiling issues that were dis-incentivizing coal based power production.
- Their changes began very quietly (if not totally in secret) and are very small.
- The changes have already been nullified / outpaced by global price increases for thermal coal.
So, what happens next? More price increases, and this summer, industrial areas will face forced idling and power cuts. This is still a planned economy to a certain extent, so a lot of thought and planning will go into managing these measures to minimize economic impact.
“But look what will happen if electricity shortages aren’t solved: the inflationary pressures will be even larger because the price of raw materials will continue to surge because of heavy demand. In the end, looking at the power shortages, there is simply no choice but to raise prices,” Lin told Reuters.
China has already cut power supplies to some industrial users in eastern, southern and central regions as pent-up demand rebounded after local governments ordered power cuts in late 2010 for the purpose of achieving energy saving goals.
The State Grid of China, the country’s dominant power distributor, has said it will cut supplies to more industrial users in summer, when the shortfalls are expected to worsen.
“This (price rise) was definitely not the last one,” said Shen at Mizuho. “But it depends on the coal price and on a lot of things, like CPI inflation and the power shortage situation.”
Even if the price of coal plummeted, the drought conditions that have reduced hydro-electricity output would still create a sizable energy shortage this summer. So the powers that be are now going to spend the summer: keeping coal plants running (cost/price management) , managing the energy impact of the drought (not to mention environmental and social impacts), and managing the numerous inflationary pressures that result from all of this.