State Grid vs Beijing: a familiar game of Chicken

China is heading for a summer of energy shortages reminiscent of the 2000 California Energy Crisis. The shortages are real: China is suffering a tremendous drought, which cripples hydroelectric production and endangers China’s food system and available drinking water. If that wasn’t bad enough, shortages are also being created: international coal prices are rising, which has created a dangerous set of circumstances for China’s power producers. According to the NYTimes, State grid, China’s dominant energy producer and distributor (with something close to 85% of China’s grid) is idling coal fired power plants and delaying new construction plans across China because they are losing money on every watt of power produced. As coal prices rise, the loss per watt grows, and State Grid, and other power producers, are choosing to protect their bottom line before their duty/function to the State. This is awkward in China, because Power producers are all State Owned Enterprises (SOE). FT’s BeyondBrics blog reminds us that industrial secturs will do pretty much anything to keep going, including switching to diesel when grid power is not available. This is similar to how Sinopec and PetroChina took on Beijing about fuel price ceilings during the 2005 global gas price bonanza. Richard McGregor covers this event in detail in his book The Party. When the central government wouldn’t move the price ceiling in the face of skyrocketing international fuel prices…

“In a high-stakes game of bluff, several large refineries were suddenly moghtballed for what the companies called ‘scheduled maintenance’. [...] The threat of angry truckers and taxi-drivers being forced to queue to get petrol in the summer heat, not to say businesses being forced to close down for lack of fuel, backed the authorities into a corner. Wen Jiabao, the Premier, personally stepped in to negotiate an end to the dispute, approving a lump-sum subsidy to the companies to solve the shortages.

–The Party by Richard McGregor

McGregor goes on to point out that while Sinopec set a startling precedent for State Owned Enterprises protecting their business interests to the detrement of the State, it cost their Chairman dearly — within 2 years he was taken down in a very public corruption scandal. This is clearly not the identical issue re-appearing, but I can’t help but feel like we’ve watched this movie before. Given the serious inflation affecting basic essentials and the ongoing drought which exacerbates food supply issues, Beijing is likely even less inclined to change the power price ceiling. From the Green perspective China has long approached hydroelectric power, and more recently solar, wind and nuclear as grid capable replacements for coal generation. Whether they’re motivated by by environmental concerns or national energy security (peep the graph above, which shows China’s MASSIVE dependence on foreign coal), China is doing their best to move beyond coal based power. China’s chief focus is economic expansion, their power consumption curve is steep and thus coal plants continue to go up. If this conflict speeds up this conversion, everyone wins, but there aren’t many ways to speed up grid connections for new wind/solar, and let’s all just pray, PRAY that China doesn’t speed up their nuclear program. Rolling blackouts across China could be devastating, and the only short-term solution is to turn the coal plants back on. Let’s see who blinks.