China's Electricity Shortages Due to Price Controls

Gordon Chang, writing in Forbes, notes the existence of widespread power shortages in China and fingers government mispricing of energy as the basic cause.

Last Monday, the State Grid Corp. of China predicted this summer’s power shortage—a shortfall larger than the total installed capacity of Argentina—will be the worst ever, even more serious than the one in 2004. 

We have not even reached the peak season, and already power is in short supply.  In Zhejiang province, a center of small industry, factories are getting power only three days a week, and limits have been imposed since the end of February.  There is also power rationing for Zhejiang homes and office buildings. 

The situation in the Pearl River Delta, sometimes called the world’s factory floor, is only slightly better.  In Shenzhen, the booming city across the border from Hong Kong, manufacturers receive electricity four days a week.  Nearby Dongguan factories are unusually fortunate: they get juice five days out of seven.

This year the coastal region will be hit hardest, but there will be shortages in 26 of the 31 provinces and provincial-level cities in the People’s Republic.  The most affected areas will be the provincial-level cities of Beijing, Shanghai, and Tianjin plus Hebei, Jiangsu, and Zhejiang provinces.

In 2004, the shortage was primarily the result of not enough rail lines, so coal was not getting to generating stations.  Moreover, there were too few power plants as well. 

This year, there are trains galore, and installed capacity is not the problem. 

So why is there a severe shortage at this moment?  First, the ongoing drought is the worst in a half century, maybe longer.  Water levels in rivers are low, with the result that hydroelectric plants are generating about a fifth less electricity than normal. 

Scare water is not the primary problem, however.  Hydro stations normally produce only about 22% of the nation’s power.  Most of the remainder—73%—comes from coal. 

The more important factor is that the cost of this commodity has been soaring.  Spot coal is up 20% this year, in part because Japan is buying more of it to replace the output of nuclear power stations that have recently gone offline.  Yet China’s electricity tariffs have risen only 2.5% this spring. 

This mismatch has also been evident for the last half decade when coal prices have more than doubled while Chinese electricity charges have increased by only a third.  As a result, electricity producers have been squeezed hard.  Coal-fired plants lost 10 billion yuan during the first four months of the year.  The chairwoman of China Power International, a utility, recently warned that a fifth of China’s 436 coal plants could go bankrupt. 

Beijing created this crisis by fixing the price of electricity.  At a time when inflation would be out of control were it not for price controls—formal and informal—Chinese leaders are especially determined to hold the line on power charges. 

Technocrats can tell producers what they can charge, but they cannot prevent the inevitable.  Because power companies are losing money generating each kilowatt of electricity, they have acted to minimize losses.  They are not going ahead with expansion plans, they are not running at full capacity, and some of them are not running their plants at all.  Many generating stations—an abnormally large number of them—are now closed for maintenance despite the desperate need for electricity. 

Which businesses are getting juice?  Technocrats in the Chinese capital can’t help but meddle, and they are favoring state-owned energy-intensive industries—chemicals, construction materials, iron and steel, and non-ferrous metals, for instance—over others—private businesses, exporters, and service industries.  The result is that the economy is becoming even more dominated by the state. 

We should not be surprised that Beijing’s mispricing of electricity is causing problems throughout the economy and creating unintended consequences.  A tactic intended to help manufacturing—by keeping the price of inputs low—is ultimately reducing manufacturing output.  Analysts say the power shortage could knock 0.2% to 0.5% off GDP growth this quarter.  Next quarter, the effect will be much greater. 

The fact that there is any power shortage this year—after all the railroad building and power plant construction since 2004—undercuts the message that China is reforming its economy and seeking to rebalance it.  And the shortfall punctures the belief, now an article of faith, that China’s technocrats can solve economic problems through their brilliant management.  The electricity shortage is almost entirely the product of bad economic planning in the Chinese capital. . . .

Chang's point about the mispricing of electricity is undoubtedly well taken, but I would insert a note of caution with regard to his argument that the shortage is "almost entirely the product of bad economic planning." The Chinese are in a serious bind, for which there is no readily available solution. Adjusting to world energy prices, and to commodity prices in general, requires a revaluation of the yuan; yet that would crater China's export industries.

The basic question is whether the gigantic building program launched by China in response to the Great Recession will appear, in retrospect, as a temporary palliative to the contradictions of its overall model as vendor capitalist to the United States.