By staff reporter Li Qiyan and intern reporter Ben Yue

China is facing its worst power shortage since 2004 -- a supply-demand gap that, according to the State Electricity Regulatory Commission (SERC), will reach 16 million kilowatt this summer.

At the core of the shortage are spiny issues over coal-fired power that the government hopes to resolve through a series of measures aimed at ending price increases and guaranteeing supplies.

Zhao Xiaoping, deputy director of the National Energy Administration, said July 22 that the coal market “cannot rely only on market mechanisms. It also needs government control measures.”

To that end, the government's National Development and Reform Commission (NDRC) in June announced price caps for the type of thermal coal used to generate power. And on July 24, the government clamped down harder with another set of price controls for spot coal shipped to major ports and distribution centers.

According to an SERC official, however, the initial price intervention failed to halt price increases for thermal coal. And although coal prices stopped rising after the July announcement, most power plants since then have had trouble securing adequate supplies.

Analysts said the power shortage is mainly caused by low supplies of and high prices for coal -- a double-edged disincentive for power plant operators to burn the fossil fuel.

“The market is expecting more severe supply shortages of coal for power generation after the control measures,” said the SERC official.

Is government intervention a proper solution for conflicts between power and coal companies? Or does the problem lie in artificially distorted prices set by the government?

Price Intervention

NDRC's move to impose temporary price restraints on coal sold to power plants as of December 31 marked the first government intervention in the coal market in more than a decade. Wang Ye, an analyst at Citic Securities, said the cap had a psychological impact on the market.

But prices rose anyway. Coal prices at the port of Qinghuangdao, for example, increased 100 percent between January and July to more than 1,000 yuan per ton.

NDRC's most recent step affected spot coal, setting prices at no higher than the June 19 levels, including 860 yuan per ton at Qinhuangdao, 840 yuan per ton at Tianjin, and 850 yuan per ton at Tangshan.

About a week after the second step, thermal coal prices at Qinhuangdao started declining. However, a source at a state-owned power company told Caijing that -- almost at the same time -- coal supplies started drying up.

Worsening Conflict

China's power companies have been pinched by the widening gap between higher coal prices and relatively low, government-controlled prices they can charge for power. A recent report by Shenyin & Wanguo Securities Co. said more than 80 percent of China's power plants are losing money.

Wu Chenghou, deputy chairman of the China Coal Transportation & Sale Society, blamed the worsening conflict in the energy sector on a distorted pricing system.

Thermal coal prices have been climbing since China started reforming the coal market in the 1990s and lifted all price controls in 2006. However, power price reform has stagnated. The government launched power industry reform in 2002, and the next year set a “price linkage mechanism” allowing power plants to apply for higher prices based on coal price increases. Nevertheless, power prices have remained strictly controlled by the government.

An SERC official earlier claimed the “price linkage mechanism” would encourage coal suppliers to boost coal prices.

“There are two choices to settle the conflicts: one is to accelerate market reform of power prices while subsidizing power producers; the other is to implement price interventions,” said an expert at the China Electricity Council (CEC).

Clearly, the government has turned to the second choice.
 
“A price cap will result in supply tension of coal for power generation,” the CEC expert said. “It is actually a retrogressive step in the process of market reform.”

Power Shortage

According to the National Statistics Bureau, the amount of electricity generated by China's coal-fired power plants reached 230 billion kilowatt hours in June, increasing 6.8 percent year-on-year. It was the slowest growth since June 2007. At the same time, the country's total power output rose 8.3 percent year-on-year to 293 billion kilowatt hours.

The grim forecast of a 16 million kilowatt hour shortage is based on statistics from regions covered by the State Grid Co. distribution network, where shortages should total 10 million kilowatt hours, and regions supplied by Southern Power Grid Co., where a shortfall of 6 million kilowatt hours is expected, including a supply-demand gap of 5 million kilowatt hours in Guangdong Province, China’s biggest power consumer.

A State Grid source told Caijing that, as of July 25, the combined installation capacity of turbines shut down in its region due to a lack of coal has increased 28 percent from the previous week to 16 million kilowatt hours.

Compounding the problem for power plants is a decline in coal quality, according to Qian Pingfan, an industry researcher at the State Council Development Research Center. Although China’s coal supply has been rising, he said, the quality is declining.

By the end of June, China's top coal producer Shenhua Group had produced 16 percent more coal than during the same period last year. But the power generation capacity of coal had fallen by almost 20 percent because suppliers failed to remove impurities.

Overall, the industry is pessimistic about the power supply outlook for this year. Some experts say the tension can be only alleviated by a sharp slump in power demand triggered by an economic slowdown.

“The conflict between power and coal is worsening,” said the CEC expert. “It will culminate at some time.”

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