Revamping energy supply system

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Last updated at: (Beijing Time) Thursday, January 08, 2004

Revamping energy supply system

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Growing power shortages have plunged large areas of the country into darkness, leading experts to the conclusion that there is one bright idea that can get the country out of this malaise -- deregulate one of the last remaining sacred cows of the Chinese economy.

The extent of the blackouts means that calls are being made to put fundamental change on the agenda.

The nation's coastal industrial regions were the first to face the energy shortages in the early summer of 2003. The shortage has since spread to a total of 21 provinces, covering two-thirds of the entire nation. Zhejiang, Jiangsu, Guangdong Province and Shanghai are among the worst-hit areas.

In what is widely regarded as the worst energy shortage in more than a decade, frequent blackouts in the affected provinces have forced local governments to resort to energy rationing.

In Changsha, the provincial capital of Central China's Hunan Province, the use of electricity has been restricted to three days every week since December 2003.

And diesel rationing has been introduced at pumping stations throughout the eastern, central and southern regions of the country. Sinopec, China's largest refiner, has had to suspend diesel fuel exports in order to meet domestic demand.

The energy shortage has been further aggravated by short supplies of coal, preventing many electricity generating plants from operating at full capacity. Some have even been forced to close down due to the shortage. At least seven major power companies, including Huaneng Group and China Power Investment Group, have petitioned the government for help.

The government has raised electricity tariffs in a bid to discourage consumption. It has also urged the coal mines to step up production and requested railway and shipping companies to ensure the timely delivery of coal supplies to power companies in various regions around the country.

As the government is trying to combat the problem, experts say that emergency measures can only bring temporary relief. The crux of the problem, they say, lies in the system itself.

"The current energy shortage reflects the failure of the government's 'command and control' approach to address energy sector issues," says Zhao Jianping, senior energy specialist of the World Bank in Beijing.

"The government may need to rethink its long-term energy policy and strategy and redefine its roles."

"It should move from making project decisions to develop a coherent energy policy framework and create an enabling environment for companies to make investment decisions," he says.

Because of its perceived strategic importance, the energy sector has always been strictly controlled by the central government through its various State-owned enterprises. Private sector participation in this sector is tightly regulated and closely supervised.

At the centre of the web of control is the National Development Reform Commission, or NDRC, which sets coal, oil and electricity prices and approves all major projects. It is also responsible for approving and supervising all private participation in the energy sector.

Critics have often complained that the sector's unwieldy bureaucracy is unable to adapt to fast changing market demand. In its defence, Zhang Guobao, vice-minister of the NDRC, blames the shortage on the overheating economy, particularly in the steel, aluminium, construction and car manufacturing sectors.

Steel production, for instance, surged more than 16 per cent in 2003 to 210 million tons and aluminium output jumped 15 per cent to more than 5 million tons. The production of passenger cars showed an even more dramatic increase of 80 per cent in 2003 to over 2 million units.

"The ratio of energy consumption to GDP growth in China is two times higher than the world average," Zhang says. "The rate of increase in energy consumption at the overheated economic sectors has greatly outpaced what the system can supply," he adds, hinting that the government may take action to try to cool down those sectors.

But Zhao from the World Bank maintains that the mismatch in supply and demand of energy is the result of over-control.

"When the government is in control of supply, rather than the market, problems will inevitably arise," he says.

Joe Zhang, head of China research at UBS Warburg, agrees. He says that it is "too dangerous" to leave the control of energy supply to a few government officials. He attributes the current shortage to the fault of government officials in underestimating the increase in market demand.

Predicting an average annual 5 per cent increase in energy demand, the NDRC has imposed a three-year freeze on power plant construction. This policy is now widely blamed for causing the present supply shortage.

Instead of the 5 per cent average annual growth as estimated by the NDRC, power consumption in China has been growing at a annual rate of at least 15 per cent over the past 17 months. The State Grid Corp, which oversees power transmission, predicts that energy demand will increase by a further 11 per cent in 2004 to 2,100 kilowatt-hours. Based on its predictions, it will take at least another two years for power generating capacity to catch up with demand.

The NDRC is under strong pressure from local governments and the private sector to speed up the approval of the construction of new power plants. Zhang from the commission says that the aggregate capacity of all the new plants waiting for approval totalled 250 million kilowatts, or two-thirds of the existing capacity.

If all of them are to be built, it will almost certainly result in over-supply in a few years time, Zhang says. "It is definitely impossible for the government to approve (all these constructions)," he adds.

Energy experts agree that it is difficult to achieve market equilibrium under the present system.

"The current government institution is not well equipped to tackle the problems and challenges facing the energy sector," says Zhao from the World Bank. "It is understaffed and poorly funded," he says. "The government doesn't have adequate capacity and budget to do thorough reviews and analysis."

Zhao and other experts say that the energy supervisors are so overwhelmed by its myriad responsibility that it has largely neglected the long-term vision. Feng Fei, an analyst at the Development Research Centre, a government-sponsored think tank, says that the government should "hammer out" a stable long-term energy policy "as soon as possible" to restore investors' confidence.

"The economic cost of an energy shortage of the magnitude we are experiencing is large indeed," he says.

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