A senior industrial official pledged at the weekend to crack down on excessive investment in the construction of power plants.

Not only is most of this investment illegal, but it is placing the nation's sparse coal supplies under greater stress, warned Xu Dingming, director of the Energy Bureau of the National Development and Reform Commission, China Daily reported Monday.

Xu told an energy investment seminar sponsored by Falcon Power Ltd that power plants with a total generating capacity of 120,000 megawatts have started construction without receiving necessary approval.

This accounted for more than 30 per cent of the nation's total generating capacity by the end of last year.

"Illegal" investment mainly occurs in East China, the Inner Mongolia Autonomous Region, Hebei Province, Guangdong Province, and the Ningxia Hui Autonomous Region, according to industry insiders.

Local governments in these areas are more than willing to allow the construction of new plants in order to ease the massive power shortage plaguing the nation since late 2002.

And China's five big power conglomerates - Huaneng, China Huadian, China Power Investment, Datang and China Guodian - are vying with each other to enlarge their presence.

Illegal power projects "have put great stress on coal supplies," Xu told the seminar.

Coal production is expected to top 1.8 billion tons this year, compared with last year's 1.6 billion tons. Half of this will be used to generate power.

China's coal mines have been struggling to pace with surging demand since late 2002. The shortfall in coal supply has put a massive strain on rail transportation, and forced some power plants to shut down.

With rampant investment in new power projects, the risk now facing the industry has switched from a supply shortfall to potential oversupply, experts said.

Huang Feng, director of Energy Projects at the China International Engineering Consultant Corp, said power supply and demand will be balanced in most of the country by 2006, with some areas oversupplied.

By 2007, a significant part of the country will have a power glut, according to Huang.

"The problem is that most of the projects are constructed with loans from State banks," said Huang, indicating potential losses may be transferred to banks.

And rising fuel costs also increase the risks in the power industry.

The price of coal has already increased by an average of 30 per cent this year due to surging demand.

Power companies will face the twin problems of fuel cost increases and electricity tariff decreases as a result of the government's decision to introduce a power pooling system to increase competition in electricity generating, said Huang.

Xu said the government is taking action to clear up these illegal projects.

"We are moving now," said Xu, without elaborating.

Analysts remain doubtful whether this action will be effective as local governments need to resolve their immediate power shortages.

"It is not the first time for Xu to publicly cite these figures this year," said one insider. "It is quite difficult to stop the projects that have already started construction."

Xu also told the seminar China's energy industry needs 10 trillion yuan (US$1.2 trillion) of investment by 2020, excluding investment of importing overseas resources.

The government plans to spend 40 billion yuan (US$4.8 billion) to find new sources of coal by 2020.

On the hydropower front, hydropower projects with a capacity equivalent to the Three Gorges Dam project need to be built every two years until 2020.

Source: China Daily