When we think about shortages in China we tend to remember the horrible starvation that has gripped the country at times, one of which during WWII was so vividly described in a book I recommend for everyone, Thunder Over China written by Theodore White.  If you read it you will never forget it.  It focuses mainly on how the U.S. backed the wrong guy during the war and was taken for a ride.

Today China may be about to experience a shortage of energy that could also be extremely disruptive and painful.  It is being caused by a perfect storm of factors discussed below all of which tend to reduce coal supplies.  80% of Chinese electricity is from coal. 

For the energy investor, I would submit that the most vital information in this story from Reuters reproduced below is that a coal shortage may significantly increase demand for oil as Chinese businesses run generators to keep the lights on, especially through the Olympics.

China power woes may worsen before Olympics

Tue Jul 8, 2008 10:48am EDT

By Jim Bai - Analysis

BEIJING (Reuters) - China may suffer a power shortage this summer as crippling as four years ago, threatening to cut deeper into industrial operations and stoke another surge in oil imports in order to keep the lights on through the Olympics.

Although Beijing has forecast a modest national deficit of 10 gigawatts (GW) when demand peaks in summer — just 1.4 percent of its installed capacity — at least four provinces between them are forecasting more than twice that amount as the risks mount.

Low coal stocks, surging costs, falling water levels, hotter weather and May’s deadly earthquake all point to more severe shortages, analysts say.

And while the central government has frozen domestic coal prices and raised power tariffs modestly in an effort to restore profitability for generators such as Huidian Power (1071.HK: Quote, Profile, Research, Stock Buzz) (600027.SS: Quote, Profile, Research, Stock Buzz), it is not enough to keep them operating full-throttle.

“Power shortfalls will be definitely worse than last year,” said Donovan Huang, an analyst with Nomura International Limited based in Hong Kong. “This is not because of insufficient installed generating capacity, but because of insufficient coal due to pricing and transport problems.”

The spreading woes may rate only second to the country’s worst crisis in a generation, in 2004, when more than half the country was hit by blackouts and power deficits amounted to 40 GW, or 10 percent of installed capacity.

Coal-rich Shanxi had already been hit by record power shortfalls of nearly 5 GW, or a third of demand, in late June and the deficit is expected to expand further in the coming months due to insufficient coal supply to power plants. ID:nPEK14868

That could force aluminum smelters to cut operations even more, further inflating prices MAL3 that surged on Monday to a record high due to fears over curtailed supply. 

Elsewhere, the outages may force companies to crank up oil-fired generators, forcing China to buy more diesel and fuel oil from abroad.

The local grid in eastern Shandong province, one of China’s economic powerhouses, had forecast supply to trail demand by up to 7 GW the summer, or nearly 20 percent of last year’s peak.

Guangdong, a persistent sufferer of power shortage for years, will face up to 6.5 GW of deficit this summer while Zhejiang sees shortfalls of up to 3 GW, grid officials had said.

ONLY 30 PCT OF COAL COST RISE COVERED

Beijing raised retail electricity prices for industrial and commercial users by 4.7 percent and passed on 80 percent of this to power generators, effective July 1, the first hike in two years aiming to help power firms cut losses.

It also set a cap on coal prices, but analysts said the measures were too little or too late to make up for the surge in coal prices, and risked back-firing for the country’s coal-fired generators, which produce 80 percent of its electricity.

“Given supply tightness, coal miners could sell more to the open market where prices are not regulated, or sell more low-quality stuff to power firms,” said Li Chaolin, a coal analyst based in Beijing.

On top of the price pressures, simply securing supplies to keep plants operating has been an increasing challenge due to limited supply after China shut down or asked for consolidation of many small coal mines for safety reasons that produce nearly 40 percent of China’s coal output.

As of July 6, major power plants connected to the State Grid had about 11-12 days worth of stocks, the China Business News reported on Tuesday, far below international norms of around 3-4 weeks and only about 3-4 days above a record low from late January when ice storms disrupted coal transportation. 

A third of these plants had less than a week’s worth of stocks, while 12 percent of them could last less than three days. A total of 58 generators had been shut down on the lack of coal, the newspaper said, citing data from the grid.

“The supply situations of coal, power, oil and transport in general look grimmer than in past years,” Liu Tienan, a deputy chief of the National Development and Reform Commission, said in late June. “The tightness since early this year has not changed and even worsened in some regions.”

FALLING WATER, HOTTER WEATHER

China’s massive hydropower generators, which produce about 15 percent of its power, are compounding the problem.

Water levels in China’s major reservoirs at the start of this month stood 2 percent below a year earlier, the first year-on-year decline since last July, and a further decline would curtail output from the sector. ID:nPEK333945

Cheap hydropower is key to stable electricity supplies especially in central and southwestern parts of the country, but Beijing has forecast hotter weather that could boost power needs while lowering water volumes.

Meanwhile, power demand, fueled by double-digit economic growth, shows little sign of abating as China shrugs off the effects of slowing growth in the West.

Sichuan, usually a power exporter to other provinces in the water-rich summer, might have to import 2 GW of electricity this year after the May 12 quake rocked dams and damaged power facilities, Yu Yanshan, deputy chief of the General Office under the State Electricty Regulatory Commission, said in June.

This would further strain the Central China Grid which had forecast shortages in some areas it covers.

China’s power generation growth this year slowed noticeably from 2007, on government curbs on the economy and efforts to improve energy efficiency, coupled with unexpected shocks from the ice storms early this year and the earthquake in May. 

Tags: peak oil energy investments

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