Power crunch underscores energy challenge

Updated: 2011-05-27 10:09
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China's top five state-owned power generating giants -- China Huaneng Group, China Datang Corp, China Huadian Corp, China Guodian Corp and China Power Investment Corp -- lost some 60 billion yuan in their thermal power generating business during the past three years, according to SERC.

In contrast, SGCC posted a 40-billion yuan profit last year.

Yun Gongmin, general manager of Huadian, said the company is under great pressure to control costs as coal prices rise. Although the company has increased its investment in hydropower and windpower to diversify energy sources, it still depends heavily on thermal power in the short run, Yun said, predicting that Huadian's demand for coal this year will exceed 70 million tons.

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Deputy General Manager of SGCC, Shu Yinbiao, insists that the current electricity supply-demand tension has nothing to do with grid's profits.

"Comparing 40 billion yuan of profit with 2 trillion yuan of asset value, SGCC's profit margin last year was not high," Shu says.

The difference of pricing coal and electricity draws the attention from academics, too.

Professor Lin Boqiang, director of China Energy Economy Research Center with Xiamen University, says the power shortage a few years ago was caused by insufficient installed capacity, but the electricity crunch this year is because of the pricing system.

"The market now fully decides thermal coal's price, but the state still strictly controls electricity prices in China," Lin said.

Hike or bite?

In 2004, the Chinese government introduced a scheme that links electricity prices with the fluctuation of coal costs in order to improve the electricity price formation system.

Under the scheme, if coal prices rise 5 percent or above during a linkage cycle of six months, electricity prices will be adjusted accordingly.

The scheme was effective, however, only twice since its introduction because it was not widely implemented, and thermal coal prices has almost doubled from the 2004 level to about 820 yuan per ton now.

So the current electricity inadequacy in many regions might prove to be a strategy by some power plants pushing for price hikes, at least for in-grid prices they sell to grid companies, analysts say.

"Speaking from a national perspective, we have a balanced supply-and-demand situation because installed power generating capacity remains higher than the normal demand level," said Shan Baoguo, a researcher at the Energy Institute with SGCC.

"Coal producers and power plants are gaming now, playing for their own stake," Shan says.

To fill the pricing gap between thermal coal and electricity, the government can hike electricity price to balance the interests of power plants and grid companies, suggests a manager working for a power plant, who declines to be named.

Such a strategy may backfire, however, amid efforts to battle inflation, as such increases will probably be passed on to the public, who have already been plagued by soaring prices.

The Consumer Price Index (CPI), a main gauge of inflation, rose 5.3 percent year-on-year in April, well above the government's annual inflation control target of 4 percent.

While power generating giants still worry about coal prices, smaller power-generating companies like China Resources Power Holdings Co, Ltd believe they have found a way out of the plight.

"We have two cents of profit for every kwh of electricity we produce," says Wang Xuehua, deputy manager of the Jiangsu Provincial Branch of China Resources Power Holdings Co, Ltd.

The secret is simple.

"Our confidence comes from the acquisitions last year of three coal mines with total coal reserves of 457 million tonnes in Shanxi province," she says.

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