<Andy Xie said: "Next year, electricity capacity will expand sufficiently to deal with shortages, so diesel generators don't have to burn fuel anymore and that will cause oil demand to come down, therefore oil prices will come down.>
Relief may be on the way, just not next year. They have already curbed the low hanging fruit on industry cutbacks.
China's energy shortage to persist, but peak summer demand now past
By Mark Natkin, Technology Forecasters
Sep 08, 2004
China has, increasingly, become the favored manufacturing base for the world's electronics makers, but with several years of energy shortages that have now grown to rival the country's worst since the 1980s, many foreign companies have started to question the stability and cost-effectiveness of a China-based operation.
In the short-run, China's energy crunch is a very real concern, and one that has already forced some electronics manufacturers, both domestic and foreign, to stagger shifts, purchase private generators, and, in some cases, temporarily interrupt production. In the long-run, however, China has already started building additional power facilities that should restore a balance between supply and demand, likely even creating a glut, within the next 2-3 years. In the meantime, already past the peak summer demand period for this year, the government will employ a number of short-term solutions that should help minimize negative impact on electronics manufacturers.
China's current power shortage is nothing new, but has become increasingly more severe over the past several years as rapid economic development has driven energy demand far in excess of the10th Five-Year Plan's (2001-2005) estimates. Over the last three years real annual GDP growth has averaged more than 8%, climbing to 9.1% last year and already registering 9.8% in the first quarter of this year. Accompanying this spike in growth, over-investment in power-intensive industries such as aluminum, steel, chemicals, and cement and the emergence of a middle-class, which can now afford refrigerators, air-conditioners, and other energy-hungry home appliances have contributed heavily to an average increase in electricity demand of 11.8% per annum, almost double the 6% average annual increase anticipated in the Plan.
Exacerbating the problem, inefficient power pricing mechanisms have given generators a disincentive to increase production while, at the same time, have provided consumers with little incentive to conserve energy. Approximately 68% of China's power supply is produced from coal-burning thermal generators. As increased electricity needs bolster existing facilities' demands for coal and China builds additional thermal plants to fill the gap before current nuclear and hydroelectric projects become operational, the price of coal has risen steadily. Adding to this upward price pressure, China's overloaded transport networks have struggled to deliver even those volumes ordered.
Rising coal prices might not be so problematic if the price of power was also set by the market. However, while China partially liberalized coal pricing for electricity generation in 2002, the government still sets both the wholesale electricity prices that the power grids pay the generators and the retail prices charged to consumers. As a result, although electricity demand and coal prices have both soared, power plants and distributors have no way to raise their prices unless the government authorizes an increase. In the meantime, coal producers continue to keep their prices high, knowing that surging power demand will eventually move the government to raise rates.
So far in 2004, China has raised the price at which grid operators purchase power from the generators twice, but coal prices have risen even more quickly, prompting the National Development and Reform Commission to impose a limit of 8% on any price increases over end of May levels. Meanwhile, the price at which industrial consumers purchase power has been increased only 4.4% this year, and the tariff for residential users, already kept artificially low and heavily subsidized by inflated rates for industry, has been held steady, pending further hearings by the commission. Accordingly, power plants have grown increasingly reluctant to run at full capacity and consumers have had little reason to moderate their use.
For highly industrialized areas, particularly eastern and southern provinces and municipalities like Shanghai, Zhejiang, Jiangsu, and Guangdong, the shortage has been even more acute than total national figures might suggest. Much of China's industry is concentrated in the east and southeast, but power-generating facilities are spread throughout the country, with many power-rich provinces in central, western, and southwestern China. Although each of China's seven regional power grids are connected, transmission links between them are so underdeveloped that cross-regional power exchanges still account for less than 3% of total electricity generation.
To remedy the power shortfall, China's central government has approved a spate of new power generation projects - currently some 130 gigawatts of new capacity is under construction, a 31% increase over the existing level - and allocated sizeable budgets for the expansion of coal transport networks and the upgrade of transmission links between both regional and provincial power grids. However, many of these projects will take 2-3 more years before becoming operational and finally closing the gap between supply and demand.
In a more immediate bid to cut usage, the government has initiated a variety of measures, including the introduction of both general tariff hikes and differential peak/off-peak pricing, public awareness and conservation campaigns, curbs on additional investment in and, in some cases, bans on the sale of electricity to high energy-consuming industries, and selective imposition of off-peak production shifts and periodic production shut downs.
For foreign-invested electronics manufacturers based in China, the adverse effects of the power shortage have varied greatly. Taiwanese electronics and computer manufacturers Walsin Lihwa Group and Mitac International Corp., both with operations in hard-hit areas like Shanghai, Jiangsu, Zhejiang, and Guangdong reported that none of their China-based factories had been affected. In contrast, others have complained that power is available in their area only two to three out of five weekdays and that they have had to purchase diesel-powered generators to keep their plants operating.
In some areas local authorities have agreed to offer subsidies to those factories willing to buy their own generator - the Ningbo city government in Zhejiang Province, for example, is offering some companies RMB 200 (approximately USD 24) for each kilovolt used. However, with the purchase price of generators running as high as USD 300,000, these subsidies only partially offset added costs, and, in many cases, generators are not sufficient to power heavy-duty machinery.
Some manufacturers have also been forced to operate night or weekend shifts in place of normal daytime and weekday schedules, in some cases simply creating mild inconvenience, but in others pushing overtime labor costs up as much as USD 1 per hour.
Further boosting production costs, in July national average electricity prices for industry users rose 2.2 fen (0.27 US cents) from the previous rate of RMB 0.5 (6 US cents), and rates for peak hour use in Beijing are slated to jump 11% before the end of the third quarter.
Concerned about scaring off overseas capital, the government has tried to limit the impact of the power shortage on foreign-invested companies. Instead, it has focused on curbing use by the cement, steel, aluminum, and chemicals industries, which together sucked up 29 per cent of China's total electricity supply last year. Government measures may also come to bear more heavily on state-owned enterprises, as they are less liable to move their factories than foreign firms. Such prospects, however, have still left many foreign-invested electronics companies concerned, as any impact suffered by their local suppliers will, in turn, affect them as well.
While many China-based manufacturing operations have and may continue to see some of their cost benefit eroded by China's power deficit, the peak of this year's shortage appears now to be past. As summer temperatures have eased, heavily reducing demand - in summer, air conditioning accounts for roughly 50% of all electricity consumed by China's major cities - Shanghai has already announced that it will end some of the energy-conservation measures it imposed earlier. This doesn't mean that the shortage will be fully resolved in the near future, but should reduce its severity and buy China another year to bring on additional supply and address the various issues currently hampering the balance between supply and demand. |
