Those coal fired plants around Bejing keeping ya coughing, Mq?
China's Dark Days and Nights
Industrial Growth Exceeds Supply of Electrical Power
By Peter S. Goodman
Washington Post Foreign Service
Monday, January 5, 2004; Page A01
HANGZHOU, China -- In a country gaining dominance in the production of electronics, 9-year-old Sheng Minjie sat down one recent evening to do his math homework. First, though, he had to solve a physics equation: How many candles did he need to illuminate his work?
Like thousands of other households in this city on China's east coast, Sheng's family was without electricity, his apartment dark and cold. The city had cut the power to his neighborhood as part of a series of rolling blackouts imposed as China struggles to cope with power shortages afflicting much of the country. At one point last month, the city's traffic lights were turned off for two days. A ban on lighted advertising has created the peculiar spectacle of a Chinese metropolis largely devoid of flashing neon.
China's relentless industrial development has outstripped its supply of power. The government forecasts shortages of 10 to 15 percent in key manufacturing areas, estimating that China needs about $108 billion worth of new generating capacity to close the gap. Factories are now cutting production, while hotels and restaurants dim lights and switch off heat. Some worry that the scarcity could shackle enterprises that have become critical employers at a time when millions of government-supported jobs are being eliminated by the country's transition from Communism to the free market.
"These power shortages are extremely serious," said Scott Roberts, an analyst at Cambridge Energy Research Associates in Beijing. "In some areas they have been crippling for economic growth."
The shortages testify to the complexities of managing China's economic transformation. China's government has in recent years liberalized much of the economy, allowing markets to determine how much factories produce and at what price, with individuals and businesses free to consume as much as they can afford. But the supply of energy remains tightly regulated. The construction of new power plants requires the permission of bureaucrats in Beijing. They have fundamentally misjudged the demand.
Erwin Sanft, an oil and gas analyst for CLSA Emerging Markets, a Hong Kong-based research firm, recalled meeting with officials in Beijing in 1998. "They were forecasting 3 percent growth in demand for electricity," he said. Since then, growth has been in the double digits, with a jump of 15 percent in 2003. This past summer, China exceeded the consumption once forecast for 2005.
China is now in the midst of a building boom in power plants, though most will not be completed for two or three years. The Three Gorges Dam -- the largest hydroelectric project in history -- is beginning to provide power, though it will not be completed before 2009. And even as these facilities come on-line, China confronts a fundamental energy deficit: Despite the vastness of its landmass, it has nowhere near enough reserves to meet its needs, necessitating a widening stream of imports. Beijing has turned its sights outward in a global quest to secure reliable stocks of energy.
More than 80 percent of China's electricity is produced in coal-burning plants. Many mines have been shut in recent years amid a series of horrific accidents as well as concerns about worsening urban air quality. But as coal shortages have emerged, the government has reinvigorated mining. Joe Zhang, an energy analyst at UBS in Hong Kong, predicts that China -- long a major exporter of coal -- will become a significant importer within four years.
China's oil and gas reserves satisfy a bare fraction of its demands. Production at its largest proven oil field near the northeastern city of Daqing is declining. Experts are skeptical about estimates for China's greatest potential oil and gas area, the Tarim Basin in the northwestern province of Xinjiang, a semi-autonomous region beset by ethnic strife.
Only a decade ago, China was a net exporter of oil. Now, it is the third-largest importer, behind only the United States and Japan. Imports leaped nearly a third during the first 10 months of 2003. By the government's reckoning, China will need as much as 600 million tons of oil annually by 2020, more than three times its expected output.
More than half of China's oil imports now come from the Middle East, stoking fears in Beijing that the country's economic stability is overly dependent on access to the world's most volatile region. To hedge its bets, China has been seeking to tap sources in other parts of the world. In 2002, China National Offshore Oil Co. became the largest offshore producer in Indonesia when it bought a stake from the Spanish firm Repsol. The company also signed a $12 billion, 25-year contract to purchase liquefied natural gas from Australia's Northwest Shelf project.
But China's grandest overseas energy visions have so far gained little besides painful lessons in the intensity of competition for the world's most crucial resources.
In May, President Hu Jintao visited Russia, where he presided over the signing of a contract between state-owned China National Petroleum Corp. (CNPC) and the Russian oil giant, Yukos. They were to build a 1,400-mile-long-pipeline to deliver crude oil from Angarsk in eastern Siberia to refineries in Daqing. Oil was to begin flowing in 2005, supplying as much as 30 percent of China's imports by 2030.
But the prosecution and jailing of Russian tycoon Mikhail Khodorkovsky, who controlled Yukos, has iced that plan. Meanwhile, Japan is aggressively wooing Moscow with an offer to pay for a more expensive pipeline reaching the Russian port Nakhodka on the Sea of Japan, enabling easy shipment to the archipelago-nation. That route would bypass China. Though a spur could still be built to Daqing, Japanese demand might absorb all or most of the pipeline's oil.
In June, President Hu presided over another contract signing in Kazakhstan: CNPC and state oil-and-gas company Kazymunyagas pledged to build a 2,000-mile-long pipeline to carry oil to western China. But that project only makes sense if China taps into sufficient volumes of Kazakh oil, a prospect that dimmed when U.S. and Japanese firms edged out China's bid for a larger slice of the enormous Kashagan field on the Caspian Sea.
Some say these setbacks are less a problem than an opportunity: They apply pressure on China's government to adopt conservation policies. Many factories and distribution networks are highly inefficient, spoiled by years of access to subsidized state power. China's most prosperous cities are now under the spell of the automobile, as a consumer-minded nouveau riche takes to a suburban lifestyle featuring shopping outings in the family sedan.
"The shortages will relieve the pressure on China's environment," said Qu Geping, a former chief of the state Environmental Protection Bureau, who now heads a non-government advocacy group. "Coal users in particular will be forced to improve their efficiency."
China is now tightening auto emissions standards, while limiting credit for the auto industry, which consumes enormous amounts of energy.
Power shortages first emerged last in summer in the coastal provinces at the center of China's export boom -- Guangdong, Fujian, Zhejiang and Jiangsu as well as the city of Shanghai. They have since spread. Today, 19 of 31 provinces are rationing electricity, according to state media reports.
In Hangzhou -- a city in Zhejiang famed for its lake ringed with pagodas -- officials last month forced most factories to limit production to four days a week. They barred virtually all production during peak hours of household demand, while forcing the biggest energy consumers such as cement- and brick-making factories to halt altogether.
At the Hanggang-Changxing Electrical Arc Furnace Steel-Making Co., production has been slowed by nearly one-fifth. "The effect is huge," a companyofficial said. "Every day, our profits are reduced by 150,000 renminbi," or more than $18,000.
For now, most analysts foresee marginal impact to China's economy, with the greatest consequences confined to the hungriest users of energy. "It could take five percentage points off production growth rates for industrial products," said Sanft, the CLSA analyst.
But if the problem persists, it could frighten away foreign investment -- particularly in energy-intensive industries such as semiconductors and petrochemicals.
"The absolute worst thing that can happen in modern manufacturing is for the lights to go off," said an executive for a multinational company who spoke on condition of anonymity. "The raw materials freeze up and the capital equipment is destroyed. Not only is this a threat to existing players, it also decreases the incentive to invest. This is potentially very serious."
The biggest casualty of the shortages so far is the momentum for market-embracing reform. Energy was once a key target for liberalization, in part because China's producers are so inefficient, but also because the industry has been rife with corruption. In 2002, the State Power Corp., which once dominated the industry, was broken into two companies with pieces of the transmission grid, and four separate power-producers. The theory was that competition within the generating business would force the building of more efficient plants. Then the state could stop setting prices and planning for future generation capacity, ceding that role to the market.
But much as the energy shortages in California sparked a rethinking on deregulation, China's troubles have sown doubts about the virtues of its reforms. "The question raised by many now is whether the reform of the power industry is a factor influencing the security of national power," said Zhang Guobao, vice-chairman of the State Development and Reform Commission, addressing reporters in Beijing.
Local officials have traditionally coaxed factories to agree to long-term power purchasing arrangements, locking in a guaranteed profit margin for plant operators -- the sort of government orchestration that the reforms have aimed to eliminate. Now, say industry sources, provincial authorities are again stepping in to ensure sufficient local supply: They are encouraging the swift development of new power plants by brokering long-term power purchasing deals.
So much so, in fact, that some now predict the process will yield an outcome currently difficult to imagine -- a glut of energy.
"We're going to have an overcapacity problem," the multinational executive said. "That is the pattern in China, because it's not really a market system."
Special Correspondent Wang Ting contributed to this report.
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