China badly needs a power surge to keep the lights on

Oct 10, 2004 02:00 AM

Beijing's communist leaders are fighting to deliver power to the people. As electricity shortages plague the country, one of the biggest generators is floating on the stock market to finance expansion.
China's roaring economic growth and burgeoning number of factories has led to electricity demand outstripping supply. Many factories have been forced to cut back production because of power shortages. The government estimates a 20,000 MW shortfall in 2004 -- about 5 % of the country's entire capacity at the start of this year.

Power generators are failing to keep up with demand despite rapidly expanding capacity, which is expected to jump 10.9 % this year. China plans to double capacity to 680,000 MW by 2010.
"We expect power shortages to continue in 2004-05 before returning to a balanced state in 2006," UBS analyst Alice Hui wrote in a report entitled China Power: Red Alert.

The roots of today's shortage go back to the late 1990s when China's government feared a glut in electricity supply after rapid building of power plants earlier in the decade. Approvals for new generating capacity -- which take about two to three years to complete -- were slowed but the growth in demand for electricity was underestimated.
At the start of the century, China assumed demand for electricity would grow at less than 6 % a year over 2001-05. But growth in demand was much higher, reaching 15 % last year, according to a report in the spring by the Institute of Energy Economics in Japan.

Power shortages put upward market pressure on the tariffs charged to customers. But China's electricity market is heavily regulated, with prices set and held down by the government. Yet coal -- which fuels about three quarters of China's electricity generation -- is less regulated and prices have jumped.
A utility analyst in Hong Kong said: „The power tariffs in China are regulated by the government but the domestic coal prices are mainly set by market forces. So there is a mismatch between the revenue side and thecost side of the power generators."

Huaneng Power, one of China's big five generators, saw its coal costs per unit of electricity produced soar 26 % in the first half of this year compared with the same period in 2003. However, earnings still grew 8.6 % to 2.5 bn renminbi ($ 3 mm) but this was much lower than expected on the back of its 18.9 % increase in power output.
"The power generators in China have been enjoying relatively high margins in the past - so I don't think they will go into loss but just lower profit," said the analyst on the impact of higher coal prices. But lower profit margins for the generators means less earnings to finance the expansion China badly needs.

To finance its expansion, China Power Investment, another of the country's big five, is expected to raise up to HK$ 2.6 bn when it lists a key subsidiary in Hong Kong and New York. An over-allotment option could raise another HK$ 386 mm. Rising coal prices caused the company to postpone the listing from July. The share offer was popular with investors with local news reports that it was almost 300 times oversubscribed.
China Power's CEO Li Xiaolin is the daughter of the country's former premier Li Peng. The listed subsidiary of China Power plans to use HK$ 850 mm from the listing to develop three power plants. Nearly all the remaining funds are earmarked for acquiring other power plants which investors expect to mainly come from the parent company.

China's power shortages have eased since the hot summer months when air conditioning, among other factors, increases electricity usage. But government officials have warned that the shortages might get worse in the winter and spring due to tight coal supplies and factories hit by power shortages over the summer increasing production to make up for earlier lost output.
Weather patterns mean also that less power can be generated by China's hydro-electric plants -- which account for more than a fifth of the country's capacity -- in the latter part of the year. China has warned that several of its key regions face more power shortages this winter and spring. Cheng Guangjie, vice-president of the East China Power Grid, said the eastern provinces of Jiangsu, Zhejiang, Anhui and Fujian, and the city of Shanghai, are all likely to be hit by power shortages in the coming months.
"The gap between supply and demand will reach as much as 17 mm kW in the winter," Cheng was quoted as saying.

China currently produces a thirteenth of the amount of electricity per head that the US generates and an eighth of the amount per person in Japan. China also hopes that various measures to slow down economic growth will also ease the rise in electricity demand. The government in Beijing has been worried that the breakneck speed of the expansion means infrastructure across the country is unable to cope with the increase in production. They also have reservations about the quality of bank lending, with fears that the money is propping up lame-duck companies.
Government officials have put pressureon banks to squeeze their lending in an effort to cool the economy. But it may not be working quickly enough to stop the soaring demand for energy.
"Even though we have these macroeconomic adjustment policies, it doesn't seem that demand will slow down," said the utility analyst in Hong Kong.

Source: PowerMarketers
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