beyondbrics

Chinese officials have warned in recent weeks that the country could face power shortages this summer in what would be an embarrassing setback for the world’s largest energy consumer.

But is this a real threat? Or is it just sabre-rattling by power companies keen to secure from the authorities increase in state-controlled electricity prices to compensate for rising world coal costs? It’s probably just talk, but nobody can be quite sure.

During the hot summer months ahead, China’s power producers are going to get squeezed by record prices for thermal coal. Because electricity prices, which are set by the state, haven’t risen, thermal power stations are increasingly being run at a loss.

According to analyst Nate Taplin at Gavekal Dragonomics, a financial services firm, China’s thermal power plants lost Rmb33bn last year because of this price squeeze and are reluctant to continue producing power at a loss. As he explains in a recent note:

The problem is not that China produces too little electricity. The warnings of blackouts are instead best understood as a form of blackmail: power producers want the government to raise the prices they get for electricity.

Several provinces, including Zhejiang, Jiangxi, Henan and Guizhou are warning of power shortfalls the summer, when power demand will peak because of air conditioning use.

Taplin predicts private manufacturers may start drawing electricity from diesel generators as rationing becomes more widespread. “Without price hikes to address the structural problem, outages will probably be significant and lead to a bump in diesel demand,” he writes.

But, even if the immediate outlook for the sector is difficult, the long-term picture may be better than has been predicted. The consensus forecast for Chinese energy consumption is of  further substantial increases as the country races ahead on the road to economic modernization.

But a new study from the US-based Lawrence Berkeley National Laboratory,  predicts that while China’s total energy demand will roughly double in the next 40 years, growing from 2.25bn tonnes of coal equivalent (mtce) in 2005 to 5.5bn tonnes of coal equivalent in 2050, it will begin to plateau around 2040.

This is according to the study’s Continuous Improvement Scenario – a scenario which assumes that current energy policies will stay in place. More ambitious energy-saving policies would produce an early slow down in energy consumption growth.

Morever, even at that point, China’s energy consumption in per capita terms would still be quite low in comparison with other countries.

China’s projected 2050 pathways are also noteworthy in that the per capita energy use will remain below most other countries with similar GDP levels. Under [the Continued Improvement Scenario], China’s per capita energy use will be below South Korea and Spain in 2050. . . These trends underscore the important role China can play in pursuing a more energy efficient pathway of economic development.

The study is more optimistic about the limits on China’s energy consumption – and CO2 emissions – because it argues that two big drivers of consumption – urbanization and energy-intensive industrial expansion will tail off.

This slowing of growth is largely due to saturation effects, as the process of urbanization will be largely complete, most households will possess all major appliances by 2030, and efficiency improvements in heat distribution will be largely complete.

Finally, in a bit of good news for China’s power companies—thermal coal will play a less dominant role for long-term energy supply:

The share of coal will be reduced from 74% in 2005 to about 47% by 2050 in [the Continued Improvement Scenario]. . .  Coal demand in [the Continued Improvement Scenario] will approach its peak in the late 2020s and reach it in 2031 at 3,000 Mtce.

So 2o years from now, the power cut fears of the summer of 2011 will seem like a long-forgotten bad dream.

Related reading:
China: cooking on gas, beyondbrics
China digs deep to reshape its coal industry, FT
China fuel price hike: long lines ahead, beyondbrics
China hits rocky road over diesel demand, FT