Can China Keep the Lights On?

Beijing finds it difficult to reconcile its desire to supply cheap, universal electricity with the economic realities

For three days in an average week, factories in Foshan's Shunde district have to work to keep their own lights on. As power cuts take effect in this small part of Guangdong province, home to Chinese home appliance manufacturers like Midea, Galanz and Kelon, diesel-powered generators hum to life to keep production going.

"It's impossible for any factory, if they rely on public utilities," said a Shunde factory operator, who asked that both his name and industry be withheld. "They cannot survive."

He spoke enviously of Dongguan, an industrial base to the northeast. "They only have a day or two of blackouts in a week."

In fact, Shunde's power proved so problematic that the factory operator applied to his local government to build a small coal-fired cogeneration plant to provide electricity and steam for his factory. Now he has more than enough power—and at a discount of around 40% on public utility prices.

He even enjoys a small but profitable sideline selling electricity and steam to neighboring factories.

This sideline is not officially permitted. But, with Shunde's local government eager to attract investment, there is room for flexibility. "When the county or local city has three blackout days [a week], it has to do something to fix its own problems," said the factory owner.

The troubles in Shunde reflect the continuing struggle of China's power system to provide reliable electricity supplies, especially in areas of high demand. Faced with a situation in which both generation and transmission are under strain, Beijing finds it difficult to reconcile its political desire to supply cheap, universal electricity with the economic realities of power.

In recent months, policymakers have ramped up their efforts to address these problems. At the National People's Congress in March, a National Energy Bureau was established to consolidate decision-making. This followed a white paper issued by the State Council in December 2007 that outlined the main challenges for energy development in China and proposed strategies for facing them.

Demand pressures

Despite a renewed government emphasis, however, the complexity of fixing problems in a system rife with disconnects means a hard road ahead for Beijing.

At the root of the troubles is a surging demand for energy. Energy, which includes but is distinct from power, refers to both the direct use of energy resources, such as oil and coal, and the secondary use of those resources through conversion into electric power.

For years, China kept energy demand in check. Dr Mark Levine, head of the China Energy Group at the Lawrence Berkeley National Laboratory in California, said strong policies limiting energy growth ensured that the country's energy demand grew less than half as fast as its GDP between 1980 and 2000.

"That was a remarkable policy achievement," said Levine. "[But] suddenly, in 2001, all that changed."

Underlying demand for commercial buildings, roads, bridges and other infrastructure revealed itself dramatically. Between 2000 and 2006, China grew so quickly that energy use during this period exceeded the country's total historical energy use to 2000, said Levine.

Put another way, according the International Energy Agency's (IEA) World Energy Outlook 2007 report, the increase in China's energy demand between 2002 and 2005 was equivalent to Japan's total annual energy consumption in 2005.

Electric power consumption has also increased rapidly, and driven by China's growing economy, this rise will continue. China's National Bureau of Statistics has forecasted total power consumption of 3.7 trillion kilowatt-hours (kWh) in 2008, up 14% from 2007. By 2010, consumption is expected to hit 4.5 trillion kWh.

"These are phenomenal growth rates," said James Brock, a Beijing-based independent energy analyst who spoke to CHINA ECONOMIC REVIEW shortly before his death in March. "And even though we've added on 100 gigawatts (GW) last year & you're really pushing the physical capacity to deliver."

Playing with prices

The huge demand increases have prompted Beijing to introduce caps on power tariffs even as prices of raw materials have risen.