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The winds of change

World Coal,

According to Government and industry officials, China’s ongoing power shortages could extend beyond this year as its supply system is unable to keep up with the country’s seemingly insatiable energy demand growth. The National Energy Administration (NEA) has conceded the possibility that the country’s electricity shortages could even worsen in coming months as rising demand continues to exceed capacity.

Throughout the year, several major provinces have suffered rolling blackouts and prolonged supply cuts due to the combined impacts of massive flooding, droughts and rising coal prices. Floods damaged power infrastructure, as well as coal delivery routes along major rail and road networks linking parts of central and southern China during H1 2011; at the same time, other parts of the country suffered severe droughts that dried up their dams and rivers, reducing the country’s hydropower capacity during the summer months when demand peaks.

Earlier in the year, Government and industry analysts had warned that China could be staring at a record capacity gap of up to 50 GW. Local authorities have said that the country’s main industrial powerhouse in its southern provinces faces the worst prospect of power cuts. Guangdong, Guangxi, Guizhou, Hainan and Yunnan provinces could face a combined power shortage of up to 8 GW in coming months.

While floods, droughts, and oil and coal prices have eased up in recent weeks, the NEA said the crisis is far from over, and could return with a vengeance if Chinese power demand picks up.

Long-term challenges

The Government is facing pressure to raise electricity prices to reflect high coal prices and to check the country’s runaway power consumption. This reached a record of more than 460 billion kWh in July, exceeding production of just over 450 billion kWh.

Chinese power companies are warning that they cannot continue to subsidise consumers for rising coal prices. The power industry said its H1 2011 losses rose to US$ 2.3 billion, compared to US$ 1.4 billion for the same period last year. While coal prices have surged by around 80% since 2007, power companies have been allowed to raise electricity tariffs by just 15%.

While raising electricity tariffs is long overdue, it will fuel inflation and could trigger political unrest. Inflation surged to a three year high of 6.5% in July 2011, at the same time that China’s main export markets in Europe and the US are sliding further into recession and financial chaos. The rising cost of energy is rapidly flowing through the Chinese supply chain, threatening the viability of many businesses.

Coal’s special position

While oil prices have recently retreated to US$ 80 – 85/bbl, coal and gas prices remain strong, with coal expected to make a big dent on the Chinese economy as it generates more than 70% of the country’s power supply. According to Pacific Strategies & Investments, a Manila-based consulting firm, China accounts for 46% of the world’s coal market and has contributed to the doubling of international prices over the last five years.

Meanwhile, attempts by the Government to consolidate smaller mines to improve operational efficiency, profitability and pollution controls are not happening fast enough.

The Government has said that it wants to raise the share of natural gas and renewable sources in the national energy mix. However, much will depend on its success in reducing dependence on coal, while keeping the economy growing at more than 8% a year for the rest of the decade. This seems an irreconcilable set of targets.

Reducing energy use

Ultimately, China may have to reduce energy consumption, possibly at the expense of the high 8 – 10% annual rate of economic growth that the country has been used to. While details are still being negotiated, experts said it will be the first time that the Government of China is even considering reducing energy consumption as a policy move.

For now, negotiators have settled on capping the nation’s total energy use to 4.1 billion tce by 2015, more than 25% above last year’s consumption. Some planners have called for China to reduce its energy consumption to 3.6 – 4 billion tce. But it will require huge political will and compromises to reduce the country’s energy consumption, as it could slow down economic growth.

On the other hand, planners are concerned that China is becoming increasingly dependent on imports of coal, oil and gas to fuel its economy, raising its vulnerability to geopolitical upheavals and events in other parts of the world. The Government is also looking to reduce the country’s greenhouse gas (GHG) emissions and improve its environmental record, which has suffered over the last four decades as it focused solely on growing the economy. China now accounts for a quarter of the world’s GHG output, and has taken over from the US as the world’s leading polluter.

Investors target Xinjiang’s coal sector

The politically-troubled Xinjiang autonomous region in the far-western reaches of China has emerged as the country’s next major investment destination for companies seeking to solve China’s long-term energy shortages. With its rich deposits of coal, oil and gas, and its proximity to Central Asia, Xinjiang offers both enormous opportunities as well as huge frontier risks.

In recent months, some of the world’s largest coal and power companies have come calling with offers to invest tens of billions of dollars to develop Xinjiang’s coal reserves. According to one estimate, Xinjiang holds nearly 2.2 trillion t of coal, or 40% of the country’s reserves.

The International Energy Agency (IEA) has predicted that by 2035, China will startup 600 GW of coal-fired electricity generation capacity that would require more than 2 billion tpa of coal. This year alone, China is expected to increase its coal-fired power capacity by 50 GW, representing several hundred million tonnes of additional annual coal use.

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