China on the brink of an electricity shortfall ?  

The FT reports that rising coal prices and regulated power prices are proving an unhealthy mix for smaller power generators in China - China on brink of electricity shortfall.

China faces its worst power shortage in at least four years as soaring coal prices and government-set electricity tariffs force dozens of small power plants to shut down rather than face mounting losses.

Nearly half of China’s provinces have started to ration electricity as the country enters the peak summer season, facing what analysts describe as its worst coal shortage.

Analysts warn that this year’s electricity shortfall could be more severe than in 2004, when the country was affected by its worst power shortage in decades because of soaring demand for power as the economy boomed.

China’s problems mirror those of other Asian countries, where the rising price of fuel and other commodities has had an impact on governments that traditionally subsidise everything from the cooking kerosene used by the poor to the electricity used by industry. Companies in Indonesia, for example, have complained of rolling blackouts and action by the government to force them to shift factory production to weekends.

The emerging power shortages have important implications for both inflation and growth, about which Beijing is to publish fresh figures on Thursday. Second-quarter GDP growth is forecast to have dropped to 10.1 per cent from 10.6 per cent in the first quarter.

Consumer price inflation is expected to have fallen in June to 7.1 per cent from 7.7 per cent in May, but problems in the power sector indicate inflation remains entrenched in the Chinese economy as the result of electricity price controls.

Late last month, the government raised fixed electricity tariffs by about 5 per cent but prices are still 30 per cent lower than the current coal price would imply, BNP Paribas estimates.

Coal prices in China have doubled since the start of the year. Beijing last month imposed price controls on thermal coal bought directly from mines but spot market prices continued to rise.

Of the 266 distinct nations or entities on the world today, nearly 100 are now reporting continuing energy shortages, mostly in the form of inadequate electricity supply, but in a growing number of cases, shortages of liquid fuels and natural gas. The actual number of countries affected is probably well over 100 but there are dozens of isolated island-states scattered around the world that are rarely heard from and are almost certainly suffering in silence while waiting for the next oil tanker to come in.

The majority of these energy-short states are small, poor and play only a minor role in world trade. While we should feel sorry for the plight of their inhabitants who are, or shortly will be, enduring severe hardships from greatly reduced supplies of electricity, water, food and use of motor transport, the impact of their problems on the better-off OECD world is likely to be minimal for a while.

Shortages, however, are not confined to small, poor states, but, in an increasing number of cases, are appearing in large, relatively well-off and active states on which the OECD world of North America, Europe and parts of Asia are very dependent. Several of the countries having energy problems are actually oil exporting states that, for one reason or another, are not able to turn their increasing oil wealth into smoothly functioning shortage-free economies. Unfortunately, several major countries appear to be on the path to an energy shortage-induced economic and perhaps political collapse within the foreseeable future which obviously will have serious consequences for us all.

Currently, the most serious situations appear to be in Pakistan and Bangladesh. Both are nations with populations in excess of 150 million people that are ensnared in devastating power shortages that have destroyed their export industries. Both are facing water and agricultural problems that threaten their food supplies. Liquid fuels are running short and reductions in exports threaten their ability to import oil and natural gas. It was recently revealed that the Saudis already are forgiving $6 billion of Pakistan's $12 billion annual oil import bill.

On top of this, Pakistan has nuclear weapons and its strategic location is vital to the course of the insurgency in Afghanistan. Worsening blackouts, the liquid fuels shortage and probably the food situation are likely to lead to serious political instability before the year is out.

The next important pair of countries in terms of their impact on western economies is China and India, and although their situations are nowhere near as serious as the problems in Pakistan and Bangladesh, both are beginning to suffer from electricity shortages which will impact economic growth. China, which now has a shortfall of around four percent of its normal electricity production, is compensating by cutting back on production of aluminum and zinc which consume prodigious quantities of electric power. The recent earthquake has given Beijing pause in its ambitious plans to expand hydro and nuclear power production. If China cannot increase coal production rapidly enough to keep up electricity generation for its rapidly expanding economy, it is likely to increase imports of coal and oil keeping pressure on world prices.

So far there is no indication of an unusually large increase in Chinese oil imports as there was during the power shortage four years ago. The world price of diesel is simply too expensive to be used to generate electricity for industrial production these days.

India's energy shortages are more serious than China's.

Its nuclear power plants are failing, hydro-power from the Himalayas is drying up due to global warming, and the costs of imported fuels are soaring. Over 85 percent of India's oil must be imported and coupled with the subsidies of oil prices the increasing costs are taking a heavy toll on the state budget. Although the situation in India is not yet as bad as in Pakistan, blackouts and liquid fuel shortages are being reported almost every day somewhere in the country. There is no end in sight to this situation and likelihood of an economic slowdown, coupled with water and food shortages, is increasing.