Chinese power plants shut on fund shortage

Chinese electric power companies have suffered losses because of cheaper electricity prices than coal prices. Number of power plants are facing bankruptcy, and a lack of funds to buy coal forces many plants to shut.

Industry sources forecast that the five major Chinese electric power groups could post RMB35-70 billion this year due to the poor margin. Furthermore, the scheduled introduction of new emission control regulations in January 2012 will cost annual RMB100 billion to the power industry.

As of late October, about 160 billion kilowatts of thermal power generation capacity in whole China was estimated to have been shut due to a lack of fund to buy coal. Around 20% of power generation capacity in Guangdong is not operated. Many industry sources expect the situation could be worse.

In China, coal prices are decided by the free market, while electricity prices are set by the government. Domestic coal prices have increased by more than 10% from January, but wholesale electricity prices were only hiked by 0.5% during the same period.

China’s electric power generation capacity exceeded 960 million kw in 2010 and is currently estimated to reach about 1 billion kw. Capacity of the hydroelectricity is about 210 million kw, nuclear power accounts for about 10 million kw, and others include wind power are 31 million kw. Thermal power generation capacity is around 750 million kw and 95% of the thermal power units are coal burning facilities.

Thermal power supply in China increased by 14.3% on year during the first 10 months in this year. The figure is larger compared to the country’s total power supply in the period at 12.3% increase on year. Lower hydroelectricity supply, which decreased by 2.2% on year in the January-October period, lifted thermal power supply despite the faded growth of electricity demand.

Chinese government is anticipated to hike wholesale electricity prices again in the near term. Power companies could secure profits if electricity prices increase by RMB0.02 per kilowatts, while the price hike would cost RMB6-7 billion to consumers.

Higher electricity prices are likely to encourage power companies to supply more electricity, however, increasing payments may reduce electricity demand.

Previous electricity price increase in 2Q this year might be one of the reasons for the slowdown of the growth of China’s electricity demand in 3Q.

Meanwhile, Chinese media frequently report the possible power shortage crisis in coming several months. Low power generation due to the poor margin may cause serious shortage of electricity.

China experienced severe power supply shortage in late 2010 when many factories boosted gas oil use for onsite power generation. Huge gas oil demand caused panic in the petroleum market at that time.

We, however, can’t see any apparent turmoil in the petroleum market despite the electricity crisis.