Catastrophe was often imminent for Captain Kirk and the crew of the Starship Enterprise. At such moments he would radio down to his engine room – normally as hostile Klingon lasers shook the ship violently – and insist on “more power” from the reliable Scottie.
Given the heavy correlation between China’s economic growth rate and its levels of power consumption, the country’s president, Hu Jintao will be insisting on “more power” too. But somewhat problematically ‘less power’ is being used. In January the nation’s electricity usage slumped 13.1% year-on-year.
Should we be surprised?
Probably not. China’s economy slowed in the fourth quarter, with GDP growth stuttering to 6.8%. Given that industry uses almost three quarters of the country’s power supply, it would have been strange if output had not shown a decline.
But 13.1% is a huge decline. Is it really that bad?
Actually, no. The headline number looks atrocious but it was exaggerated by seasonal circumstances – to be more exact, the timing of China’s Lunar New Year. In 2008, this huge public holiday occurred in February. This year it fell at the end of January. The Lunar New Year sees the shutdown of factories for as much as 10 days, and this leads to dramatic declines in industrial electricity usage. So the 13.1% figure is quite misleading. January of 2008 – when production was undisrupted – is being compared to January 2009 when industry got shut down for almost a third of the month. It’s hardly like-for-like.
In fact, some analysts see a silver lining in the latest power statistics. When Lunar New Year fell in February last year, the decline in power output versus January was 21%. This year the decline in power output between December and January was only 9%. That’s a shallower decline.
So it’s not that terrible after all?
The power utilities still face serious problems. The China Electricity Council estimates that – thanks to the rampant construction of power stations in the past 18 months – there is severe overcapacity. It reckons that 67 gigawatts (GW) of net new capacity will be added this year, which equates to 8.45% of total industry capacity (which was 792.5 GW at the end of 2008). It forecasts power demand for the year will rise by only 5% (the same as last year), which means new supply will outstrip demand growth by three and a half percentage points. That’s a lot of spare volts.
Will the industry make a loss?
If last year is anything to go by, the answer would be yes. According (again) to the China Electricity Council the thermal power producers made a combined loss of Rmb70 billion ($10.2 billion) in 2008.
How do electricity firms lose $10 billion?
A major problem for the power companies is they cannot control the price of their product. The government has deliberately kept electricity prices stable so as to contain inflation and keep industrial users competitive.
On the other hand, the power companies main input, coal, has soared in price.
This year the attitude of the embattled power utilities – the five biggest are Huaneng, Datang, Huadian, Guodian and China Power Investment Corporation – has hardened. They want to negotiate a lower price with the coal producers, so as to get their costs down and return to profit.
How’s that going?
If you are looking for near-impossible tasks, try remaking David Lean’s Dr Zhivago, or cutting a deal between China’s coal and electricity firms. There is a high degree of interdependence – more than 60% of the nation’s coal is used by the electric utilities – but they are like warring siblings.
In January they got together in Fuzhou to set a price. But the utilities walked away from the negotiating table and announced they will run down their coal stocks – hoping the depressed economy will see the coal firms capitulate on price. Their goal is to lock in a fixed price for the year of below Rmb400 per tonne. The big coal producers want Rmb540 a tonne. The two sides remain at a stand-off.
That doesn’t sound good. Surely there must be some positive news?
There is: China’s power planners see an opportunity in the current economic crisis. They want to use stimulus package funds to reshape the power generation landscape. After years of building new capacity, the shift this year is to spending on transmission infrastructure. Beijing will invest Rmb580 billion in 2009 on badly needed distributions grids, with this number estimated to reach Rmb1 trillion over the next two to three years.
The main vehicle for this is the State Grid Corporation which will build an ultra-high voltage power grid that spans 4,200km. In mid-January, it opened its first piece of the network, a 645km line running from Jingdongnan in Southeast Shanxi to Hubei province. Another 15 such power lines are planned.
What is ultra-high voltage?
It is a new technology that China has been working on since 2004. China will be the first country to put it into practical service – though Russia and Japan have both experimented with it. Put simply, existing transmission lines (all around the world) have a capacity of 500kv or lower. Ultra-high voltage doubles this capacity to 1000kv (for alternating current) and can thus transfer power over greater distances – with less power lost in the process.
This allows the grid to move power more efficiently from where it is generated to where it is needed. This is a particular issue in China where most of the energy generation is located inland, but two thirds of the consumption is on the coasts.
The new policy – named ‘use big, abandon small’ – will close the smaller, coal-powered power stations on the coast. That is good, since these are a major source of pollution.
Instead giant coal-fired power stations will be concentrated in Shanxi – where most Chinese coal is mined – and then distributed to coastal areas via the grid. That means less greenhouse gases wasted on the transport of coal to the coast, and frees up bottlenecked railways. Similarly, power can be moved via the grid from the hydro-electric power plants in the country’s west, and from the planned nuclear, wind and solar generation facilities.
What’s the downside?
It’s costly, but fortunately in this stimulus-charged environment that’s not a particular deterrent. So ambitions remain high; China Business Journal calls the new grid the “Mount Everest of electricity grid construction”.
The grid provides a new technology boon too; according to Shu Yinbiao, the deputy general manager of State Grid, “90% of the equipment is made in China”. More than 100 domestic electrical equipment firms are suppliers. These include firms like Tebian Electric Apparatus, Henyang Transformer and Baoding Tianwei Baobian Electric. According to Shu: “In the past, foreign brands could often be seen in China’s electricity grid construction. But in the building of ultra high voltage lines, foreign brands are hardly found.”
Just think of all that steel…
Yes, all those pylons and wire will be a much-needed boost to China’s flagging steel industry – the world’s largest. In fact, Hu Zhaoguang of State Grid’s Economic and Technology Research Institute says the building of the new grid is a win-win: it will stimulate domestic demand and also lay the foundations for a more efficient, environmentally-friendly power industry. Just like the Hoover Dam, it’s an opportunity to use a depression to invest in something big that will benefit generations to come.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.