Author: Dominic Meagher

In May we wrote about China running out of coal and repeated the economic truism that there’s no such thing as a shortage; only a price that needs to go up.

Yesterday, China’s grid price for electricity went up for the second time in two months (except in Tibet) [NDRC].

Source: Rosen and Houser (2007) China Energy: A guide for the perplexed

There have been months of negotiations and lobbying between China’s energy producing firms (especially the five firms which dominate the market**), the two state-owned grid companies, the National Development and Reform Commission (NDRC), provincial officials and probably the SERC and SAAC as well. [See Rosen and Houser's eminently readable, China Energy: A Guide for the Perplexed (p24-25) for details]

During those negotiations, the Chinese people have had to put up with frequent electricity shortages. This circumstance is reminiscent of 2002-2003, when small cities routinely went without electricity for entire weekends. The NDRC has come up with a band-aid solution (see over the fold), but unless China embarks on a more comprehensive reform of its electricity market, 3-4 years from now China will be experiencing wide spread and frequent power shortages again.

On Tuesday, the NDRC announced (Chinese only) that the price at which coal based electricity generators can sell electricity to the grid networks would rise by between 10-25 RMB per MWh, effective Wednesday.

For context, see this statement released by Huaneng Power International, detailing their on-grid tariffs both before and after the price adjustment. Huaneng now charges just under 250 RMB/MWh in Gansu Province (their lowest rate) and just over 520 RMB/MWh in Guangdong (their highest rate, excluding their Combined-cycle plant in Shanghai, which is a bit of an outlier at 604 RMB/MWh). The rise represents around 4-5% of current prices. Last month’s price rise was around the same magnitude [Wall Street Journal].

In mid-June the NDRC raised the price of oil in China by 18% (see my post: Understanding China’s oil prices). It remains to be seen how long yesterday’s 4-5% price hike will mollify China’s big 5 electricity generators. It is unlikely to be long, and once they decide they need to raise their prices again, they’ll resort to cutting supply (deliberate electricity shortages) to pressure the government into agreeing.

The problem here is not that prices are too low; its that they don’t adjust quickly enough. This problem is inherent in a system where government sets prices. Flexible prices allow markets to clear (supply to match demand). If the price is fixed in a changing market, supply will not match demand. The result is either surplus or shortage. In this case, wide spread shortages of electricity.

As long as power generators face market prices for their inputs and central-government-mandated prices for their outputs, this is a history that will be repeated in China again and again.

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** From Zhao Yong, in Drysdale, Jiang and Meagher (eds) (2007): Five firms manage and operate 36 per cent of China’s electricity generating assets: 1) China Huaneng Group, 2) China Datang Group, 3) China Guodian Group, 4) China Huadian Group, 5) China Power Investment Group. Much of the rest is operated by relatively small firms.
China’s 7 regional grids are managed by the State Power Grid Company and the Southern China Grid Company (both state owned).
NDRC = National Development and Reform Commission
SERC = State Electricity Regulatory Commission
SAAC = State-owned Assets Administration Commission