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China takes steps to fend off another power, diesel 'perfect storm'

By Calvin Lee in Singapore, with Silvia Yu in Shanghai

June 2, 2011 - China's policymakers have taken several measures in recent days to head off a repeat of the situation that occurred in late 2010, when an electricity shortage and power rationing led to a severe diesel supply crunch as manufacturers switched to using the fuel to run their captive power units. (See related chart: China power production and consumption: 2010-11).

An electricity shortage in the first quarter of this year has seen more than 500,000 enterprises in East China's Zhejiang province operating on insufficient power supplies, with the blame placed on rapidly expanding power demand, sharply reduced hydropower because of a lingering drought, and high coal prices amid regulated power prices that have kept utilities wary of running at full capacity.

A previous shortfall of electricity supply in the fourth quarter of 2010 had industrial power consumers using diesel for power generation, leading to severe shortages of the transport fuel -- petrol pumps ran dry and retailers were forced to ration their sales. (Listen to related podcast: Implications of China's electricity shortage).

The International Energy Agency estimated China's gasoil shortfall at 70,000 b/d over October 2010-February 2011.

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Only then, instead of the problem stemming from a drop in hydropower and increased demand, local governments had switched off electricity supplies to meet commitments made on energy conservation and emissions reductions.

The end result has been the same, with manufacturing companies struggling to maintain output amid constrained power supplies.

"As a quarter of our company's factories are based in eastern China, the electricity shortage in eastern China areas has caused several factories to reduce production or suspend production altogether," said Zhou Linying, secretary of the board at Shenzhen-listed Xinjiang Tianshan Cement Co.

An official from the state grid was quoted last week by the official Xinhua news agency as saying that an expected power shortage during the upcoming peak summer demand period could be worse than the shortfall that occurred in 2004.

China power production and consumption: 2010-11

As least 10 provincial grids, covering regions such as Beijing, Tianjin, Shanghai and industrial provinces of Hebei, Jiangsu and Zhejiang, would be hit by power shortages, the report quoted Shuai Junqing, the State Grid Corp. of China's executive vice president, as saying.

In 2004, China suffered the worst power shortage in two decades, with power cuts or limits imposed in 27 out of its 31 provinces, municipalities and autonomous regions.

NDRC hikes power prices

To ease the power shortfall and forestall another diesel shortage ahead of the peak summer demand, the country's top economic planner the National Development and Reform Commission raised prices on May 30 for electricity used for industrial, commercial and agricultural purposes in some regions by around Yuan 20 ($3.08) per 1,000 kWh.

Electricity prices for residential users remain unchanged.

The commission said the price increases were designed to ease regional power shortages, restrain the development of energy-intensive industries and ensure a steady supply of electricity for residential use.

The hike would only help electricity producers to cover losses caused by raising coal costs, rather than negate losses generated by rapidly expanding industrial development, the NDRC said.

The provinces and municipalities affected by the price hikes are Shanxi, Qinghai, Gansu, Jiangxi, Hainan, Shaanxi, Shandong, Hunan, Chongqing, Anhui, Henan, Hubei, Sichuan, Hebei and Guizhou.

Shanxi province, the country's biggest coal producer, saw the largest price increase, at Yuan 24 per 1,000 kWh, compared with a rise of Yuan 4 per 1,000 kWh in southwest China's Sichuan province.

The China Electricity Council has, however, warned that power supplies are expected to be tight for the rest of the year, especially during the summer when demand is expected to surpass supply by 30 million kW or more.

The NDRC has also, meanwhile, temporarily suspended diesel exports, except for regular cargoes shipped to Hong Kong and Macau, in order to ensure sufficient supply for the domestic markets.

It has also asked state-owned refiners Sinopec and PetroChina to keep operating at full capacity, make "reasonable arrangements" for maintenance, and optimize the production schedule to increase supply of oil products.

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