Xiao Peng, the deputy GM of CSPG, revealed that, due to a recent shortage of coal in the power plants that provide the juice for the CSPG, many generators with a total capacity of 10.3 million kilowatts were left idle. As a result, Guizhou province produced 4.2 million kilowatts less electricity than its normal operating capacity. Yunnan and Guangxi provinces also produced 3.8 million and 2.3 million kilowatts less respectively. "Many generators were left idle for the first time since the establishment of CSPG." Regarding this situation, CSPG wrote an urgent report to the National Development and Reform Commission (NDRC), the authority is in charge of the Chinese energy policy.

CSPG supplies electricity to Guangdong province, one of China’s economic growth engines, as well as to its four neighboring provinces. In 2008, the company will find it hard to satisfy the electricity demands of these provinces. Last year, the power supply in these provinces was tight to the demand and it is expected it will only get worse. Xiao Peng calculated the annual electricity shortage to be around 6 million kilowatts. CSPG will have to purchase Hong Kong electricity and Three Gorge  Dam electricity at an expensive price in order to ensure a stable supply for the provinces it covers.

The pressure of emission reduction

In order to reduce egregious energy consumption, NDRC has asked CSPG to cut small thermal power plants up to 13.27 million kilowatts during 2006-2010, accounting for 19% of the total thermal power capacity. In 2007, CSPG cut down 3.5 million kilowatts capacity by closing down a few small power plants, 210,000 kilowatts more than their goal. Meanwhile, NDRC plans to have 164 million kilowatts of capacity by the year of 2010 and to further the use of hydroelectric power, wind power together with other recyclable energy to account for 34% of total capacity. But at the moment, this is just a plan and nothing else.

Pressed by energy saving and pollution reduction policies, the electricity sector has taken some energy reduction measures and updated with more efficient generators. But, due to insufficient power grid technology and machines wearing out, generators are unable to operate in full capacity and there is therefore a limited potential to achieve coal-savings with these new machines.

Shortage of coal and rocketing prices  

In China’s southern region, there is not enough coal to generate the required electricity and the rising price of coal isn’t helping the situation. Most coalmines in China are located in the northern and western regions but it is the east and the south that demands the most electricity. Therefore, the transportation of coal has always proved challenging and constraining on power supply. Faced with a net growth of 70-75 million kilowatts of thermal power, the transportation capacity is far from enough. The difficulty of transporting coal around the country has also been the main factor pushing up the price of coal. Moreover, work safety issues in many coalmines have posed serious problems. Recently, the government conducted more investigations into coalmine accidents in efforts to reduce risks in many southern mines. Some small-scale coalmines were closed down, again affecting the coal supply.

Since the beginning of 2007, the domestic coal price has kept rising. In 2008 the coal price for purchasing contracts increased by more than 10%, and it is expected to continue to go up after the Spring Festival.

Already a net coal importer

Currently, some southern port cities and their economic center, Guangzhou, are picking up the pace on importing coal from South East Asia. China, traditionally the coal exporter and the biggest consumer of coal, is having problems satisfying its own demands. China is taking stronger measures to close down illegal and unsafe coalmines, leading to a lower coal production capacity. Meanwhile, domestic demand on coal keeps growing. In an effort to encourage an influx of foreign coal, China has lowered its tariff on coal imports.  In 2007, the country imported a total volume of 51.02 million tons of coal, up by 34%. China’s net export of coal in 2007 was 2.15 million tons.

A rigid regulatory system

In China, the State sets the price of electricity.  So, despite the rising price of coal, power plants are not allowed to charge the power grid more for their supply and in turn, the grid is not allowed to charge its consumers more. This means that the higher coal price, which the power plants can’t afford, cannot be passed onto the consumers. And they can’t turn on most of their fuel driven generators because of skyrocketing global oil prices. In short, regulators did not appropriately loosen their control over the prices of coal and electricity, resulting in the shortage of electricity.

The power grid business is very profitable. The CSPG, seeking a potential IPO, has an 11% return on assets, greatly surpassing the 6%-8% of the international average. Currently, industry insiders are calling for regulators to let power plants to charge more on grid. In order to cope with the ever-worsening inflation, however, the government has instead set a fixed price.