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China’s Real Olympic Challenge: Managing Capacity Shortfalls

August 6th, 2008 by Fereidoon Sioshansi, EEnergy Informer

Clampdown on illegal coal mining, rapid economic growth and subsidized prices have result in power shortages, surprised?

While the media attention will be focused on the Beijing Olympic games, Chinese authorities are distracted by looming electricity shortages now affecting half of the country’s provinces. The problem – expected to exceed serious shortages experienced in 2004 – is blamed on rapid economic growth and a government clampdown on illegal coal mining by small operators with notoriously poor safety records. These operators, however, account for roughly a third of the coal production in a country that relies on coal for 80+% of its electricity generation.

20080804_01_china_olympic

Source: BP Statistical Review of World Energy 2007

More fundamentally, China’s chronic power shortages are the result of inappropriate government pricing policies – the sort of stuff taught in Economics 101. If the price is set too low, below its true cost and relative value, too much will be consumed. China, like many other rapidly developing countries, has traditionally subsidized energy consumption to encourage economic growth and as a way of supporting its vast underclass population. These are laudable goals, but as any economist will point out, low prices result in over-consumption.

Aware of the un-sustainability of the situation, officials recently raised electricity prices by roughly 5% – but experts believe that prices are still 30% or more below what they need to be. Coal prices in China have doubled since the start of the year and that has not yet been incorporated into the price regime. In the mean time, China’s economy continues to grow at 10% or better, straining the government’s resources to keep pace. Electricity demand has doubled over the past 5 years alone, and there is little sign of relief, unless there is not enough power to feed the factories

F.P. Shioshansi

This post is extracted from EEnergy Informer, August 2008 issue.

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2 Responses to “China’s Real Olympic Challenge: Managing Capacity Shortfalls”

  1. McLovin Says:

    Perhaps when China gets real prices for energy they will become less competitive and all the stuff about “the next empire” is only a bluff.

  2. franstine Says:

    Well, i see the problem differently. First of all, i don’t think there is a real clampdown on illegal coal mining. If there is a real clamgdown, given the full centralised power of the chinese government, i don’t see why the illegal coal still serves one third of coal production in Chine.

    Secondly, as a different view from that of Mclovin, once China gets real prices for energy, the structure of industries in Chine will be forced to transformed in favor of less polluted and more value added industries, It’s good for the chinese people. Maybe there wil have some peinfull transitional period, but the direction is right and good for China.

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