Guangdong's Power Crunch - a Widening Gap between Supply

UNCLAS SECTION 01 OF 03 GUANGZHOU 000175 SIPDIS SENSITIVE SIPDIS EMB BEIJING FOR DOE USDOE FOR OFFICE OF THE SECRETARY USDOE FOR INTERNATIONAL AFFAIRS USDOE FOR FOSSIL POLICY AND ENERGY STATE FOR EAP/CM, EB/TRA, AND EB STATE ALSO PASS USTR FOR CHINA OFFICE E.O. 12958: N/A TAGS: ENRG ECON EMIN SENV PGOV TRGY CH SUBJECT: Guangdong's Power Crunch - a Widening Gap between Supply and Demand ¶1. (U) Summary. South China is experiencing its worst power shortages in thirty years. An annual problem, the situation in the region intensified due to January's winter storms as Guangdong imports almost all of its power from other provinces whose power generation capabilities were affected. The combination of damage caused by severe weather, competition between market and retail prices, and growing demand levels, is likely to remain an obstacle to solving an ever-growing power crisis. One official pointed out that national regulations requiring the simultaneous elimination of small, inefficient plants before new construction exacerbate the shortages. In the wake of these pressures and supply constraints, the peak summer period is predicted to be riddled with widespread "brownouts." End Summary. -------------- Supply Not Keeping Pace with Demand -------------- ¶2. (SBU) Guangdong officials warn that the province is facing its worse energy shortages in thirty years. The Guangdong Economic and Trade Commission (ETC) conservatively estimated the supply shortfall to be 7 million kilowatts, while the China Southern Power Grid estimated a gap of between 9.5 and 10.5 million kilowatts. Official media reports citing provincial officials predict that the gap could reach 12 million kilowatts during periods of peak demand. ¶3. (SBU) Guangdong's power generating capacity has not grown quickly enough to keep up with demand. According to Rao Subo, Deputy Engineering Chief of the Yudean Group, Guangdong province's leading supplier of power, since 2000, Guangdong's power consumption has grown at an annual rate of 13%. At the end of 2007, Guangdong had an installed capacity of 60 million kilowatts, which is expected to grow by only 7-8 million kilowatts over the next two years, a pace far slower than growth in consumption. ¶4. (U) Guangdong's power supply is primarily composed of three parts. The province's "official capacity" consists mainly of 1) power generated by large-scale state-owned power plants, which are mostly located in other provinces and 2) the West-to-East power transmission project, which includes power supplied from the Three Gorges Dam, Guizhou, Guangxi, and Yunnan. The third source is power generated by small hydro-power plants or diesel power plants located in rural areas, and commonly referred to as "backyard generators." These are highly sensitive to weather conditions and are therefore less reliable. Many of these small-scale and inefficient power plants are in the process of being phased out. ¶5. (SBU) Over the long-term, Guangdong expects to add 16 million kilowatts to its annual installed capacity, but this will not be enough. Critics of the Central Government's current regulation regarding the construction of new power facilities, including Rao, argue that the central government, which authorizes all new power projects through the National Development and Reform Commission (NDRC),should increase the approval rate for proposed plants in Guangdong. Mo Jianbin, Deputy Director of Guangdong's Economic and Trade Commission's Electric Power and Energy Section (GD ETC), commented that national regulations exacerbate the shortages, requiring that new construction cannot occur without simultaneous elimination of smaller, less-efficient facilities. While this policy may be beneficial in the long run by increasing the use of energy-efficient, clean technologies; in the short-term, it does little to alleviate supply constraints. -------------- Winter's Toll -------------- ¶6. (U) January's severe winter storms exhausted power supplies and caused outages across China. Since Guangdong imports most of its power from other provinces, the results of the storm's aftermath continue to affect its power supply even though it was spared the most severe weather. Snowstorms in western provinces cut the capacity of the West-to-East project to transmit electricity to Guangdong from 15 million kilowatts to 2.5 million kilowatts, according to Yuedan's Rao. In addition, severe conditions in Guizhou, Hubei, and Hunan provinces reduced Guangdong's supply by GUANGZHOU 00000175 002 OF 003 another 6.3 million kilowatts of power. ¶7. (U) In response to the winter supply constraints, the Yudean Group, which is responsible for one third of power generation in Guangdong and maintains a capacity of approximately 21 million kilowatts spread across several provinces, implemented an emergency action plan to counter wide-scale shortages. Their plan included: -- utilization of all spare power generating units, -- suspension of all scheduled maintenance on generators, and -- close coordination with coalmines in northern China to ensure continued supply. In addition, local government instituted an action plan focused on coal transportation, which helped increase coal reserves in the province above "safe reserve" levels. -------------- The Pending Summer Crisis -------------- ¶8. (SBU) Going forward, anxiety looms as south China prepares to enter the summer months, a peak season usually plagued by increased "brown-outs." Rao estimates that Guangdong's power shortage will reach 8 - 10 million kilowatts during this year's summer months. While the summer season presents its own set of problems under regular operating conditions, the aftermath of January's storms adds additional pressure. Construction to repair the damage to transmission lines feeding into Guangdong province continues. The GD ETC estimates that the damage won't be fully repaired until the second half of the year. In addition to weather damage, increased residential-level consumption of power as more homes acquire air conditioners is expected to amplify the problem. -------------- Price Controls - The Elephant in the Room -------------- ¶9. (SBU) In addition to weather-related challenges, the issue of price continues to be the 'elephant-in-the-room' for policy-makers sorting through possible solutions for the growing crisis, according to Mo. While market prices of coal and other fuels increase, the government continues to cap domestic electricity prices in order to check inflation. The growing gap in market versus retail prices has forced some power generating companies to cut supply, sometimes rationing output to counter dwindling profit margins. Continued public pressure means low power costs will likely remain a policy priority. However, Guangdong ETC's Mo told us that his agency will work with the pricing officials to raise the price of electricity generated by liquefied natural gas (LNG) to address the gap between output prices and production costs. -------------- -------------- Taking Action: Plans to counter increasing outages -------------- -------------- ¶10. (SBU) The Guangdong provincial government has implemented a variety of new policies to reduce outages, focused primarily on limiting power consumption by energy inefficient, polluting enterprises. During peak consumption hours, many of these enterprises are cut from the power grid. Others are only allowed to operate four days a week, a practice known as "peak-load shifting." Mo emphasized that this practice is based on national policy directives. In the past many of these corporations have also been charged more for electricity, essentially creating an informal tax for inefficiency. ¶11. (SBU) The GD ETC claims that enterprises do not object to this practice. Mo said one possible reason may be the use by some enterprses /f!priv`dgly-owned dIe3el gendrcosc Awq su{tip5|d-JltrkNgtk-as8uHa/(sep0liewyru$#}tQ 5bgwwdq.yuun,#tj%