China’s Power Shortage: Challenges Today, Opportunities Tomorrow

China’s Power Shortage: Challenges Today, Opportunities TomorrowEnterprises in China are suffering the most serious off-season power shortage since 2004, bringing about great concern that the power supply deficiency will be exacerbated during the coming summer.

Click here to get up to speed on China’s power shortage.

East China’s Yangtze River Delta region, one of the country’s primary economic growth engines, has been forced to slow itself down due to the rare slack-season power supply crisis. As key indicators of this power deficiency, the world’s second largest steel producer Shanghai Baosteel has received a government notice that its electricity use for production will be restricted between June and September, many manufacturers in Zhejiang Province have been forced to take two-days of production off every week, and the Jiangsu power station has also foreseen a 16 percent – or 11 gigawatt – of supply gap in the province during the coming peak season.

Realizing that the situation could very well get much worse, the Chinese Ministry of Industry and Information Technology released an urgent circular on May 10, calling for enterprises to better manage their demand for power. It requests industrial enterprises to follow the principle of “creating the most industrial output with minimized energy consumption” and make reasonable priority lists for power use, so that producers can decrease the waste in energy to the lowest level.

However, the Chinese public is wondering if better management on the demand side is enough to solve the problem, since the tension between power supply and demand has long existed. While the demand surge is inevitable with the economic recovery, power stations are not producing enough. Not that they do not have the capacity – some 60 percent of China’s power generation capacity stays idle, but they just can’t afford more production because of the expensive transmission that is eating away at their profits. China’s state-owned grid received revenues of RMB2.19 trillion during the first 11 months last year, taking up 65 percent of China’s whole power industry’s revenue, and 42 percent of its total profit. In comparison, power stations that are not seeing electricity rates go up will lose even more if they produce more.

Enterprises in China may want to study the country’s power supply dilemma to get prepared for the challenges it brings. They may suffer losses after a sudden power cut that stops streamline operations, they may expect diminished production capacity in the several coming months, or they may even worry about a electricity rate raise in the future, which means increasing production costs.

However, every imperfect industry in a country also generates new opportunities. While foreign investors were previously stopped outside the door of China’s power transmission sector, last year the government has started to welcome their participation in the country’s smart grid development – a sector that covers numerous industries including grid technology, power equipment, information and communication, as well as new energy. The new industry is expected to generate a lucrative market with a value of over RMB1 trillion.

For professional assistance, please contact Rosario di Maggio: rosario.dimaggio@dezshira.com or visit www.dezshira.com

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China Briefing hosts a wealth of business intelligence on legal, tax, and operational issues in China from a practical perspective. Knowledge, expertise and commentary for China Briefing is regularly contributed by Dezan Shira & Associates´ professional legal and tax staff. Currently located in Futian district, Dezan Shira & Associates has been assisting foreign companies in Shenzhen for 22 years.

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