China Environmental Law

The coal business in China is completely dysfunctional, and it is no wonder that China’s power plants are living on razor thin inventories and blackouts are predicted.  The Economic Observer Online has a fascinating article, “Battling for Coal,” which profiles a coal buyer for a Hunan Province power generator holed up in Shanxi Province for two months trying to clinch a deal for coal at a price his company can afford.  Why is the coal buyer Cai Wending so far afield?

The power plant Cai worked for was a typical one in Hunan province, surrounded by small-scale coal mines. Yet, nearby power plants started competing for the resources in the region in recent years and drove up prices.

In recent years, more and more power plants in northern Guangdong province had invaded the Hunan coal market by offering higher prices; and with the opening of Beijing-Zhuhai expressway, transportation between Hunan and the Pearl Delta region had improved greatly, further attracting more coal search teams from the south.

External demand had then pushed up local prices, thus leading to the Hunan local government restricting out-of-province coal supplies. That policy, however, only led to smuggling.

“Our boiler is designed for using Hunan-produced coal, it is costly to redesign the boiler,” said a thermal power plant manager from Guangdong.

The local Hunan authorities apparently frustrated by their inability to keep local coal for local power producers issued a new circular in May which

demanded local mines to supply coal based on its electricity consumption. The circular also required mines to ensure timely, transparent and quality supply to local power plants.

“If local mines failed to supply coal to local power plants on time, they would experience a power cut,” explained Cai. However, he believed this could only be a temporary measure and might not yield the desired result, as most coal mines had their own power generators.

Negotiations are tough for Cai and are made tougher by the unscrupulous actions of private coal mine owners

Cai claimed that if coal mines fulfilled their contract obligations on a timely basis, local power plants would not have faced shortage, adding private mines were usually small-scale and poor in delivery.

“Private mines are more profit-minded and whenever they could sell for better prices, they would cut or even stop supplying to our plant,” Cai claimed.

Many of these private operations are illegal and notoriously cavalier about mine safety (as the frequent reports of fatal coal mine accidents in China attest), so its probably unrealistic to hope they would let a little contract stand in their way.

Not surprisingly, given that it has been flooded with out-of-Province buyers, Shanxi Province is feeling a coal supply pinch as well. In an article in today’s China Daily

Shanxi province, which produces one-fourth of China’s coal, has witnessed approximately 5,000 mW of power shortages, the highest level recorded in recent years.

The province has an installed power capacity of 34,340 mW. However, power generators with capacity of 3,500 mW halted production because of coal shortage, accounting for 15.2 percent, said the regulator.

“The tense situation caused by the coal supply and the rise in coal price has had a big impact on the province’s power companies,” said Li Fulong, director of the provincial price bureau.

To help power producers faced with significant rises in coal prices, the National Development and Reform Commission (NDRC) raised the price paid by grid operators to power generators on July 1.

The increase will account for up to 80 percent of the overall hike in retail power prices for industrial and commercial users that NDRC announced June 19. . . . At the same time, the commission capped the price of coal paid by power plants.

While this tariff tinkering may provide a small amount of financial relief to power generators, few people are optimistic the price cap on coal will work (as noted in China Stakes)

price intervention, far from stabilizing the market, will actually reduce the supply of power coal, leading to even greater demand and pushing ever higher the coal spot price.

Reduced supplies of coal are something China can’t afford right now.  According to The Economic Observer Online

Based on June 2 data from China’s State Electricity Regulatory Commission (SERC), thermal power plants nationwide with a capacity above 10,000 kilowatts had stocked up a total of 372,000 metric tons of coal.

This amount of coal reserves could only last for 11 days worth of power generation. Some provinces experienced acute coal shortage, and could only remain in production for under a week, these included Hebei (4.8 days), Anhui (3.2 days), Hunan (3.4 days) and Hainan (5 days).

As noted above, the situation in Shanxi and elsewhere in China has caused some power producers to shutdown, as a result, the China Daily article states

This summer, some regions in China will see blackouts, according to the State Electricity Regulatory Commission. An official from the commission earlier told China Daily that in the summer, the gap between power supply and demand would be 16 gW.

China may have been able to plan its way out of this mess before it split up the state power monopolies and decoupled the grid and generation, having taken some structural measures toward a free market, however, China finds itself ill-equipped to plan in an environment with so many free radicals.  It needs to either pull back into a strong centrally-planned power supply structure or it needs let the market work.  Dabbling in this grey zone, as I’m sure the leadership is acutely aware, is a fool’s game.