Drought, inflation and generators
May 24, 2011 by Jules
When it doesn't rain it pours
While 50 years droughts hit central China along the Yangtze river, prompting a mass release of water from the Three Gorges Dam, this summer will be hot on more than one front:
- electrical power production is constrained by utilities, which run at a loss when buying record high priced coal on the international spot market but have to sell at government appointed prices. As a result, and much Sinopec and Petrochina in 2008, utilities are dragging their feet and planning an unusual number of maintenance closures this summer.
- inflation is of course the reason why the PRC government is holding back energy prices. While the price of petrol has gone steadily up since 2008, China still subsidises consumption by holding pump prices artificially low. And for now the fight against inflation is a no holds barred affair, especially if punches can be aimed at foreign business (populism is the same worldwide). In the last few weeks the government also made headlines by fining a well known western FMCG company for merely considering the introduction of a price hike in China and making the mistake of saying so.
- hydro power generation will obviously be impacted if dam water levels are run low in late spring to compensate for drought
- small scale power generation is expensive and messy. Factories in Zhejiang, Hunan, Guangdong, Jiangsu that do not have generators are already facing power cuts now, before the peak electricity consumption season, summer, when consumers crank up air conditioning and factories ramp up for peak season. In all 11 provinces are already issuing warnings.
- electricity consumption continues its relentless surge. The government subsidies of 2008-2009 to boost rural consumption of air conditioners and washing machines in an effort to boost domestic consumption and reduce living standards disparity between town and country are paying off too well, energy production has not caught up yet.
- scale is large: Remember those ads by ABB in 2005-6 about how China was adding the power generation capacity of the UK to its electrical grid each year? It is much more now... smart grid anyone ?
- labour cost inflation and unrest is next: flexibility comes from the workers. Factories adjust to the availability of electricity by working at odd times of the day or week, which will probably lead to additional labour demands.
Interesting articles on the subject in the Financial Times and New York Times
In: Market News