The Hindu Business Line : On what drives the dragon and how the giant organises electricity

AN ISLAMABAD datelined story on www.greaterkashmir.com speaks of India offering to share with Pakistan the electricity "from the controversial Baglihar and Kishanganga hydropower projects located on the Chenab and Jehlum rivers". Meanwhile, BBC News reports, "Mumbai commuters hit by power cut", and a fresh posting on www.guardian.co.uk is a video footage of "a deadly clash between farmers and gangs employed by a Chinese electricity company".

Deciding to catch up theselater on, I connect with "China Power Sector" from China Knowledge Press (www.chinaknowledge.com). For, electricity is really just organised lightning, said George Carlin, and here is a book on what powers the dragon and how the giant organises electricity.

The market research report is aimed at those interested in investing in the country's power sector, and also other China-watchers. The executive summary, however, cautions that the sector is in the throes of a complicated deregulation process "aimed at breaking up the monopolistic status of the former State Power Company", and that foreign investors might be vulnerable to some problems.

Part one of the book introduces the reader to the power sector. First, a few facts: Thermal plants constitute almost three-fourths of the total 353 GW of installed generation capacity, while nuclear hovers around one per cent. The balance, of about a quarter, is from hydropower. About 70 per cent of thermal power capacity resides in coal-fired power plants, which are mostly small in size and run on old combustion technology at a thermal efficiency of 38 per cent.

Though China's power industry ranks second in the world, electricity consumption per capita is only 1255 kWh, which is less than half of the world's average, and only 13 per cent of the OECD's, says the book.

"However, China's CO2/GDP is 2.5 times higher than the world's average and 4.4 times higher than that of OECD countries," indicating the worrying levels of pollution and also the low energy conversion efficiency.

"Within the coal-consuming industry, the power sector is the biggest, accounting for 50 to 60 per cent of coal consumption and responsible for about 30 per cent of total SO2 emission."

To control the menace, big power plants are mandated to install desulphurisation equipment. "The nation shall implement a time-limited system for the elimination of obsolete or obsolescent production technologies, processes, equipment and products gravely hazardous to environments and wasteful of resources," reads Article 12 of a new statute called Cleaner Production Promotion Law. Year 2005 targets for China are to populate half of the thermal sector with 300 MW and above units, reduce coal consumption to 380 g standard coal/ kWh from 394 g/kWh in 2000. After completing the `separation of operation from administration', the next phase of reforms will be aimed at `separating power generation from the grid, bidding for tariffs under state's supervision', states the research work. An electricity pricing mechanism is said to be at the heart of the reforms.

"Under the Communist system, the prices of electricity, like other products, were only for accounting and recording purposes and they were not decided by demand and supply considerations. Generation units had no incentive to increase productivity while consuming enterprises — also owned by the State - were lukewarm about increasing efficiency of energy utilisation," recounts the book.

The promise now is of a new tariff-setting mechanism that will send "a clear market signal in order to rationally allocate scarce resources." The industry watchdog, SERC or State Electricity Regulatory Commission has divided tariff into four components, viz. prices for generation, transmission, distribution, and end-users.

"The generation and end-user prices will be decided by the market, but the government - with its monopoly on transmission and distribution systems — will set transmission and distribution prices."

Accountants will find useful the discussions on how `cost plus fixed rate of return' encourages investment but leads to very complicated pricing, on LRMC or long-run marginal cost that fixed the operation period of thermal plants at 20 years, and on the two-component policy that factors in both capacity and quantity.

A time-differentiated policy has been introduced in Henan, to charge at 133.5 per cent of normal price during peak hours, and at 50 per cent during the valley period. "Since electricity cannot be stored directly, variable demand means that there is insufficient supply during peak hours, while some portion of generating capacity is forced to stop running at valley times," explains the book. "Frequent starting and stopping shortens the life span of generating units and decreases the efficiency of energy utilisation. It may even cause the collapse of the whole grid system," observes the book.

Part two of the book deals with `demand and supply'. A chapter is devoted to `developmental indicators of the power sector' such as: Generation equipment utilised hours, ratio of consumption capacity to generation capacity (as an indication of potential electricity demand), elasticity ratio of electricity produced (computed as average annual growth rate of electricity production upon that of national economy), ratio of constructing capacity to new generation capacity, and so on.

Ironically, the year 1999 witnessed `a serious oversupply of electricity', when there was a rapid decline of utilised hours.

China's aluminium industry is also running on old technologies and is, therefore, consuming disproportionately more electricity, states the book. "Textile and papermaking are two other high-electricity-consumption industries."

No discussion of China's power in power is complete without meandering through the Three Gorges and the ambitious gas project west-to-east.

"Most natural gas reserves are located in the centre, northwest and coastal waters, while the main natural gas consumption regions are in the east," explains the book. The 4,200-km pipeline with a diameter of 1.118 metres and adding up to an investment of RMB 38.4 billion will be a win-win solution, it is said, because the east gets the power it needs, and the west receives huge investment to effect economic development.

"The complete pipeline is scheduled for commissioning in 2005, with an annual volume transmission of 12 bcm of natural gas." Though a gigantic project, the share of natural gas in China's energy mix will only increase by 1 to 2 per cent, it is anticipated.

Before I switch off, a headline from www.thestandard.com.hk grabs attention. It is about Shanghai rationing power from June 15 to bridge the gap between supply and demand during the hot summer months; as a result, "all industrial operations could face shutdowns during the hottest weeks, from the middle of next month through to the end of August, and thousands are likely to suspend production or transfer work to overnight shifts."

What a grim scenario, but that makes it all the more essential for you to plug into this power-read from China Market Research.

Economics@TheHindu.co.in

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