Many economists and analysts aver that China’s power policy is lop-sided. The producers (generating stations) are not allowed to increase tariffs in line with the costs of production. This is to enable the consumer (industry and middle classes in particular) pay less.
Under Communist capitalism, the producer may not be the king but he has the second best means to teach the consumer a lesson or two. That is cut backs in production and this is what has happened leading to the worst power shortage in seven years. The shortage is set to worsen as electricity demand rises during the peak summer months – a period when there is less water in hydel reservoirs and hence less power generation.
During May – October 2010, hydro-power contributed just a fifth of total generation. And now the State Grid Corporation of China forecasts a power deficit of over 30-40 gigawatts during the summer peak season. One expert says if there is a 30 GW deficit from June to August, the drag on full-year economic growth could be as big as 0.4 percentage point.
What is the government’s response to the crisis? Well it is conventional – restrictions on consumption by big users like steel mills and aluminium shelter. In Shanghai, the energy guzzling showpiece of China, glitzy neon-lights are to be switched off. Diesel exports are banned, and gas imports are stepped up to provide feedstock for power plants.
These are small steps and effective as talking points. In no way, these measures offer a power nirvana nor will they avert the slowdown of the economy which topped ten percent last year.
Listening to economists whose expertise is on the supply side offer no way out either because the prescription they offer, as always, is a hike in tariffs saying that power shortages and low tariffs are perennial problem in China.
Unlike in 2004, when China faced its biggest power crisis unable to keep with demand, today the country has the capacity to generate enough power. What it lacks is the political will to produce enough if not more.
In other words, the same old problem is staring at China – how to balance the interests of producers and consumers.
Its stock in practice is keeping the production costs low artificially, whether it is agriculture or power. May be the logic is that Communist rule is for the proletariat or more precisely for a chosen few and the princelings.
In a command- control economy such approach meets with no resistance but not when market forces are allowed a free-play and when the country is showcased as the land of cheap labour, cheaper input costs and higher profit margins.
Time therefore it is for the Chinese leadership to revert to the strategy session for a durable solution on what constitutes an incentive price to the producers and durable tariff for the consumer. Any attempt at subsidising the consumer while keeping the producer happy or vice versa will only burden the economy. And monetary controls to tame inflation which is running at more than five percent will stifle growth. In other words, it is call for focus on the root cause, not short cuts for dollars, like naming a university hall after a jean brand like Tsinghua University did.
