A coal shortage has forced Chinese power companies to idle nearly 1 percent of the nation's estimated electricity generating capacity in recent weeks, while continuing increases in prices and falling supplies of coal portend possible outages during the coming summer peak period for electricity demand.
 
Since late May, trading prices for power plant-grade coal at the Shandong Province port of Qinhuangdao have hit record highs. And during the first week of June, the price of a high-thermal value coal called "Datong quality mix" reached 800 yuan per ton, compared with less than 600 yuan at the beginning of the year.

As coal prices continue to climb, supplies have been tightening. And power companies have been losing money. Between January and the end of April, China's five largest power companies lost a combined 5 billion yuan.

"Power generating companies are facing a hard time," said a senior manager from Huadian Group, one of the country's top power suppliers.

Banks have tightened loans to power companies due to the shortage. Meanwhile, as supplies shrink, more coal suppliers are requiring that power companies pay in cash, which has pushed capital-short power plants to dig into their coal reserves.

The lack of coal has forced an increasing number of power generators to halt operations, Yu Yanshan, an official with the China Electricity Regulatory Commission (CERC), told Caijing.

By the end of May, Yu said, 35 turbines at power stations had been idled nationwide, reducing generation capacity by more than 6 million kilowatts. At the end of 2007, China's nationwide generating capacity was an estimated 700 million kilowatts. The number of idled turbines had climbed to 41 by June 3.

CERC says coal-fired power plants with more than 100 megawatts of capacity have stocked a total 44 million tons in coal reserves. But it's a thin safety margin. Plants in many provinces including Hebei, Anhui, Hunan and Hainan have less than seven days of coal reserves.

"If the situation continues, electric supply shortages will appear," said a source at power producer China Huadian Group.

Seeking a Way Out

The government is looking for a way around the supply shortage, with the National Development and Reform Commission (NDRC) spearheading studies aimed at finding a solution.

Caijing learned that possible solutions include expanding coal production, coal price intervention, lifting grid power prices, offering subsidies or tax preferences to power plants, and implementing a linking mechanism for coal and electricity prices.

Regardless, the immediate task is to boost coal supplies. But several hurdles stand in the way.

A source at Huadian told Caijing that in Datong, a city in China's coal-rich Shanxi Province, safety issues have forced nearly 80 percent of coal mining companies to halt operations since late 2007, worsening the nationwide shortages.

Rising coal prices and low supplies are behind the shutdown of more than 10 turbines operated by China Power Investment Co. in Shanxi, a company source told Caijing.

Meanwhile NDRC has ordered major coal producing provinces including Shanxi, Sichuan and Inner Mongolia to expand production at large-scale coal mines, Caijing learned. Also, small- to medium-sized mines are being told to resume operations after safety inspections.

Some local governments have taken measures to intervene in coal prices. The government of Shandong, for example, issued an urgent circular to cap thermal coal prices and secure domestic power plant supplies.

However, analysts see nationwide intervention into coal prices as impractical. They say such steps may even worsen the shortage of coal.

Subsidy, or Price Hike?

China has linked coal and electricity prices since 2005 through a mechanism allowing power plants to apply to lift electric retail prices based on increases in coal prices. But the mechanism has been implemented only twice in the past three years because the government fears higher power costs will have a broad impact on the economy. Concern about inflation this year has further diminished the possibility of power price hikes in line with higher coal prices.

Besides implementing a price linkage mechanism, NDRC has also considered plans to adjust power plants prices for distribution grids and grant financial subsidies to power plants. A CERC official told Caijing that one solution may be to lift prices that power plants charge grids, while keeping retail prices unchanged and subsidizing the grids.

However, the official said, subsidies would only be a temporary fix and would not solve the fundamental problem, which many say is connected to China's failure to reform its power price system despite six years of power industry reform. Currently, administrative measures, rather than the market, determine prices.