After hearing for years about how many power plants China is building and how they may be beating us in the development of wind and other renewable energy industries, we learn today that China has been forced to ration electricity because of rising coal prices. This type of power rationing happens every summer in China, but this year the rationing (a nice term for brownouts and blackouts) is starting earlier. Could it be that we are beginning to see the Achilles heel not only of China's power industry, but of its entire economy?
China's construction of generating capacity has been extraordinary. Each year, China builds enough electric power generating capacity to power the entire nation of France. And this has been going on for at least 5 years. So why can't they keep up with demand?
The answer has more to do with their command and control economy than anything else. Prices for thermal coal -- which fuels 70% of China's electric power -- have risen 20% in the past year, but China has only allowed electricity prices to rise by 2%. In other words, coal fired power plants lose money on every kilowatt of electricity that they sell. This simply is not sustainable. At some point, the price of electricity must catch up with the cost of producing it. The longer China waits to do this, the more likely it will suffer from an inflationary shock and possibly political unrest or worse.
CNN reports that some Chinese manufacturers are turning to diesel generators to keep their factories running when power is not available from the grid due to rationing. That is not a very efficient way to produce electricity. And with oil at $100 per barrel or more (and expected to rise over the next two years) reliance on diesel generators will raise their costs of production significantly.
Market economies and command and control economies both suffer from rising commodity prices. The difference is that a market economy responds by allowing rising prices to inspire innovation that produces solutions over time, while the command and control economy responds by rationing (i.e., starving the economy) that produces inefficiency and political unrest. China can only ration for so long. At some point, it must face the difficult decision of either declining outputs and competitiveness caused by rationing or more economic freedom and innovation. Given its history, the former is more likely than the latter.
John Howley
Woodbridge, New Jersey
China's construction of generating capacity has been extraordinary. Each year, China builds enough electric power generating capacity to power the entire nation of France. And this has been going on for at least 5 years. So why can't they keep up with demand?
The answer has more to do with their command and control economy than anything else. Prices for thermal coal -- which fuels 70% of China's electric power -- have risen 20% in the past year, but China has only allowed electricity prices to rise by 2%. In other words, coal fired power plants lose money on every kilowatt of electricity that they sell. This simply is not sustainable. At some point, the price of electricity must catch up with the cost of producing it. The longer China waits to do this, the more likely it will suffer from an inflationary shock and possibly political unrest or worse.
CNN reports that some Chinese manufacturers are turning to diesel generators to keep their factories running when power is not available from the grid due to rationing. That is not a very efficient way to produce electricity. And with oil at $100 per barrel or more (and expected to rise over the next two years) reliance on diesel generators will raise their costs of production significantly.
Market economies and command and control economies both suffer from rising commodity prices. The difference is that a market economy responds by allowing rising prices to inspire innovation that produces solutions over time, while the command and control economy responds by rationing (i.e., starving the economy) that produces inefficiency and political unrest. China can only ration for so long. At some point, it must face the difficult decision of either declining outputs and competitiveness caused by rationing or more economic freedom and innovation. Given its history, the former is more likely than the latter.
John Howley
Woodbridge, New Jersey
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