china improves electricity generation

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    Monday, September 19, 2005

    China has emerged from the summer with far fewer electricity blackouts and shortages than feared, potentially closing the latest chapter in its boom- and-bust power sector saga.

    Better demand management, rainy weather and improved coal transport helped close supply gaps, in turn curbing the need for extra oil supplies to power independent generators, a key reason for this year's surprisingly weak oil demand.

    And with dozens of new plants set to boost supply sharply by 2007, China may may be on the verge of solving two problems at once - putting its worst power crisis in decades behind it while helping rein in oil consumption in the years ahead.

    Last summer's blackouts, triggered by a lack of new capacity, heatwaves and soaring air-conditioning use, taxed power grids and forced multinationals such as Volkswagen to curb output.

    While shortages persisted across the country this summer, forced holidays, power rationing and color-coded shortage alerts helped better manage demand through the day, while output at hydropower and coal-fired plants rose, officials say.

    "Not so many provinces were out of power [this year]," Zhang Guobao, vice director of the energy policy setting National Development and Reform Commission, told a conference recently.

    "For example, Fujian, which last year and the year before had shortages, could meet their own needs this year and even pass some on to Zhejiang because there was a lot of water."

    Officials from the State Grid and industry association the China Electricity Council declined to comment on the extent of the supply gap.

    But retailers have reported a sharp fall in diesel generator sales, strong evidence in itself. China's electricity demand, up 13.4 percent in the first eight months of this year, has surged since the 1997-98 Asian financial crisis, as the world's seventh-largest economy takes off, straining power plants that had been under-utilized five years ago.

    This summer, however, proved different than in 2004.

    The need for extra oil-fired capacity was limited in part by an unusually watery summer, especially around the export hub of Guangdong, heavily dependent on fuel oil generation.

    This helped boost hydropower reservoirs - depleted by a drought last year - and lowered temperatures. "It has been a wet year, which also had the influence for short periods of bringing the temperature down two or three degrees [Celsius]," said power expert Yue Lijun with consultancy Cambridge Energy Research Associates.

    Coal output also rose and supplies moved smoothly down upgraded railways and roads to plants that last year stood idle for lack of fuel, boosting utilization rates.

    More dependable power supplies from the central grid sharply cut demand for diesel to fuel small-scale generators, used extensively last summer by businesses, hotels and offices and a key reason for China's surge in oil demand last year.

    New construction over the next three years - adding at least 60 gigawatts or 10 percent per year, enough to power Spain - means the country could even face a glut by 2007.

    "A combination of stronger capacity growth and slower demand growth ... should result in the power shortages being eliminated by 2007, even by the more bullish estimates on the street," said Credit Suisse First Boston in a research report.

    That will help reduce the need for extra oil supplies, which are also being squeezed out by Beijing's avid pursuit of renewable hydropower, cheaper coal and cleaner natural gas.

    "Lower oil demand into power will continue to be a recurring problem into 2006 and 2007, we believe," CSFB said.

    CSFB said it had reduced its estimate of China's oil demand growth to 4.3 percent next year because of diminished power sector use, on the low side of industry forecasts.

    The International Energy Agency is predicting 7.5 percent.

    Oil-fired power generation is a key and highly volatile component of oil demand in much of Asia, as oil-rich countries such as Indonesia use it heavily in their mix and Japan is forced to fall back on oil when its nuclear generators go down.

    In China, oil used to generate electricity accounted for between a third and half of last year's 15 percent jump in consumption, analysts estimate.

    Many had expected another shortage this summer to help keep demand booming, straining a global oil industry already struggling to keep pace.

    State officials forecast at the start of the summer that electricity demand could outstrip supply by up to 30 gigawatts, slightly less than the 40-gigawatt peak-period gap last year.

    But the summer's demand spike never materialized.

    Oil prices continued to rally, hitting a peak of US$70.85 (HK$552.63) a barrel two weeks ago.

    But they were driven by relentless US demand growth and shrugged off signs of weakness in China, where implied oil demand rose only 2.6 percent in the first half.

    The IEA, which initially projected a more than 500,000 barrel-per-day rise in oil consumption from China, now expects an increase of 220,000 bpd.

    REUTERS

 
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