I once heard Scott Rozelle say that in economics there’s no such thing as a shortage; you only have prices too low.
It seems on the face of it that China’s mind-bendingly complicated energy pricing system is to blame. The government sets the price of electricity because they don’t want people complaining the way we complain about petrol prices. But the price of coal is determined by the market. The result is that coal price fluctuations have a quite direct impact on profits for coal power plants (their operating costs fluctuate but the price of their product is fixed).
So has China’s complicated pricing system resulted in a mis-match of supply and demand? I asked my friend Xunpeng, a Rio Tinto China Scholar who previously worked for Shenhua Group (the world’s largest coal company).
According to Xunpeng this is a standard trick of power companies trying to bargain with the government to raise electricity prices. They let their coal stocks run down, then point to the shortfall as evidence that they can’t operate profitably at the current price level. If they suspend operations for a few days they figure they can pressure the government into a better contract. To understand how this works, you only have to think of this morning’s Qantas strikes. In that example, suppliers of labour withheld their product to pressure buyers of labour (Qantas) to offer higher prices. In China’s case, suppliers of electricity are withholding product to pressure the buyers (represented by the government) to offer higher prices.
The key to knowing if we’re talking about a real shortage or a bargaining ploy (according to Xunpeng) is in what the power companies are asking for. If they’re demanding government action to increase supply of coal (or offering mining companies premium prices on short-term contracts), you know we’ve got a problem. If they’re demanding government raise the price of electricity, we can dismiss it as industrial lobbying.
It seems we can all relax.
(The EAF has a major research project on China and East Asian energy. The project is a collaboration between ANU and the ERI (Energy Research Institute of China’s NDRC). Research from the project is published in the Asia Pacific Economic Papers and can be downloaded for free.
If there ever was a posterchild for desperately needing alternative energy sources, China would be it.
There’s more than environmental concerns at stake here, and I think they’re finally starting to realize that.
China is in a prime position to push alternative energy and unlike the U.S. they don’t like to depend on anyone for anything. If they can produce it themselves and sell instead, that’s the path to follow. The Chinese steel market is prime evidence of that.
Interesting to know how the power companies work. It makes pefect sense since the power companies, with their insider knowledge of coal supplies, can create false shortages alongside real shortages to pressure the government. It seems similar to what happened in California a few years back when energy prices were going through the roof.
Eksith,
I agree with your sentiment about alternative energy, but its worth keeping in mind that OECD countries went through similar conditions when they industrialised. Once upon a time the London sky looked just like the Beijing sky does today.
I wouldn’t overstate China’s energy indepenence though. They import a lot of iron ore for steel production (something I’ll be posting about in a week or so) and in recent years China has been a net importer of coal. They definitely aren’t self sufficient in oil; an issue which has caused some friction in US/China relations.
China’s best advantage for switching quickly to solar/wind/nuclear/etc is that their demand growth is so strong they are in a phase of massive new capital investment. The choice is still largely in front of them.
Western countries can help by making sure renewable technology is as cheap as possible.
People respond to incentives.
If one can gouge more money by simply saying that your product or its inputs cost more, than one will say my product and inputs cost more.
If, however, several people come with that same story, but alas, one person says that they can still provide the product at the original lower prices, than that person will reap the rewards. Thus, the problem with fixing the price. If that price doesn’t suit, than people won’t produce. Blackouts and the like, similar to the US Western Energy Crisis mentioned by chunzhu (although that had various mitigating circumstance), may well ensue.
Australia’s National Electricity Market (NEM) achieves a relatively satisfactory situation, but in obviously very different circumstances than China (including a regulation and design process taking years, large wads of money and the importation of a Nobel prize winning economist). The NEM has a two sided auction set up (between retailer and supplier) that allows fluctuating prices with an options market for the risk averse. High prices (which can jump from ten of dollars to ten thousand in a matter of minutes to hours) give people signals that either investment in capacity is required or – if indeed, they are prolonged – that costs are going up.
Also, the NEM has many suppliers. This means that the market can do what it loves to do when left unmolested, punish the weak and reward the able. When prices jump from maybe a hundred dollars to ten thousand, those that aren’t sending out luscious megawatts onto the electricity grid get punished for their lack of capacity. (I don’t know what the supplier situation in China is, but I would assume there are several given that they need to regulate the price.)
A last point, since renewable energy was mentioned. Although there has been some movements and money spent in China for various renewable sources, I think the conversation can safely turn to the issues related to nuclear power. Renewable energy would be hard pressed any time soon, to say the least, to satisfy China’s requirements and growth.
[…] May we wrote about China running out of coal and repeated the economic truism that there’s no such thing as a shortage; only a price that […]