Chinese Coal Plants Face Bankruptcy – Woes of the Regulated Utility
According to a recent article by Industrial Fuels and Power, 87of China’s coal-fired power plants could face bankruptcy as a result of disagreements between state-owned utilities and government economic planners. These plants, which represent 20% of China’s coal fleet, are struggling to survive as high demand (and resulting high coal prices) collides with government mandated electricity prices aimed to keep economic development on a positive trajectory through cheap electricity.
In regulated electricity markets, the price of electricity is set by government entities instead of the utilities themselves. These prices are established by a combination of factors including predictions on fuel prices and any capital investments made for power plant infrastructure. To request an increase in the price of electricity, utilities make a rate case – an argument for charging a certain amount of money for power – that outlines their expenses (and predicted increase in costs). Governing authorities then approve a price for electricity, which the consumer pays.
This regulated structure has pros and cons. It benefits utilities by providing an effective guaranteed rate fo return on their investments while eliminating price gouging for areas with few electricity providers. But, at the same time this structure can lead to problems when government priorities – such as keeping prices low without subsidies – conflict with market realities such as fuel price spikes and necessary plant maintenance and upgrades. This is the problem facing Chinese coal plants.
The Chinese government wants to keep electricity costs low as a party of the country’s economic development strategy. Cheap energy means cheap goods – a backbone of China’s success in exporting goods through the world’s markets.
So, what can be done when the government wishes to keep electricity prices low in the face of rising costs for producing that electricity?
In the short-term – subsidies can be made, robbing Peter to pay Paul. Funds can be shifted from other sources (for examples through taxes on consumer goods) to keep power plants in the black, while maintaining low utility bills for China’s residents. But, in the long-term, this could quickly prove to be an unsustainable strategy if power plant expenses continue to rise.
For now – China’s coal fleet is curtailing electricity generation in order to reduce the amount of coal that they burn, hoping that fuel prices will drop. This stop-gap measure will (hopefully) keep the doors open and the generators running until a compromise can be struck between utilities and the government’s economic planners.
[HT to Chad Blevins for sending me the article that inspired this post]