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Cablegate: Guangdong's Power Crunch - a Widening Gap Between Supply

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RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0175/01 0870230
ZNR UUUUU ZZH
R 270230Z MAR 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6998
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 000175

SIPDIS

SENSITIVE
SIPDIS

EMB BEIJING FOR DOE
USDOE FOR OFFICE OF THE SECRETARY
USDOE FOR INTERNATIONAL AFFAIRS
USDOE FOR FOSSIL POLICY AND ENERGY
STATE FOR EAP/CM, EB/TRA, AND EB
STATE ALSO PASS USTR FOR CHINA OFFICE

E.O. 12958: N/A
TAGS: ENRG ECON EMIN SENV PGOV TRGY CH
SUBJECT: Guangdong's Power Crunch - a Widening Gap between Supply
and Demand

1. (U) Summary. South China is experiencing its worst power
shortages in thirty years. An annual problem, the situation in the
region intensified due to January's winter storms as Guangdong
imports almost all of its power from other provinces whose power
generation capabilities were affected. The combination of damage
caused by severe weather, competition between market and retail
prices, and growing demand levels, is likely to remain an obstacle
to solving an ever-growing power crisis. One official pointed out
that national regulations requiring the simultaneous elimination of
small, inefficient plants before new construction exacerbate the
shortages. In the wake of these pressures and supply constraints,
the peak summer period is predicted to be riddled with widespread
"brownouts." End Summary.

-----------------------------------
Supply Not Keeping Pace with Demand
-----------------------------------

2. (SBU) Guangdong officials warn that the province is facing its
worse energy shortages in thirty years. The Guangdong Economic and
Trade Commission (ETC) conservatively estimated the supply shortfall
to be 7 million kilowatts, while the China Southern Power Grid
estimated a gap of between 9.5 and 10.5 million kilowatts. Official
media reports citing provincial officials predict that the gap could
reach 12 million kilowatts during periods of peak demand.

3. (SBU) Guangdong's power generating capacity has not grown quickly
enough to keep up with demand. According to Rao Subo, Deputy
Engineering Chief of the Yudean Group, Guangdong province's leading
supplier of power, since 2000, Guangdong's power consumption has
grown at an annual rate of 13%. At the end of 2007, Guangdong had an
installed capacity of 60 million kilowatts, which is expected to
grow by only 7-8 million kilowatts over the next two years, a pace
far slower than growth in consumption.

4. (U) Guangdong's power supply is primarily composed of three
parts. The province's "official capacity" consists mainly of 1)
power generated by large-scale state-owned power plants, which are
mostly located in other provinces and 2) the West-to-East power
transmission project, which includes power supplied from the Three
Gorges Dam, Guizhou, Guangxi, and Yunnan. The third source is power
generated by small hydro-power plants or diesel power plants located
in rural areas, and commonly referred to as "backyard generators."
These are highly sensitive to weather conditions and are therefore
less reliable. Many of these small-scale and inefficient power
plants are in the process of being phased out.

5. (SBU) Over the long-term, Guangdong expects to add 16 million
kilowatts to its annual installed capacity, but this will not be
enough. Critics of the Central Government's current regulation
regarding the construction of new power facilities, including Rao,
argue that the central government, which authorizes all new power
projects through the National Development and Reform Commission
(NDRC), should increase the approval rate for proposed plants in
Guangdong. Mo Jianbin, Deputy Director of Guangdong's Economic and
Trade Commission's Electric Power and Energy Section (GD ETC),
commented that national regulations exacerbate the shortages,
requiring that new construction cannot occur without simultaneous
elimination of smaller, less-efficient facilities. While this policy
may be beneficial in the long run by increasing the use of
energy-efficient, clean technologies; in the short-term, it does
little to alleviate supply constraints.

-------------
Winter's Toll
-------------

6. (U) January's severe winter storms exhausted power supplies and
caused outages across China. Since Guangdong imports most of its
power from other provinces, the results of the storm's aftermath
continue to affect its power supply even though it was spared the
most severe weather. Snowstorms in western provinces cut the
capacity of the West-to-East project to transmit electricity to
Guangdong from 15 million kilowatts to 2.5 million kilowatts,
according to Yuedan's Rao. In addition, severe conditions in
Guizhou, Hubei, and Hunan provinces reduced Guangdong's supply by

GUANGZHOU 00000175 002 OF 003


another 6.3 million kilowatts of power.

7. (U) In response to the winter supply constraints, the Yudean
Group, which is responsible for one third of power generation in
Guangdong and maintains a capacity of approximately 21 million
kilowatts spread across several provinces, implemented an emergency
action plan to counter wide-scale shortages. Their plan included:
-- utilization of all spare power generating units,
-- suspension of all scheduled maintenance on generators, and
-- close coordination with coalmines in northern China to ensure
continued supply.
In addition, local government instituted an action plan focused on
coal transportation, which helped increase coal reserves in the
province above "safe reserve" levels.

-------------------------
The Pending Summer Crisis
-------------------------

8. (SBU) Going forward, anxiety looms as south China prepares to
enter the summer months, a peak season usually plagued by increased
"brown-outs." Rao estimates that Guangdong's power shortage will
reach 8 - 10 million kilowatts during this year's summer months.
While the summer season presents its own set of problems under
regular operating conditions, the aftermath of January's storms adds
additional pressure. Construction to repair the damage to
transmission lines feeding into Guangdong province continues. The GD
ETC estimates that the damage won't be fully repaired until the
second half of the year. In addition to weather damage, increased
residential-level consumption of power as more homes acquire air
conditioners is expected to amplify the problem.

-----------------------------------------
Price Controls - The Elephant in the Room
-----------------------------------------

9. (SBU) In addition to weather-related challenges, the issue of
price continues to be the 'elephant-in-the-room' for policy-makers
sorting through possible solutions for the growing crisis, according
to Mo. While market prices of coal and other fuels increase, the
government continues to cap domestic electricity prices in order to
check inflation. The growing gap in market versus retail prices has
forced some power generating companies to cut supply, sometimes
rationing output to counter dwindling profit margins. Continued
public pressure means low power costs will likely remain a policy
priority. However, Guangdong ETC's Mo told us that his agency will
work with the pricing officials to raise the price of electricity
generated by liquefied natural gas (LNG) to address the gap between
output prices and production costs.

--------------------------------------------- -----
Taking Action: Plans to counter increasing outages
--------------------------------------------- -----

10. (SBU) The Guangdong provincial government has implemented a
variety of new policies to reduce outages, focused primarily on
limiting power consumption by energy inefficient, polluting
enterprises. During peak consumption hours, many of these
enterprises are cut from the power grid. Others are only allowed to
operate four days a week, a practice known as "peak-load shifting."
Mo emphasized that this practice is based on national policy
directives. In the past many of these corporations have also been
charged more for electricity, essentially creating an informal tax
for inefficiency.

11. (SBU) The GD ETC claims that enterprises do not object to this
practice. Mo said one possible reason may be the use by some
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