Xu Dingming, director of the Energy Bureau of the National Development and Reform Commission, pledged at the weekend to crack down on excessive investment in the construction of power plants.

Not only is most of this investment illegal, but also it is placing the nation's coal supplies under greater stress, he warned.

Xu told an energy investment seminar sponsored by Falcon Power Ltd. that construction of several power plants with a combined generating capacity of 120,000 megawatts has begun without receiving necessary approval. This is equal to more than 30 percent of the nation's total generating capacity at the end of last year.

Most of the illegal projects are in eastern China, the Inner Mongolia Autonomous Region, Hebei Province, Guangdong Province and the Ningxia Hui Autonomous Region, according to industry insiders. Local governments in these areas are willing to allow the construction of new plants in order to ease the massive power shortage that has plagued the nation since late 2002.

Meanwhile, China's five big power conglomerates -- Huaneng, China Huadian, China Power Investment, Datang and China Guodian -- are vying with each other to enlarge their presence.

Illegal power projects have put great stress on coal supplies, noted Xu.

China's mines have been struggling to pace with surging demand since late 2002. Coal production is expected to top 1.8 billion tons this year, compared with last year's 1.6 billion tons. Half of this will be used to generate power.

The desperate need for coal has also put a massive strain on rail transportation and shipping bottlenecks have forced some power plants to shut down.

With rampant investment in new power projects, the risk the industry now faces has switched from a capacity shortfall to potential oversupply.

Huang Feng, director of Energy Projects at the China International Engineering Consultant Corp., said power supply and demand will be balanced in most of the country by 2006, with some areas oversupplied. But by 2007, a significant part of the country will have a power glut.

"The problem is that most of the projects are constructed with loans from state banks," said Huang. Potential losses may end up being the problems of banks that are already struggling to reduce bad assets.

Rising fuel costs also increase the risks in the power industry. The price of coal has already jumped about 30 percent this year as a result of surging demand.

Power companies will face the twin problems of fuel cost increases and electricity tariff decreases as a result of the introduction of a power pooling system intended to increase competition in power generation, said Huang.

Xu said the government is taking action now to clear up the illegal projects, although he did not elaborate on the nature of that action.

Whatever it is, many analysts remain doubtful about its effectiveness, as local governments need to resolve their immediate power shortages.

"It is not the first time for Xu to publicly cite these figures this year," said one insider. "It is quite difficult to stop construction on projects that have already started."

Xu said at the seminar that China's energy industry needs 10 trillion yuan (US$1.2 trillion) of investment by 2020, excluding investment in importing overseas resources.

Hydropower projects with a capacity equivalent to that of the Three Gorges Dam project need to be built every two years until 2020.

The government plans to spend 40 billion yuan (US$4.8 billion) to find new sources of coal by 2020.

(China Daily November 29, 2004)