China experienced the worst power outage in four years in the past months due to coal shortages that in some degree were caused by a clampdown on small and unsafe coal mines.
Zou Yiqiao, director general of the Department of Tariffs and Financial Regulation, under the State Electricity Regulatory Commission, estimated that coal demand for power generation will surpass 1.4 billion tonnes this year and any supply volumes below that could lead to power shortages.
In 2007, a total of 1.282 billion tonnes of coal was used for power production, accounting for 51 percent of China's raw coal output of 2.523 billion tonnes last year, according to Zou.
Meanwhile, power plants that were initially reluctant to store the fuel due to soaring costs later found they were unable to secure supplies after freak winter weather disrupted transport.
The estimated deficit in coal supply for power generation was based on analysis of current production and stocks, said Zou in a study published on the commission's Web site (www.serc.gov.cn).
He did not elaborate on the current stocks and production levels.
"The coal supply and demand situation nationwide would be even grimmer given demand elsewhere from sectors including petrochemical, steel, coal deep-processing and exports," he concluded. China's five major power generating groups so far have signed less than 50 percent of the term contracts they need for this year with coal suppliers, with prices for coal in supply deals already settled up 30-40 yuan a tonne from those in 2007.
Fuel costs for the power majors will increase 29.9 billion yuan ($4.27 billion) this year and some of their power plants will operate at a loss, Zou said, citing data from the power groups.
"Power firms are facing fairly large cost pressure because of rising costs, as well as a freeze in power prices in 2007," he said, which have yet to be raised in line with a government policy to link coal and power prices.
Zou proposed that the central government choose a proper time to implement the linkage policy to alleviate the power firms' pain and ensure sustainable development of the power sector.
Under a pricing scheme instituted in 2005 that is reviewed every six months, power generators can pass 70 percent of coal price increases on to consumers when coal prices rise by more than five percent.
But China did not activate the mechanism last year and has ruled out any such hikes nationwide in the near term due to inflation concerns.
The trend of rising coal prices is irreversible in the short term, and power groups should slow down their expansion in coal-fired power plants and invest in coal mines, he suggested.
Coal-fired power plants, accounting for 78 percent of China's installed power generating capacity, generated 83 percent of China's electricity last year.