Guangdong may extend power subsidy to ease crunch

Guangdong province, China's manufacturing hub, may extend till June provisional subsidies to small, oil-fired power stations to help them crank up output and fight a worsening shortage, trade and industry sources said.

In the last two months, the Guangdong government has allowed some 30 such plants to raise on-grid rates -- prices power firms charge the grids -- by nearly 50 percent in a last-ditch effort to boost output.

By paying the difference of 0.35 yuan ($0.049) for each kilowatt hour of electricity, the Guangdong government is effectively giving subsidies to the power stations.

But the government keeps retail rates unchanged, in line with the national policy of keeping power and fuel prices low for consumers, in order to keep 11 year-high inflation in check, and vows that residents and industries would be safe from brownouts.

Electricity consumption is set to grow 16.4 percent this year, and Guangdong, China's wealthiest province, could see a supply gap of 12 gigawatts (GW) during peak demand around June, Chinese media has said, citing an official from the trade and economic commission.

Local authorities allowed the power plants to charge 0.90-1.00 yuan ($0.13-$0.14) for generating each kilowatts hour of electricity for January and February, a government document seen by Reuters showed, versus normal rates of 0.63 to 0.65 yuan.

The subsidy benefits only small plants and not big generators such as Huaneng Power International <0902.hk> and Guangdong Electric Power Development Co <000539.sz>, which operate mostly large stations and survive on burning the relatively cheaper domestic coal.

"As the power shortage is much worse than last year, the government will need to keep the special power tariffs to lure power plants to produce more," said a trader at Twinace, a Guangzhou-based independent dealer which supplies fuel oil to power plants.

BOOST FOR FUEL OIL?

An extension of the subsidy -- which the government also offered at a smaller level in third-quarter 2007 to help relieve summer power shortages -- could lift China's tepid fuel oil imports until mid-year. [ID:nSP290586]

Imports fell 14 percent last year as record-high global oil prices cut into demand but have started to creep back up after Guangdong announced the subsidy, traders said.

But such subsidies need to be more prompt to allow importers time to secure cargoes, Chinese traders said. The subsidy that covers January to February was announced only in mid-February, effectively making the policy too late to help shore up fuel oil imports for most of the first two months.

And a significant boost in China's fuel oil imports in coming months would also depend on benchmark Asian prices falling some 10 percent to around $480 per tonne, versus the current high of $530, traders estimated.

However, the head of a Guangdong-based power plant said his firm had switched off the 50-megawatt plant in Foshan city from last October, as it was unable to bear the losses despite the recent increases in on-grid rates.

"For us to restart our plant, the government may need to further raise the rates to 1.20 yuan per kwh," said the manager who goes by the surname Zhao.

The peak shortfall of 12 GW in Guangdong is equivalent to 30 percent of China's total supply gap in late January during its worst power crisis since the summer of 2004, when more than half the country were hit by blackouts due to a demand surge.

The supply deficit will cause brownouts to industries such as steel, cement and ceramics makers, media reported.

Part of Guangdong's supply gap originated from China's southwest region, the traditional supplier of electricity to the manufacturing hub. Many power lines in that region were damaged in the coldest winter in decades and are not expected to restore normal operations for weeks to come.

($=7.1 yuan) ($1=7.105 Yuan)