Moves to curb investment in power plants
By Wang Ying (China Daily)
Updated: 2004-12-20 08:39

After repetitious warnings of overinvestment in new power plant construction, the central government began taking determined actions to curb the investment binge by heralding an urgent notice.

The government will eradicate unapproved power plant construction projects, by stopping bank loans to unapproved plants, and by controlling land property usage and rail transportation.

An industry analyst with the Beijing-based CITIC Securities said the move reflects the government's determination to halt the investment spree.

"The government is making tangible measures after rounds of warnings to stop the excessive investment in power plant construction." Wang said.

So far, 120,000 megawatt power plants have begun construction without the necessary approval, said Xu Dingming, director of the Energy Bureau with the National Development and Reform Commission last month.

The amount accounted for more than 30 per cent of China's total generating capacity by the end of last year.

Most parts of China are currently plagued with electricity supply shortages.

But industry insiders project that by 2006 or 2007, the power supply will suffice the demand, with some areas seeing an oversupply of electric power, industry sources indicated.

Unapproved power plant builders focus their attention on immediate economic benefits without considering long-term development, said Zhang Guobao, vice-minister of the National Development and Reform Commission, at an industry forum earlier this month.

"For example, one small city has built five or six electric power plants, which is completely irrational for the electric power industry." Zhang reportedly said on the same occasion.

Additionally, the overinvestment in power plant construction will possibly threaten the balanced market supply and demand by dramatically increasing the burden of coal supply and rail transportation, industry analysts said.

Experts also argue that a surplus, to a moderate extent in electricity power construction, is normal for the forerunner industry of a country's economy, and the current heated investment mirrors the natural effect of the market after a long period of power shortages.

The nationwide overhaul of power plant construction will deal a heavier blow to small and medium-sized electricity power providers than to large providers, said CITIC Securities' Wang Xiaohui.

"In light of production scale and operation efficiency, large providers take an advantaged stance in meeting the standards for power plant construction approval, because most electricity power plants under construction are of small and medium size, and have not yet passed the necessary approval." Wang said.

A deputy manager of an electricity power provider in Shandong Province, who has built many small and medium-sized power plants, told China Daily they would suffer from a considerable loss resulting from a coming dive in power plant construction projects.

China's five major power conglomerates - Huaneng, China Huadian, China Power Investment, Datang and China Guodian, are expected to respond in a comparatively mild tone, according to Wang.

Negative impact on the five power providers is expected to concentrate on a reduction of bank loans, due to the suspension of bank loans to unauthorized power plant projects, Wei Bin, an analyst with the State Power Economic Research Centre, told China Daily.

Experts say the current restriction on power plant construction will not intensify the current electricity shortfall, as power plants generally take a few years to plan and construct, and the elimination of some plant projects will not render a direct effect to the current power supply.

Compared to the little impact on the current power supply, the restriction of overinvestment may exert some negative effect to China's State banks.

The major State banks, including the State Development Bank, the Industrial and Commercial Bank of China and the China Construction Bank, will stop providing bank loans for unapproved power plant construction as the central government ordered.

The banks may risk a certain amount of bad debts, if some plant construction is forced to stop due to an inability to meet the standard, industry analysts said.

Experts suggest the government make cautious considerations when introducing policies which affect the construction of power plants, because changes in the pillar power industry will produce significant influence over many other sectors in the country's economy.

Government policy-makers should take three factors into account when making concrete actions to restrict the overinvestment in building power plants, Wang said.

The three factors include the restriction's possible effects that may deteriorate the shortage of China's power supply; the chain effect that may arise from a nationwide prohibition, especially the impact on the banking system; and lastly, the possible oversupply of electricity power in three to four years without putting strict rules into effect.

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