China's small mines and power plants mushroomed across the country in the 1980s as the economy started to take off. But some unscrupulous mine owners pushed reckless production facilities beyond safety limits in a mad rush for profits, while the energy-guzzling production facilities of small power plants caused serious environmental damages. Worse still, the small coal producers and power generators were usually subject to market fluctuations, a further destabilizing factor for national power supplies.

The new large power bases will help consolidate the highly fragmented thermal power sector and coal mining industry with cleaner and more efficient production facilities, as well as stronger risk-resilience, Zhang said. They also will be a catalyst for the introduction of advanced equipment and high technologies, which will help push forward the sector's industrial upgrading, he said.

On the way

According to the National Energy Work Conference, China will start building a coal power base in Shanxi Province this year and also accelerate the ongoing construction of two coal power bases in Hulun Buir in Inner Mongolia and the eastern part of Ningxia Hui Autonomous Region.

"We will also further encourage the integration and restructuring of coal and electricity industries," Zhang said. "The waning demands should not be a reason to slack off on energy projects since the rapidly industrializing economy still has an enormous potential appetite for power in the long term."

Although it will be years before the effects of the consolidation works their way through the power sector, some initial efforts already have paid off. Last December, the country's first large coal power base came into operation in Anhui Province after five years of construction, with an installed capacity of more than 13 million kw and expected annual coal output of 120 million tons.

"It would effectively appease the energy thirst of east coastal economic hubs like Shanghai and Zhejiang Province," said Zhang at the base's inauguration ceremony.

The Tianji Power Plant, a key part of the base, also provides a graphic illustration of why China has been dedicated to such an integrated operation model.

The plant, a 50-50 joint venture between Huainan Mining (Group) Co. Ltd. and Shanghai Electric Power Co. Ltd. (Shanghai Power), started operation in late 2007 and reported a stunning profit of 400 million yuan ($58.5 million) in 2008, while the whole sector was pummeled by skyrocketing coal costs, said Zhou Jinfa, a spokesman at Shanghai Power, in a statement. Shanghai Power is a subsidiary of state-owned China Power Investment Corp.

"The plant has become one of the few bright spots of our company amid the economic downturn," Zhou said, adding that its saved transport expense alone was about 300 million yuan ($43.9 million) last year.

Concerted efforts

As part of its energy safety commitments, China has started building eight more national oil reserve bases this year, according to the National Energy Work Conference. Four other bases of their kind already came into use last year.

"The development of clean energies like wind power and hydropower will also come into full swing," Zhang said, adding that the government's total investment in the power sector for 2009 would amount to a dizzying 580 billion yuan ($84.9 billion). "This will help wean the economy off thermal power and temper the strains on coal."

Another viable solution to the coal conundrum is to rationalize the country's electricity pricing system so that prices can better reflect supply-and-demand relations, said Wang Yonggan, Secretary General of China Electricity Council, in a report. At the moment, we also should hang on to the so-called "coal and electricity price linkage mechanism," he said.

According to the mechanism, electricity prices are allowed to rise if the price of thermal coal rises by more than 5 percent within a period of six months. But with inflationary fears taking hold last year, China mandated a price freeze on electricity tariffs while coal prices kept spinning out of control. To cushion the blow to generators, power tariffs were raised twice in July and August last year, although the modest increases left many generators still in the red.

Wang also predicted that the anemic power demand would continue in 2009, but could show signs of a turnaround in the third quarter. The possibility of electricity outages could not be ruled out during some peak periods since the coal predicament still looms large, he added.