The strategy and plans for electric power are not yet keeping pace with climate change," said Wu Zhonghu, Director of the China Energy Research Society.

Wu said he deeply regrets the huge losses brought about by the snowstorms that hit south China this year. Yet, in his view, the snowstorms may become an important factor in promoting the reform of the power mechanisms. One of the focuses of the reform is breaking monopolies over power grids.

Past errors

Natural disasters, such as snowstorms, are easy to deal with. But it is not easy to reform the power system and break power monopolies. Five years ago, power reform was carried out with the aim of "breaking monopolies and introducing competition." Five years later, the reform shows a tendency of imbalanced development, with construction of power plants emphasized while that of power grids ignored.

"Power generators are developing more and more vigorously," Wu said.

Before the reform, both power plants and grids were managed by the State Power Corp. In order to break the monopolies, power plants were separated from grids. In terms of power generation, five companies were set up, namely, China Huaneng Group, China Datang Corp., China Huadian Corp., China Guodian Corp. and China Power Investment Corp. Each of these five power generation companies holds about 20 percent of the market share. In terms of power transmission, two companies were established: State Grid Corp. of China (SGCC) and China Southern Power Grid Co. Ltd. (CSG), who hold 79.56 percent and 20.44 percent of the market share, respectively.

According to Wu, during the past five years, market operation has been gradually realized in the field of power generation, competition among power generators is increasingly fierce and capital from various sources has entered the system. Besides the five state-owned power generating companies, nuclear power, hydropower and wind power projects have been developed. Local energy investment companies are cooperating with local governments to develop power generating projects. At the same time, overseas capital, such as CLP Holdings Ltd. and China Resources (Holdings) Co. Ltd., both from Hong Kong, have been scrambling for a part of the power generation market.

By the end of 2007, the total installed capacity in China surpassed 700 million kw. Four of the five state-owned power generating companies each had an installed capacity of more than 60 million kw, which is equivalent to the total power generation level of South Korea.

In contrast to competition in the field of power plant construction, power grids are still monopolized. Investment in the construction of power grids is not open, and grid construction has lagged behind.

Statistics from the National Development and Reform Commission (NDRC) show that in the past five years, investment in power grid construction was less than 35 percent that of power plant construction. In many other countries, investment in power grid construction accounts for 50-55 percent of the total power investment. "To deal with such a large market by relying just on the two companies is not enough," said Wu.

According to Wu, the result of emphasizing power plants while ignoring power grids is that Chinese power grids have become very fragile. Before the snowstorms there had been many small-scale power outages because of gales and heavy snowfalls. Since the construction of power grids lags behind, electricity produced in some localities even cannot be transmitted out.

The inadequate investment in power grid construction has caught the attention of the government and the two state-owned grid companies. Since 2006, the two grid companies have greatly increased investment in power grid construction. In 2006, newly increased input in grid construction reached 210.58 billion yuan ($29.66 billion), doubling the figure in 2005. However, problems accumulated over time cannot be solved through short-term investment alone.

What grids do we need?

Wu thinks that Chinese power grids need deep reform.

He said that according to expectations, the main tasks of the power mechanism reform include: separating power plants from grids and reorganizing power generating and grid companies; adopting a price bidding system for power plants; establishing market operation rules and government regulation mechanisms; initially setting up a competitive and open regional power market and realizing a new power pricing mechanism. However, later reform deviated from the targets somewhat, Wu said. SGCC, transformed from former State Power Corp., failed to throw off the monopoly and the administrative-oriented pattern.

"The next step should focus on breaking power grid monopolies," said Wu. "First of all, power transmission and distribution should be separated so that power generators can get more customers, not just SGCC or CSG, and a price-bidding mechanism needs to be adopted by power generators and distributors."

Wu's suggestions are the same as those of Yang Mingzhou, division chief of the Information Center of the State Electricity Regulatory Commission (SERC).

According to Yang, power grid companies are presently burdened by heavy debts and low profits. Their assets now account for one fourth of the country's total state-owned assets. Though electricity prices have increased, their annual profits are only 20 billion yuan ($2.82 billion), with the rate of return standing at 1 percent, lower than the interest rate of bank loans and in sharp contrast with the 9-11 percent return rate of the power industry in developed countries.

Yang thinks that the power market can learn from the reforms of the telecommunication industry, which is also a monopoly industry, and adopt a pattern of separating networks from product providers.

"In detail, power grids are owned by the state and operated with the administrative pattern of state public expenditures, only collecting basic maintenance and management fees," Yang said. "Meanwhile, many grid operators will be set up through the market mechanism to distribute electricity from power plants to customers."

This model is conducive to breaking the natural monopoly of power grids and promoting virtuous competition among operators.

According to Yang, in the Industrial Catalogue for the Guidance of Foreign Investment, effective as of December 1, 2007, the Chinese Government, for the first time, includes the construction and operation of power grids in the catalogue of industries in which limited foreign investment is permitted. This means that foreign investment can be introduced to the field of power grids that has been under monopoly for years, on condition that Chinese investors hold the majority of shares. For the reform of power grids, this may be a turning point.

Coal and power coordination

Besides power grids, another problem uncovered by the snowstorms was how to ensure the coal supply to power plants.

Before the snowstorms, many power plants only had coal reserves for five or six days and some just for one or two days. Seventeen provinces and municipalities had to switch off electricity supplies during the snowstorms.

Traffic inconvenience caused by the snowstorms was one of the reasons coal couldn't get to power plants, but the major reason for the coal shortage was the high price of coal.

In China, coal prices are decided by the market, but electricity prices are controlled by the NDRC, meaning power plants have no pricing power. In the past two years, coal prices have increased, while prices of electricity sold to power grids remain the same. Under these circumstances, power generators are faced with cost burdens.

According to Yang, since electricity generated by all power plants is the same, competition among ordinary commodities cannot be adopted. Because of huge investment in power grid construction, the state may allow several power grids to compete in a locality in order to save cost. For such reasons, the relationship between power generators and power grids has seen delicate changes. When power generators are faced with fierce competition because of the same product, grid companies are exempted from competition owing to the natural monopoly of the national power grids. When the costs of power plants rise, power grids refuse to increase the purchasing prices of electricity from power plants. As a result, power generators have to bear the pressure of rising costs while coal suppliers continuously demand higher coal prices.

"Grid companies refuse to bear the rising cost pressures of power generators, who have to demand the state regulate coal prices since they cannot digest the costs by themselves," said Yang. "This is the major reason for the failure of the chain reaction attempts between coal and electricity prices during these years."

Failure of chain reaction reform between coal and electricity prices also blocks reform of China's power mechanisms.

It seems that power companies should thank the snowstorms, because power disasters caused by the snowstorms have enhanced the resolve of the Chinese Government to promote the reform of the power industry. Wang Yeping, Vice Chairman of the SERC, disclosed that comprehensive reform of the electricity system is expected to start in the first half of this year, and experiments with this reform will be carried out in snow-hit south China.