China’s electricity production industry may not be particularly profitable but it is certainly expanding fast. The benefits for the rest of the economy are clear. Electricity production is growing at a breathtaking pace. Many firms (virtually all state owned) are growing at 30-40% annually. According to a (subscription only) Economist article, China’s endless power-plant construction boom has accounted for 80% of the world’s new generating capacity in recent years and will continue to do so for many years to come. Capacity added this year alone will exceed the installed total of Brazil, Italy and Britain, and come close to that of Germany and France. By 2012, China should produce more power annually than America, the current leader.
Profit motive certainly does not appear to be the main driver of this relentless program of investment. Tariffs are suppressed by the state and it is doubtful most firms are in the black let alone making a reasonable return on capital. However, with access to cheap government directed bank loans the firms can continue to invest and operate at levels that would not be feasible in the west.
The second great advantage Chinese generators have is the scale of development has spurred a thriving components and services market that is reducing the cost of constructing power plants by economies of scale. As a result, the cost of building power plants is said to have dropped by half in recent years.
There is a downside however and that is the provision of ever expanding supplies of reliable low cost energy has fathered the rise of energy dependent industries like steel production and aluminum smelting, which in turn add to the greenhouse gas emissions of the electricity producers making China disproportionately more polluting per capita income or GDP compared to others.
It has also made China even more exposed to world energy costs than more energy efficient economies. The cost of coal, oil and natural gas will have a more direct and proportionally greater impact on China’s economy than say the US.
The use of power derived from coal will continue to grow in absolute terms according to the article, but its share of total Chinese output will fall from 75% to 65%. Hydro-power will expand by more than half, but due to the overall growth of the market its share of the total will drop a bit, from 21% to 20%. Wind power will see a big expansion, taking its share from 3% to 7%, as will nuclear, up from 1% to 5%. The rest will come from such niches as solar panels and incinerators. China’s massive expansion of nuclear power provides a good example of how the country is capitalizing on both the economies of scale such expansion brings and the opportunity for technology transfers. Over the next ten years, the authorities plan to spend a trillion-odd yuan ($150 billion) to increase capacity nine-fold. The country has 21 nuclear reactors under construction. Gradually China will make more and more of the components needed to make reactors domestically. By 2020, China’s goal is to build advanced reactors entirely by itself, and to export its prowess abroad. Chinese firms have already built one reactor in Pakistan, are working on another and plan two more.