BEIJING -- China's seasonal hydropower output has been falling since August as dry weather shrinks reservoirs, but two years of rapidly rising coal- and gas-fired power generation should prevent another surge in oil demand.
Power generation from hydropower plants -- which can produce up to a quarter of China's electricity -- fell 10.3 percent on year in October, raising the burden on other plants to meet China's 10-plus percent growth in electricity demand.
Output was down by 8 percent and 4 percent, respectively, in the preceding two months, as water reserves shrank and the southwest was crippled by a drought that state media said was the worst in over a century.
Reservoir levels, which indicate how much power can be produced by water churning through dams, stood 6.4 percent below a year ago by the start of November. In early-September they were down 15 percent from 2005 levels.
The last time reservoir levels slumped, in 2004, the decline in hydropower output exacerbated China's worst power crunch in two decades, causing a spike in demand for diesel as small businesses fired up individual generators to keep the lights on.
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But in the two years since then, power companies have built a host of new coal-fired power plants, helping break the link between dry weather and high Chinese oil demand. Oil prices also doubled in the interim, making it a less attractive fall-back.
"Coal demand, instead of oil, is likely to grow strongly in the winter," said Edmond Lee, research head of utilities at JP Morgan in Hong Kong. "Oil is costly, it's not an economically viable option."
The National Development and Reform Commission, the top energy regulator, warned in late September that lower-than-usual water reserves may make it difficult for hydropower plants to produce enough electricity for users in some regions during winter.
COAL, GAS SUPPORT
Hydropower plants can be an important but volatile source of electricity, fluctuating depending on weather conditions and rainfall, risking leaving national grids short of power.
In 2004, analysts estimated the extra fuel needed to generate power may have been responsible for more than half of the year's 900,000 barrels per day (bpd) rise in oil demand, one of the key triggers for oil's three-year rally.
So far this year, despite accounting for about a quarter of China's installed generating capacity, hydro plants supplied less than 15 percent of its power.
Hydropower generation was up 4.6 percent for the year to date, a much slower rate than the overall 13 percent increase in electricity output, official data show.
Output from thermal plants -- which burn oil, coal or natural gas -- surged around 20 percent from a year earlier after increasing at a similar pace in the previous two months, compensating for the declines in hydropower production.
Much of that additional power was from coal, while gas-fired output rates also likely rose as China began importing liquefied natural gas (LNG) and increased domestic production.
Even so, greater overall capacity has seen utilisation rates of all power plants fall by about 6 percent since 2004, with a further decline expected next year, said Yang Ming, a researcher with Shenyin & Wanguo Securities in Shanghai.
This is good news for China: despite plans to boost the amount of energy it gets from renewable sources - including hydropower - water shortages are a growing problem.
Distribution is also a problem, with many of the most promising sites for new dams located in remote, poor areas.
China's poorer inner provinces already have capacity to generate more power than they can use while affluent coastal regions have difficulty coping with demand.
However, trans-regional power transmission remains limited by insufficient infrastructure and a rigid tariff system that discourages operators from seeking new markets for surplus power.
SHORTAGE EASING
Overall, officials and analysts remain confident that this will be the last year of any kind of serious shortages.
"Power supply will basically match demand across the country next year, with some surplus expected in some regions," Shi Yubo, vice-chairman of the State Electricity Regulatory Commission, told Reuters recently at the sidelines of an industry conference.
Generating capacity nationwide is set to hit 600 gigawatts by the end of this year from 390 GW in 2003, an average growth rate of about 18 percent, the China Electricity Council said.
That rate far outpaces the 12 to 14 percent growth in demand, which could slow further as Beijing attempts to gently apply the brakes to China's galloping economy.
East China Grid Co. Ltd., a unit of top grid operator State Grid Corp., also said it expected 10.5 GW of excess capacity even if demand reached a forecast winter peak of 96.6 GW.
And the margin may still be up to 8 gigawatts in the summer of 2007 when demand is seen peaking around 120 GW, it said in a recent report posted on the China Electricity Council's Web site. Two years ago China faced a summer shortfall of 40 GW.
Some analysts are beginning to fret over a potential glut of power capacity that would further ease the risk of sporadic outages that would cause oil demand spikes, although Beijing has a poor history of matching demand and supply growth.
With the economy still growing at a double-digit pace, however, any excess capacity may be quickly called into service.
"Some excess supply is likely to appear next year," said an analyst at China Securities Research, who declined to be named. "But that could vanish in two or three years if the economy keeps raging ahead."
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