The unusually hot weather forecast for China this summer may put extra strain on its power grid, helping extend a recent surge in domestic demand for oil despite new plants and topped-up hydropower reservoirs. A heat wave is unlikely to cause a spike in diesel and fuel oil use like the one that roiled world markets in 2004, when power demand outstripped supply and the country turned to oil-fired generators to keep factories and air conditioners running.

But it could mean a greater need for fuel oil and diesel powered peak supplies than now expected. The National Development and Reform Commission (NDRC) has forecast in March a shortfall of under 10 gigawatts this summer, less than half last year`s level and a quarter of the 2004 gap.

However, the government is now urging caution as the Chinese economy continues to grow at or above 10 percent. "This year droughts, floods and other extreme weather conditions are likely to be more frequent than in recent years," said Ou Xinqian, deputy head of the energy policy-setting NDRC.

"Electricity demand and the summer peak load may break forecasts, we cannot afford to relax," he was quoted as saying in a report on the commission Web site. China`s oil use varies much less over the year than in the United States, where warm weather and school holidays herald the arrival of a gasoline-guzzling driving season.

But in the last two years the air conditioners of an increasingly wealthy population created an extra summer strain on an overstretched grid, causing rolling brownouts and shutdowns. Temperatures in the three months to end-August will be above long-term averages in cities across much of China.

The key economic hub of Guangzhou faces a particularly sweltering summer, with expected temperatures of 28.5 Celsius (83.30F) to 29.5 Celsius, compared with a long-term average of 28.5 Celsius. A bit of extra demand from the power sector could cause China, the world`s second-biggest energy user, to top forecasts for 5-6 percent oil demand growth this year. April data showed implied demand growth of over 10 percent, the fastest rate since 2004.

CAPACITY UP, RESERVOIRS BRIMMING
However, many analysts believe that the system is more or less able to cope thanks to the more than 60 gigawatts of new capacity -- enough to power Spain -- switched on since last summer. This prompted Beijing to reverse a policy of the past two years and will not impose compulsory power cuts on factories this summer, a newspaper reported on Wednesday.

"From a structural point of view there is a lot more supply available than in 2004 and 2005, so any disruptions could be minimal, and also concentrated around Shanghai," said Merrill Lynch`s Asia head of utilities research, Joseph Jacobelli. "Guangdong is usually able to ward off serious shortages by buying extra power from Hong Kong utilities." Overall supply is even expected to exceed demand in 2007.

The gap has also been narrowed by a recovery in hydropower generation rates from ultra-low levels in 2004, a factor that exacerbated China`s worst power crunch in two decades. Major reservoirs stood more than 16 percent higher at the start of the summer than a year ago.

While the northwest and areas south of the Yangtze could face water shortages, rainfall is expected to be higher than usual across most of the country, Chinese media have reported. Dams including the Three Gorges, the world`s largest hydropower project, account for a quarter of generating capacity but last year produced just 15 percent of China`s electricity.

Most of it came instead from dirty-burning coal, which Beijing hopes to replace in part with cleaner gas-fired plants. China`s first liquefied natural gas (LNG) shipment reached in Guangdong last week, which should help boost power generation, but supply woes are threatening to crimp gas-fired output.

Some plants are sitting idle and even facing closure as energy companies strain to fulfill demand following Beijing`s aggressive push to use more gas as a solution to pollution woes. Last year fuel supply shortages helped head off a summer demand surge despite the power shortfall.

State-set caps on fuel prices meant refiners lost money on crude processed for the domestic market and so cut back sales, leaving pumps dry at many service stations in the southeast. Moves to bring costs more in line with international markets should bring further support to apparent demand growth by ensuring oil supplies flow steadily.

"If prices continue to keep pace with those on international markets this year, then I think that supply cap will be much less rigid," said Julian Lee, senior analyst at the Centre for Global Energy Studies in London.
(by Emma Graham-Harrison, Planet Ark, 01/06/2006)
http://www.planetark.com/dailynewsstory.cfm/newsid/36609/story.htm