Clearing the air on electricity

Coal had always been the culprit. Old factories in the city would burn mountains of the stuff and power plants, in particular, were small scale and polluting. They have all moved out now, or been closed down, and a new breed of more-efficient generators established in the suburbs to meet rising demand for electricity. With only a few notable exceptions, these demands have been met.

But there are clouds on the horizon. Last year was disastrous for the power-generating industry throughout China. Losses of the five big national generator groups are estimated to have been at least £3 billion. Not a lot by bank standards but still significant.

The reason was not inefficiency or lack of demand but good old-fashioned price control. Around 80% of China's electricity comes from coal-fired plants. Last year coal prices were allowed to go up dramatically while electricity prices (a component of the CPI) were kept largely unchanged. This produced some very unhappy generators and many closed down plants to avoid losses. Although Shanghai has been unaffected so far, lights have been going out all over China.

As usual with government policy, what seems a little strange at first glance may have a hidden logic. In this case, the generators that can't handle the operating losses are small ones. Inefficient and highly polluting, the government has had them in its sights for some time. If they close down, so much the better. Unless you happen to rely on them for your electricity supply.