ICFAI Business School (IBS) Student Community

[vishal159357 (vishal pasari)]

Resolving China’s power shortage
(A case analysis)

We have divided the whole case analysis into 2 broad sections, mainly—
a) Problem identification
b) Electricity as commodity and solutions
Problem identification—the main problem China is facing is that China is under deep power crisis. As the thermal coal is used to produce electricity so export of the same by China has also fallen considerably (considering that China is one of the biggest exporter of coal to international market). Ships have been diverted from overseas routes to transport coal. Chinese government even determined the contract price of coal which is below spot market price. But due to consistent power crisis the Chinese government is under immense pressure to increase the electricity price.
Electricity as commodity and solutions— now, electricity as commodity has different use as per different users of it. For industrial use, electricity is part of factors of production. For middle and lower class households, electricity is necessity commodity and for rich household, electricity is a means of having access to luxury commodities like air conditions, microwave ovens etc.
But whatever may be the nature of electricity as a commodity its price elasticity is low or rather say relatively inelastic. That is to say that even a big change in price, ceteris paribus, will not affect the consumption of the electricity to that extent. This will particularly happen in case of short run demand of electricity as substitution of electricity is difficult in the short run.
However change in electricity prices affect electricity consumption in following two ways:
a) They directly affect the use of electricity and non-electric fuels as input factors of production.
b) They indirectly affect productivity growth and thereby economic growth.
That means any increase in real price of electricity will indirectly further decrease electricity use because it will lower productivity growth rates in many industries, in turn leading to a lower rate of economic growth. But while the price elasticity may be low, the efficiency implications of large adjustments can still be significant. Now, what an “energy efficient” country will have as price elasticity it will certainly will be different for the “energy inefficient” and “energy neutral” countries will have as price elasticity. “Energy efficient” countries like UK and USA will have lesser price elasticity and “energy inefficient” countries will have more price elasticity.
Hence, an important determinant that comes up from above discussion is that how is electricity produced? Now, if the electricity is produced from any renewable source like hydro power than its production will be supply induced and the production will continue until the demand equals supply. The demand curve will be vertical up to maximum price determined by the settlement rate that consumers must pay if they are not in compliance with their quota.
But if electricity is produced from non-renewable source like coal (as in case of China) then its price will be supply induced. As supply is determined by a number of factors like cost, technology mix and expectation about future prices, so, the supply curve is relatively inelastic as costs of production are low once the technology is established. Also, thefts and power transmission and distribution losses do affect the market determined prices. It creates inflationary trends in the economy.
Now as in case of China the government is considering of increasing the electricity prices which may have adverse fallout. Like under short run the industry may shift the burden to consumers who are already facing pricing brunt of electricity and thereby leading to inflation. As a result, depending upon the level of income of user, if their real income falls then they will consume less of electricity and may switch to other modes like batteries. However, under long run, producers of commodities may not be able to shift the price rise burden to the consumers as in international market industry might face tough competition. So producers might search for other “energy efficient” countries to get electricity. In case of China they may even leave the country and set up their plant in some other country.
So as government of china came out with price ceiling she must increase the price only to the extent that normal consumers are able to afford in short run. In long run the government of China must develop basic infrastructure to fulfill power consumption. She must also search for other renewable sources of producing electricity like hydro power, nuclear power etc.

-----Prepared By
Vishal Pasari

[abhishek1711 (shah)]

Hi,

Good to see your participation. however need to educate u about this-

1. Is this ur original writtings? if not plez mention source with link

2. How is this related to Finance Discussions?



Please dont make job tougher for the voluntary Moderators team....read ur private messge, u must have got posting etiquttes as a welcome message.

[chiya (-=hidden=-)]

hey this is the second case that has been posted in the wrong thread!!...please post in the appropriate section....

and if you are confused about that...post any case study here >>

http://www.ibsrocks.com/forum/viewtopic.php?t=240