High coal prices, low electricity prices

Analysts say another cause of the power shortages is that coal prices are surging while electricity prices are not increasing accordingly. Coal prices, which account for 70 percent of thermal power plants' costs, have more than doubled since 2005.

"The more a coal-fire power plant generates, the more money it loses. Hence even the state-run power plants lack motivation," says Lin Boqiang, head of the China Center for Energy Economics Research at Xiamen University.

Related readings:  Tibet to become China's leading solar power base  China to double solar-power capacity by 2015  Thermal power supply slump causes power shortage  Domestic energy supplies addressed

The coal-fire power operations of China's top five energy companies have lost more than 60 billion yuan ($9.24 billion) from 2008 to 2010, with each of them losing more than 8.5 billion yuan, according to a 2010 report from the State Electricity Regulatory Commission (SERC).

Energy sector analysts are calling for reforms in electricity pricing. But Zhang Lizi, professor at North China Electric Power University, says raising electricity prices will worsen China's already runaway inflation.

Curbing coal prices will discourage coal production leading to even more shortages of supply. The best solution is to promote energy-saving to reduce demand and use the surplus power from other regions to remedy the shortages, Zhang says.

Demand for power is expected to grow rapidly as China's economy continues to grow rapidly. Shu Yinbiao, deputy general manager of the State Grid said China's demand for power will rise from the current 4.2 trillion KWH to 7.8 trillion KWH in 2020.

Extensive power cuts are likely in China during the summer peak if the drought worsens and coal-fire plants continue to suffer heavy losses, says Yu Yanshan, deputy head of the general administrative office of the SERC.