The expanding gap between the demand and supply of electricity, worsened by serious drought this year and rocketing demand in summer, is pushing the government to enhance demand side management (DSM) and accelerates power-price reform, according to sources close to the State Development and Reform Commission.

A new price-setting system has been drafted recently and is expected to be implemented soon, the sources said.

The new system, which will adopt different prices for different times, and for different seasons, is expected to curb soaring demand; and provide more funds to fuel investment in power-plant construction, said Liu Shujie, a senior expert of the Economic Institute of the commission.

According to Liu, the new system will be mainly based on the DSM, a popular power-management model in European countries and the United States.

The DSM encourages power consumers to use power when the total demand is low and limit consumption when demand is at peak, according to Liu.

DSM can appreciably reduce the incidence of power cuts, Liu said.

However, a bumpy road is expected for the reform, according to insiders.

Producers might not be enthusiastic given that they get no direct benefits; and transmission companies might be reluctant because they have to compete against each other for consumers, and so lower prices, insiders say.

But many experts are optimistic, saying that shortages resulting from years of drought and increasing demand would force power generators, transmission firms and consumers to accept the reforms.

According to the Ministry of Water Resources, the Yellow River's water level has fallen dramatically, to the point that a major dam in the Northwest China's Ningxia Hui Autonomous Region will now be hardly able to meet demand.

The Qingtongxia Dam is facing its worst situation since it was built in the 1960s with only two of its eight generators in operation.

The fall in water levels, which scientists attributed to drought, deforestation and overuse of ground water, is having a similar effect on other hydroelectric stations, including those in Qinghai and Yunnan provinces.

To make up for the shortfall, coal-burning thermal stations are running at full capacity but this has pushed up coal prices, forcing some of the plants to shut down due to high cost of inputs.

Even in Shanghai and Guangdong, where demand is largely served by thermal power stations, supply is only barely adequate.

Compounding tight power supply, demand has been growing by 10 per cent a year since the 1990s, a rate which will be maintained for the next few years, experts said.

"A shortfall of about 10 million kilowatts will continue for some time," said Wu Jingru, an adviser to the China Development Bank.

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