China is grappling with its worst power shortage in years, particularly in the country’s main industrial bases in the east and south, which will lead to reduced economic output in the second quarter, industry sources said on Monday.

China typically faces a power crunch from June to September, when demand is at its peak. This year, the shortage came about in March, and it is expected to worsen, said a source from the State Grid, which builds and operates China’s power networks.

China Electricity Council, a power-industry federation, said in late April that a power shortfall of about 30m kilowatts will be seen this summer and that the demand gap will likely expand.

“This is about twice the shortage that Japan is facing after the March quake. And this is in addition to the gasoline/diesel shortage,” said Gordon Kwan, head of energy research at Mirae Asset Securities, in a research note.

A fuel shortage has resulted from heavy demand for diesel since March, as the manufacturing season approaches its peak. State-owned oil firms are trying to address the lack of fuel by cutting production of chemicals and curbing exports. The power restrictions in place in select regions of China will only aggravate the fuel shortage, analysts said.

“China’s industrial output will be hit in this round [of] power shortages,” said Dong Xian'an, chief economist at research firm Peking First Advisory.

“According to our forecast, China’s industrial output in the second quarter will fall by one percentage point to 14% from our earlier expectation of 15%, while GDP will be dragged down by 0.5 percentage points to 9.7%,” Dong said.

In April, China's industrial output grew at a slower pace of 13.4% year on year from March's 14.8% expansion.

More than 10 provinces, including Zhejiang, Hunan, Anhui, Jiangsu, Hubei, Sichuan and Henan, are facing a serious lack of electricity supply, according to media reports.

The Chinese government has been rationing power in some regions, prioritising its use for households rather than for industries.

In Hunan, the hardest-hit province, daily demand was outstripping supply by 80m kilowatt hours (kWh), which was one-third of the province’s requirement, the Shanghai Securities Journal reported.

Small to medium petrochemical producers in the affected regions have had to cut operating rates or shut down operations because of the power restrictions.

“Downstream plastic plants in Ningbo were ordered to shut down for one day a week from March,” a Chinese polypropylene (PP) trader said.

In the eastern Zhejiang province, some polyvinyl chloride (PVC) facilities and their downstream pipeline plants reduced operating rates by 10-20% from March, sources said.

Some polyester plants in this province have bought diesel generators, hoping to keep normal production at plants in anticipation of the power rationing, they said.

“It looks like that the power shortage this year will be [of] unprecedented intensity,” an industry source said.

China’s energy giants China National Petroleum Corp (CNPC) and Sinopec are boosting domestic supply of diesel amid the power shortage.

“High coal prices and the capped electricity price have also reinforced fears that the regional power rationing could further [affect] many manufacturing hubs (e.g., Guangdong, Zhejiang and Jiangsu) amidst the government’s monetary tightening,” Kwan said.

Energy companies are reluctant to increase supply via building new coal-fired power plants because of surging prices of this fossil fuel. They are bound to continue incurring heavy losses since electricity prices are being controlled by the government, analysts said.

China’s top-five power producers incurred a loss more than yuan (CNY) 60bn ($9.22bn) between 2008 and 2010, the State Electricity Regulatory Commission (SERC) stated in a report in early May.

On 10 April, China’s National Development and Reform Commission (NDRC) raised on-grid prices in 16 provinces, including Shaanxi, Shandong and Henan, by an average of CNY0.012/kWh ($0.002/kWh) to encourage power producers to increase supply.

“Such a small hike could not offset any losses of power producers,” said the source from the State Grid.