For the first few months after setting up a circuit board production line, Eddie Chu had seen things go smoothly. Then one day, without warning, the factory went dark, computer monitors went black, and the production line stopped.

"It was chaotic," Chu says. Employees ran out to find dry ice for cooling raw materials and scrambled to get the backup generator going. With a whole line of potentially defective boards and with production possibly stopped for an entire day, Chu's company, which he didn't want named, stood to lose US $200 000. But the generator came on within 10 minutes, and losses were minimized. It was a close call.

Chu's introduction to the vagaries of Chinese power came in 1999. But as more factories open and others expand in China—now the world's second largest consumer of electricity, behind the United States—the country's power grids are seriously straining, and experiences like his are becoming more common. Two dozen of China's 31 administrative units had rolling blackouts this year. The problem is worst in the summer, when temperatures of 40 ^oC are common in some areas. On the hottest days, Chinese officials predict total power demand could top 420 gigawatts [see photo, "Overburdened"], which would mean a shortfall of 30 GW, or twice the estimated deficit in 2003. Although provincial governments are enforcing conservation on industry and scrambling to get power plants built, many observers wonder how the world's most populous country can meet its energy demands. International businesses are already beginning to weigh the added expense of uncertain power against the low cost of Chinese labor.

Hoping to reduce demand, China has increased the price of electricity by an average of a quarter of a cent per kilowatthour. But because that alone isn't expected to be enough, local governments are also asking industrial users, consumers of 75 percent of China's power, to cut back. At the start of summer in Shanghai, for example, the city government distributed contracts to some foreign-owned factories, asking them to agree to a one-week shutdown during the summer and to stagger their work schedules. A letter attached to each contract said 1700 Chinese enterprises had already agreed to the measure.

The official government position is that power outages are a temporary problem that will be solved as soon as 2006 by building more power plants [see sidebar, "Supply, Demand, and Consequences"]. But skeptical officials of some foreign-owned companies note that the outages have occurred on a regular basis since the late 1990s. "If they can't meet demand now, how can they expect to do it later?" asks Trent Lambis, general manager of Tech International Shanghai, which makes tire repair products. His company was one of those asked to shut down.

"They tell new factories that there is no problem with electricity," says the general manager of a European heavy equipment manufacturer who asked not to be identified. "But the problem is just getting worse." Some companies say their power has gone off with as little as five minutes' notice. Others complain that they've been shut down with no warning at all.

Foreign firms with production lines in China increasingly cite having an ample power supply as their top concern, and Chinese officials are listening to them. According to the American Chamber of Commerce in Shanghai, the city has assured foreign companies, particularly large multinationals, that they will be treated preferentially, compared with Chinese companies, regarding mandatory shutdowns. But foreign companies still have had to sacrifice. The general manager of the European heavy equipment company says that in early July the Shanghai government took back a 100 percent power increase that his factory had received just months earlier. "We're looking at countries like Vietnam" as possible alternatives, he says.

Oddly enough, not so long ago China had an electricity glut, notes Scott Roberts, the chief representative for the consultancy Cambridge Energy Research Associates, in Beijing. In the mid-1990s, the central government clamped down on industry, cutting back production of goods at low-performing state-owned enterprises and consequently decreasing demand for electricity. But at the same time the electricity supply had increased, with power plant builders expecting demand to rise during that time. "There's a tendency to overinvest in capacity, since lead times are three to five years to build a plant," Roberts says.

But since the mid-1990s, consumption has raced ahead of the amount of new electricity generated, mostly at coal-fired plants [see photo, "New Generation"]. Compounding the problem, an inefficient railway system slows the flow of coal to the industry-heavy eastern part of the country. Citing Wang Yongsan, general secretary of the China Electricity Council, the official news agency reported that the country needs to invest 1 trillion yuan ($120 billion) over the next five years, to boost generation by 215 to 245 GW and meet future demand.

Roberts says it's too early to tell how long the energy crisis might last. Usually, an additional 30 GW of electricity is brought onto China's grids each year as more coal-fired plants and hydroelectric projects—such as the massive Three Gorges Dam—are completed. If China's economy falters and demand for goods decreases, there could be another glut, he says.

But one wild-card factor is the growing use of electricity by residential customers. They have not been asked to cut back, thanks to the Communist government's concerns about social unrest, some observers say. Although residents consume only 25 percent of China's power, that portion is likely to grow as the increasingly affluent populace purchases air conditioners, televisions, and refrigerators. Says Roberts: "That is a factor that has not even played out yet. When it manifests itself, [China's energy demands] will be even more explosive."