China's energy firms may struggle to meet growing demand for power this summer thanks to high coal prices and a drought in one of the country's main hydropower-generating regions, an industry association warned late yesterday.

In a statement on its web site the China Electricity Council said the current drought in south west China and a 15 per cent price hike in thermal coal may lead to power shortages in central and south west China during peak hours this summer.

Regions including Jiangsu, Zhejiang, Hubei, Hunan, Jiangxi, Sichuan provinces and Chongqing municipality may see temporary power shortages.

The situation highlights China's reliance on coal and hydroelectric power and provides support for analysts and campaigners who say it must urgently diversify its energy supply to include more nuclear power and renewables.

China's electricity consumption jumped 25 per cent year on year to 969.5 billion kWh during the first quarter of 2010 and will rise by nine per cent year on year to 3.97 trillion kWh in 2010, according to the China Electricity Council report.

The report said that total demand will continue to accelerate during 2011 as industrial production increases.

The warnings come at a torrid time for China's hydropower producers, who reportedly incurred 900 million yuan (£86m) in losses in the first two months of 2010 as production dipped. The performance marks a startling turnaround on the one billion yuan profit recorded during the same period last year and highlights the growing impact droughts are having on the sector.

Similarly, as coal prices rise, the country's power-generating companies may plunge into the red if the state-set power tariff does not rise in tandem, Wang Zhixuan, secretary general of the China Electricity Council told the Shanghai Securities News.

The council report recommended a more flexible system where electricity prices are linked to coal price, easing the financial pressure on power companies.

The government last year approved a mechanism that sees electricity prices rise incrementally after coal prices have increased by more than five per cent over a six-month period, but so far it has only been used twice to increase prices.

The National Development and Reform Commission, the country's top economic planning body, said earlier this week that China would see a rise in power prices this year as industrial production continues to grow, further increasing pressure on Chinese firms to enhance their energy efficiency.