 A major drought has squeezed electricity output at big dams across southwest China, highlighting the risks of Beijing's massive hydropower expansion plans on coal and oil markets in a warmer, drier world. Ships are stranded, millions are short on drinking water, and power supplies to big consumers in several Chinese provinces have been cut back, industry officials and local media have said. And while building more dams will help Beijing meet more of its electricity demand using resources within its own borders, it also risks short-term surges in consumption of oil, coal or natural gas to generate emergency power when rivers run low. The world's number-two energy user already gets 15 percent of its electricity from hydropower and aims to increase capacity by more than half to 190 gigawatts -- over double Britain's entire stock of power plants -- by the end of the decade. But Australia's similarly ambitious Snowy Hydro power scheme, designed more than half a century ago as a lifeline for the fertile yet dry Murray-Darling river basin, offers a grim warning. Normally the provider of three quarters of the mainland's renewable energy, it has seen output tumble and drowned towns re-emerge from shrinking reservoirs after years of poor rains. "The Australian example shows how risky hydropower is, from the point of view of droughts," said CLSA analyst Simon Powell. "The Snowy system really is not being dispatched at all. And that has caused a tightening of supply on the generation side, resulting in a spiking of wholesale electricity prices." Other countries like Pakistan and Vietnam that are heavily reliant on hydropower have been forced to step up imports of fuel oil or buy power from neighbours during dry spells, driving up costs for producers and unsettling regional oil markets. SHORTAGES CREEP BACK In 2004, China endured its worst power shortages in decades as new plant construction lagged far behind rapid economic growth. Many businesses turned to diesel-fired generators to stave off blackouts, causing oil demand to surge by 15 percent, a key factor behind oil prices' first ascent above $50 a barrel. The International Energy Agency estimated that up to 350,000 barrels per day of oil demand, or over a third of total consumption growth that year, went to power generation. That strain has since eased, as China builds new power stations at a rate unprecedented anywhere in the world; installed capacity has grown by half since the end of 2004. But in some areas the shortage of local resources -- from coal to water -- is emerging as a new cause of an old problem. Southwestern Yunnan and Sichuan provinces are both facing electricity shortages because of low water levels in rivers. The strain is so serious in Sichuan that it has affected supplies to major users like metals smelters. Nearby Guizhou province is also suffering from outages because tight supplies of thermal coal are compounding problems caused by low water levels. Water levels on the country's longest river, the Yangtze, are the lowest since records began in 1866, state media reported, though reservoirs at its massive Three Gorges project -- the world's biggest hydroelectric plant -- remain healthy. "This year's dry season came a month earlier than usual and water levels fell sooner than expected," the China Daily quoted an unnamed government official saying on Thursday. The dry spell is not a one-off. Last year also saw historic droughts in some parts of the country and officials have repeatedly warned that climate change is already affecting China. "With the impact of global warming, drought and water scarcity are increasingly grave," the State Council, or cabinet, said in a recent directive. Beijing's fight to curb greenhouse gas emissions includes boosting the role of renewables in powering its economy, which has the added attraction of cutting reliance on oil imports. "In terms of energy security the government is right to push for hydropower. China also has a lot of water resources that are untapped," said Donovan Huang, research analyst at Nomura. WORSE TO COME But the country has naturally low per capita water resources, and China's top water official has warned that the challenge of managing scarce supplies is compounded by climate change. The frequency of both the droughts and floods that regularly batter China are expected to increase in a warmer world. And rural demands could compound the impact of short supplies, because China tends to time releases of water to suit the needs of farmers rather than power companies. For instance, water levels behind major reservoirs nationwide rose 6 percent in early January from 2006, but only because dam operators are stocking up ahead of spring planting season. Below dams, boat traffic piled up on drought-stricken rivers, and authorities had to release water from behind the Three Gorges Dam to ease cargo ship stranding downstream. That may have helped power wholesalers in the manufacturing hub of Guangdong, which is looking to the dam for extra supply to help tide over expected summer shortfalls, local media reported. But if the dam cannot deliver, generators will have to chase tight coal or pricey fuel oil supplies, pushing prices up in a cycle that global warming could make unpleasantly familiar.