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China power cuts harm growth as climate goals cheer

China is experiencing its worst power shortage since the 1980s, a phenomenon that puts at risk the country’s post-Covid economic growth and supply chains by shutting down electricity in homes and industries alike, as it affects also suppliers to global tech giants such as Apple and Tesla. In September, factory activity shrunk as much as 44%, reaching the low point of February 2020, when the coronavirus pandemic hit the hardest.

14.10.2021 21:00
Piše: Valerio Fabbri
Ključne besede:   Valerio Fabri   China   electricity   power   energy   oil   Russia   East Asia   Lantau Group

State-owned coal, electricity and oil energy companies are being told to secure supplies for the winter, as the problem may only worsen.

It comes as no surprise that global investment banks have cut their forecasts for China’s economic growth, estimating the economy to contract from 8,2 % to 7,8 %. The Chinese authorities, as is their wont, have ordered top state-owned energy companies to secure supplies for this winter at all costs, otherwise they may face the consequences. According to some accounts, the Chinese Communist Party (CCP) has taken it as a personal affront that the world’s second largest economy has to face travails long forgotten. Energy-intensive industries such as steel-making, aluminum smelting, cement manufacturing and fertiliser production are among the businesses hardest hit by these outages. The government has called on companies in major manufacturing areas to reduce energy usage during periods of peak demand or limit the number of days that they operate.  

 

There are several reasons for this new situation. In the first place there is rising power demand. As the post-pandemic world re-opens industry production, there is a surging demand for Chinese goods and the factories are using more power than usual. In the second, higher coal prices and climate goals create a new setting. China’s attempts to become carbon-neutral by 2060 come with new rules imposed by the government, resulting in slower coal production, despite relying on it for more than half of its power needs. In turn, these two factors forced the most populated areas to curb energy use and even close some factories to save on electricity. Between June and September, the demand hit through the roof and the authorities had to shut power supplies in some cities, resulting in residential outages. 

 

State-owned coal, electricity and oil energy companies are being told to secure supplies for the winter, as the problem may only worsen. Black-outs will not be tolerated, the CCP said, well aware that coal supplies are limited and reserving oil will have adverse impact on transportation costs. The National Development and Reform Commission (NDRC), China’s development planner, intends to solve the crisis by asking power-generating companies to increase output and promote the rationing of electricity. In turn, the power companies, represented by China Electricity Council, stated that "coal-fired power companies were now 'expanding their procurement channels at any cost' in order to guarantee winter heat and electricity supplies". However, finding new sources of coal supply is easier said than done, because among the suppliers, Russia is already focused on its customers in Europe, Indonesian output has been hit by heavy rains and nearby Mongolia is facing a shortage of road haulage capacity.

 

The Lantau Group, Hong Kong-based Asia Pacific’s premier energy-focused strategy and economic consulting group, issued a white paper in late September in which it identified the main drivers of the current scarcity. In a nutshell, the paper points out that the most relevant factor currently contributing to power shortages is that "against soaring prices, coal generators have reduced their on-site inventories to a week or less. Some are idling their plants or only operating at a minimum capacity factor, as they are currently incurring losses on all their generation".

 

In the last week of September the Chinese government dispatched inspection teams to various provinces in order to work on two separate items: ramping up coal production domestically and reviewing the application of the coal on-grid tariff mechanism. Both items speak volumes to the need to provide economic relief for generators, both by expanding the supply of coal and by evaluating the cost-recovery mechanism for coal generators. As the Lantau Group paper put it, perhaps for the first time Chinese citizens are being asked to "accept higher power costs to keep their lights on". Chinese consumers are used to normally paying some of the lowest tariffs in East Asia, "particularly for industrial and commercial users". In the past, these higher costs would have been "assumed by the generator or grid company, never by the power consumers", something that might mark a watershed in China’s approach to energy.

 

Valerio Fabri is Ljubljana based Italian journalist. He writes for several international media outlets, including portal+.

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