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Explainer: Why Is There A Power Crisis In China?

A post-pandemic export boom, coal supply shortages, government emissions targets and inefficient renewables sources have all been blamed for outages that have seen the lights turned out in parts of the world’s second biggest economy


A molten salt solar tower stands behind electricity pylons at a power station near Dunhuang, Gansu province, China. Photo: Reuters

 

The worst power outages in decades are hitting many parts of China as energy demand surges amid a post-pandemic recovery, and as coal supply shortages bite under Beijing’s emissions-reduction campaign.

In Zhejiang province, 161 textile and dyeing businesses were ordered to immediately halt production on September 21 until the end of the month.

On September 30, local authorities in Liaoning province warned of the risks of temporary power cuts as State Grid projected a maximum power shortage of 5.39 million kilowatts, or 15% of the province’s demand during the 2020 winter peak. 

 

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The power crunch is disrupting manufacturing of all kinds of products from textiles and toys to machine parts and construction materials in the world’s second-largest economy, raising global supply chain risks and inflationary pressures that could ripple through the rest of the world.

An export boom, a shortfall in coal supplies, and local government efforts to reduce carbon emissions have all contributed to the recent wave of electricity cuts.

Several leading economists expect China’s economic growth to slow in the coming months as power shortages hit industrial output and Beijing’s zero-Covid strategy and property sector curbs further reduce activity.

Nomura has revised down its China growth forecast for the fourth quarter to 3.0% from 4.4% while Oxford Economics has cut its quarterly growth forecast to 3.6% from 5%.

Over the past few weeks Beijing has been scrambling to ease the national power crunch by raising its coal output quota, lifting the ceiling on coal-fired power prices, and expediting coal imports from Russia, Indonesia and Mongolia. 

The National Development and Reform Commission, China’s top economic planner, said on Tuesday it was looking for ways to intervene in record high coal prices.

China has also turned to Australian coal to combat power shortages despite an unofficial import ban on the fuel for nearly a year, Reuters reported.

However, floods in Shanxi province, which accounts for about 30% of China’s coal output, have added to supply challenges. 

The demand for fuel has eased this month in Guangdong province, southern China’s export hub, as air-conditioning usage decreases, local media reports said.

But analysts warn that the power crunch could return in the winter, particularly in northern China where heating needs will increase, and continue through the lunar new year into February 2022.

 

What Are The Reasons Behind The Power Crunch?

The key reasons behind China’s power crunch are an export boom, coal supply shortages, and government efforts to curtail emissions. And, as the country transforms to non-fossil-fuel power generation, power grids face challenges dealing with the wildly uneven supply of power from renewable sources.

 

1 Export Boom 

As China’s Covid-19 containment has been relatively more effective, the nation has assumed manufacturing orders from other countries that are still in pandemic shutdowns. Spending on goods also rose when lockdowns stifled activities such as travel and dining out.

“China’s manufacturing sector is booming – exports to the US are nearly two thirds higher than they were before the pandemic. The power network is struggling to keep up,” Mark Williams, chief Asia economist of Capital Economics, told Asia Financial.

Electricity consumption in industry was substantially higher in both August and September than a year before, he observed.

China’s total export value in the first three quarters grew by 33% year-over-year to $2.4 trillion, according to data from the General Administration of Customs. The figure in September reached $305.7 billion, up 28.1% from a year earlier and exceeding analyst expectations.

 

2 Coal Supply Shortages

While demand surges, power plants are struggling to keep up amid declining coal supplies and rising prices. Coal-fired power generation accounts for nearly 70% of China’s electricity, according to first-half data from the National Bureau of Statistics.

Although China has ample reserves, efforts to curb industrial overcapacity, improve safety, and reduce emissions have slashed its coal output since 2016. 

Coal prices skyrocketed amid the widening gap between supply and demand. The most-traded thermal coal futures contract on the Zhengzhou Commodity Exchange more than doubled over the last nine months. 

 

3 Government Efforts To Curtail Emissions

As Beijing aims for carbon emissions to peak by 2030, local authorities must meet specific goals to reduce power consumption. Some provinces that have missed their targets so far this year – such as Jiangsu and Zhejiang – have resorted to aggressive measures such as ordering production halts, and some, such as Liaoning and Jilin, have even imposed power rationing on residents.

Beijing has set goals in its 14th Five-Year Plan to reduce national energy consumption per unit of gross domestic product by 13.5% and carbon emissions by 18% by 2025, from 2020 levels. 

Lu Ting, Nomura’s chief China economist, said Beijing will “undoubtedly” order the suspension of many polluting factories in north China to ensure blue skies for the Winter Olympic Games in February 2022. It issued similar edicts before and during the summer Beijing Olympic Games in 2008.

 

4 Renewable Energy Limitations

Although China has stepped up its expansion of renewable energy supplies, non-fossil-fuel power generation such as hydroelectricity and nuclear power is prone to the weather.

Last winter, Hunan province suffered a power blackout because 45% of electricity produced in the region is from hydropower plants – but the water levels had dropped.

“Europe has been a world leader in the transformation to green energy. However, in a year of pandemic and frequent natural disasters, risks of Europe’s transformation were exposed. While storage technologies are not yet mature, renewable power generation could not provide the reliability needed in the case of a natural disaster,” Ming Ming from CITIC Securities said.

Non-fossil-fuel power generation will account for 47.3% of China’s installed power capacity by the end of this year, surpassing that of coal-fired power generation for the first time, according to China Electricity Council.

What Parts Of China Have Suffered Outages?

The affected regions include Liaoning and Jilin provinces in northeastern China, Jiangsu and Zhejiang provinces in southeastern China, Guangdong province in southern China, and Hunan province in central China, according to reports by state-owned Xinhua news agency and the business magazine Caixin.

Liaoning, Jilin, Jiangsu, and Hunan are industrial hubs, while Zhejiang is China’s largest textile-producing province. Guangdong is an export hub that manufactures all kinds of products from clothing to appliances. 

Also, Hebei, Shandong and Inner Mongolia, which did not miss targets but are known for being highly energy intensive, are expected to face severe restrictions as the Winter Olympic Games approach, Lu from Nomura said.

 

What Sectors Have Been Most Impacted?

Sectors directly impacted by power shortages include mining, chemicals, steel, non-ferrous metals and non-metallic building materials, Lu Shengbin, a researcher from Suning Institute of Finance, said in a note.

Impacts have been spreading downstream to include product manufacturing, textiles and construction, he added.

 

What Are The Economic Consequences?

Morningstar sees the power cuts in China as a short-term hindrance with largely limited impact, but some economists expect a more severe impact.

Supply shocks caused by the power crunch will likely push raw material prices to soar, which will squeeze the profit margins of downstream companies and depress demand, Lu from Nomura said. 

This will add to other demand shocks such as property sector curbs, Covid-related disruptions, and slowing export growth, he noted.

To stabilise growth, Beijing will step up easing measures, speed up construction of infrastructure projects and encourage investment in hard-tech and alternative sectors, according to Lu. “But we believe these measures will fall far short of what is required to deliver stable growth,” he said.

 

What Measures Have Been Taken To Ease The Crunch?

Over the past few weeks Beijing has been scrambling to ease the national power crunch by raising the coal output quota, lifting the ceiling on coal-fired power prices, and expediting coal imports.

An official from China’s National Mine Safety Administration said at a conference last Wednesday that China is set to increase coal output by 220 million tonnes per year, or 55 million tonnes in Q4, to ease supply shortages.

The 220 million tonnes of the new annual quota is equivalent to about 5.7% of China’s annual coal output in 2020.

On October 8, the Chinese cabinet decided to raise the ceiling on coal-fired power prices up 10 percentage points to 20%. Moreover, prices for high energy consumption industries will be set by the market and exempted from the price ceiling.

Li Xiang, chief environmental analyst of CITIC Securities, said the move would help coal-fired power companies pass on fuel costs downstream and improve their profit margins.

Jilin’s provincial government said in a statement late last month it would secure a long-term coal supply contract with Inner Mongolia and promote coal imports from Russia, Indonesia and Mongolia.

While local media reports say the power shortages have abated in recent weeks, heavy rainfall and floods in the first week of October in Shanxi province, which accounts for about 30% of China’s coal output, has added to the challenge.

 

How Long Will The Power Crunch Last?

China’s state-owned Xinhua news agency has shrugged off the power crunch, calling it a “blip“ in an editorial published on October 1.

“As decisive and prompt moves show effect gradually, the power crunch would be short-lived. The implications of the power shortage to the economy will be reduced to the minimum,” the editorial said.

However, analysts are not as optimistic. “While the energy crunch could ease slightly in October due to a seasonal decline in demand and the new power pricing scheme, the floods in Shanxi represent yet another challenge. The power crunch could also return in winter, as power demand rises again,” Lu from Nomura said.

 

  • By Iris Hong

 

Read more:

China Coal Prices Surge to Record Again Despite Policy Shift

China Calls For Huge Boost in Coal Output to Fight Power Crunch

 

Iris Hong

Iris Hong is a senior reporter for the China desk, and has special interests in fintech, e-commerce, AI, and electric vehicles. She began her career in 2006 and worked for Interfax News Agency and for PayPal before joining Asia Financial in July 2020. You can reach out to Iris on Twitter at @Iris23360981

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