What you need to know about China’s power crunch

What are the reasons for the power crunch?

1. The demand for power is rising. China has been experiencing a strong recovery in exports, intensified by seasonal orders for Christmas, prompting factories to extend their work hours and increase power consumption. The hot weather this summer also pushed up residential power usage, especially in coastal province Guangdong. “The pandemic has driven China to become the world’s factory again. So even though traditional power plants are running at full capacity, electricity demand cannot be met,” wrote Xia Chun, managing director and chief economist of wealth management firm Noah Holdings International, in a column for Chinese financial news outlet Caixin.
2. High coal prices. China’s curbs on coal mining for environmental and safety reasons, as well as heavy rain in Indonesia, disrupted coal production, pushing up its price. Given China’s tight control on electricity prices, for many power plants the high coal prices means it’s unprofitable or even loss-making to operate, according to Myllyvirta. Last October, China also decided to stop importing coal from Australia over political disputes. Although China managed to make up some of the void created by its boycott by importing from countries like the US, it has to pay higher prices for it due to the longer transportation distance. Through August this year, China imported 10% less coal that it did last year.
3. Climate goals. Many energy analysts including Myllyvirta have argued that this is a more minor reason compared to other factors that are driving the power crisis. But in a country where local officials are mostly measured on their ability to meet state goals, the pressure from Beijing for provinces on fulfilling energy targets cannot be ignored. In August, China’s National Development and Reform Commission, which sets energy consumption and economic targets, in a rare move named and shamed nine provinces for not meeting their energy intensity reduction targets, prompting the provinces and other regions to scramble to set curbs on power use. Such pressure will likely become more significant in time.

When did China begin limiting electricity use?

As early as May, some factories in the wealthy southern manufacturing hub Guangdong province began shutting a few days a week, but the shortage seems to have seriously worsened since last week. As of Tuesday (Sept. 28), power rationing and industrial production cuts have been reported in at least 20 provinces, which account for 71% of China’s industrial production, according to a note from analysts at BofA Securities.

While earlier power curbs mostly affected manufacturers, around Sept. 23 some cities in three northeastern Chinese provinces—Jilin, Heilongjiang, and Liaoning—cut electricity for some residential use, causing panic among citizens. After waves of complaints under the hashtag #northeast power cut on microblog Weibo, state media People’s Daily on Sunday urged local governments to ensure residents’ power use, and to avoid “stimulating conflict and transferring responsibilities.”

Today, Liaoning issued a new warning about the “acute” electricity shortage the province faces and revealed more restrictions, while the southern hubs Shenzhen and Guangzhou announced the cancellation of light shows for the upcoming Oct. 1 National Day holiday.

How is it affecting China’s economy?

The energy crisis is seen as an equally huge, if not bigger shock to China’s economy compared to the financial woes of embattled Chinese developer Evergrande, which is mired in around $300 billion of liabilities and struggling to make interest payments. Economists at Nomura and Goldman Sachs $GS have lowered their estimates for China’s GDP growth this year, with the latter citing Beijing’s increasing pressure to meet environmental targets for energy consumption and energy intensity.

Some suppliers to Apple and Tesla have halted their production due to the crunch, while more than 20 China-listed companies, ranging from bread makers to furniture producers, have announced that they have to suspend or limit their production. This could push up consumer goods prices in China.

What China is doing to fix its electricity crisis

On Wednesday, the National Development and Reform Commission laid out plans for tackling the power crunch. They include an orderly increase in coal imports, ensuring power generation of coal and gas plants, and urging plants to prepare coal inventories before the winter to above “safety levels,” and allowing prices to reflect demand and costs. The country might consider raising power prices for industrial or even residential users, according to Bloomberg, perhaps linking tariffs to the price of coal. Last month, it also said it had temporarily restarted some shuttered coal mines.

“In the slightly longer term, the rational response would be to dramatically increase investment in clean energy,” said Myllyvirta. China has set a goal of increasing the share of non-fossil fuels, such as wind and hydropower, in primary energy generation to 25% by 2030. But as those energies are highly reliant on weather conditions, and until related storage and transport infrastructure exists, they will not be able to replace coal as a stable source for power generation in the foreseeable future. Lower hydropower production contributed to power shortages in southern China this year.

The crunch has “no sign of abating in the near term,” according to the BofA Securities analysts’ note, pointing out that peak electricity use in this part of China usually takes place in winter, which is looming.

“Power crunch is usually observed in [the] summer or winter, when household power consumption peaks. The September outage raises question on how bad things could go in two months’ time when winter heating starts,” they wrote.