Energy

China’s Energy Crisis Deepens With Potentially Fatal Consequences


China’s multi-month energy crisis is deepening, with coal and natural gas prices now at record highs while temperatures are poised to plummet across the country. Emergency power rationing policies are still in effect, meaning that many households and factories alike could be left with intermittent power as winter sub-zero (Celsius) temperatures approach. Further supply chain shortages, inflation, and public discontent are on the horizon. Political fallout for the Chairman Xi is unclear.

How did we get here? It is a perfect storm, literally. Flooding across China’s key coal producing provinces, resurgent demand for Chinese goods in the wake of pandemic easing, conflicting CCP energy policies, and extreme market distortions, including power rationing and price controls, have all contributed to the energy shortage. Globally, intense weather events, production slowdowns, overreliance on green power production, and Russian opportunism have all exacerbated a tightening energy markets. 

Inside China’s energy intensive economy, power rationing for factories and businesses is in effect for more than a dozen provinces, per mandate from Beijing. Some provinces have gone as far as ordering factories to halt all production for a few days each week. As early as May (though much much more severe now) factory owners have increasingly turned to diesel generators to keep their business running amidst the energy crunch, as chaos escalated.

Reactions from citizens are a mix of shock, fear, and frustration, as cuts are made with no warning, lasting from hours to days.  Generator companies like Shandong Huali Electromechanical have witnessed a dramatic increase in sales while the Weifang Yuxing Power Company completely sold out of generators last month.

With winter fast approaching, China also ordered coal production to expand significantly. Over 100 mines have received approval to expand production, with a possible 55 million tons of coal to be mined in the forth quarter. Share values of coal mining companies such as China Coal Energy and Shanxi Coking Coal Energy have nearly doubled this year as prices hit record levels. Thermal coal futures contracts across China have risen more than 200% year to date, reaching 1,669.40 yuan ($259.42) per ton last week. Because coal is the main source of winter heating, we likely haven’t seen the ceiling for prices.

There’s hope. Instead of more screw-tightening, in a dramatic step Beijing is now trying to resolve the crisis through an unprecedented electricity price liberalization. Attempting to rectify market distortions, China’s top economic planning agency announced it will allow coal-fired electricity prices to rise more in response to forces of supply and demand. Prices are now allowed to fluctuate up to 20 percent from base levels to incentivize lower energy consumption. For energy-intense industries like steel and cement, prices will be determined by market forces and will not be limited to 20 percent. This will enable power plants to pass on their higher-cost generation to commercial and industrial end-users. 

However, many believe this will not be enough to immediately solve or even alleviate the crisis. Industry makes up 59 percent of total grid demand in China — more than all homes, offices, and retail stores put together. Heavy industry accounts for the lion’s share of China’s domestic energy demand, and unless their usage is curbed the shortages will persist. With price liberalization poised to raise electricity costs for high-end users like heavy industry, cost of goods will rise, and inflationary pressure is sure to set in. Rising costs of energy will make factories pass on higher costs to consumers. In addition to higher electricity prices, if power rations continue to force factories to halt production and contribute to supply chain shortages, then China will contribute to global inflation. The world has become accustomed to cheap Chinese power for making a range of its goods. We all could be feeling the effect of the crisis if it is not tackled soon. 

If Beijing wants to manage this crisis without crippling the global economy, it will need to increase its energy imports and even temporarily rethink some emissions control to address domestic shortages. This may mean pumping the breaks on renewables targets to get access to whatever energy is available, regardless of emissions profile.

The rollout of green energy sources in China did not replace coal – the backbone of China’s power sector. Extreme weather this year has disrupted supplies of some renewables such as hydropower and wind. The unfolding crisis suggests that China may need to rethink the pace of its energy transition and ensure that nuclear energy, and hydrocarbons like gas and coal can adequately anchor the power system.

Countries around the world are learning not to take for granted their energy security. There is extreme danger in the form of unemployment, inflation, blackouts, severe supply chain disruptions, and even widespread deaths if the unfolding energy crisis is not addressed. “Energy poverty” is also an important factor. Political repercussions may be dire even in authoritarian systems such as China’s. It is too early to tell if Beijing’s policy actions are strong enough to fight the market and environmental forces facing People’s Republic.

With Assistance from Sarah Shinton



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