Opinion: Supply/Demand Mismatch, Price Caps to Blame for China’s Power Shortage
Last weekend, several provinces in China suffered power outages and were obliged to ration electricity supplies. Although similar incidents occurred in some provinces in southern China in late 2020, this time, the outages and power rationing have hit a wider area.
There are clear causes: shrinkage in coal inventory in many provinces and increasing generator failures. Meanwhile, rising prices for global bulk commodities —especially coal — and the relatively low electricity price set by the government mean that the more electricity power plants generate, the more economic losses they sustain.
Why are coal inventories so low? Is it due to the government’s 2021 energy conservation and emission reduction requirements or due to the country’s 2030 peak carbon dioxide emissions goal and the 2060 carbon neutrality goal? These two factors are widely regarded as the main causes of the recent power shortage. I think these factors contribute to the shortfall, but they are not root causes.
Energy conservation and emission reduction measures certainly have a great impact. For example, to realize dual-control targets for the year, some provinces and municipalities have introduced production limits and imposed rationing on high energy-consuming industries starting in August. “People’s Daily” called their move “a last-minute push.” After procrastinating, they now impose strict requirements in a huge rush as their performance assessment approaches.
The carbon neutrality goal is also having an impact. To address issues like global warming, the whole world advocates replacing traditional energy with green energy. But this creates a paradox: Even as prices of traditional energy are driven up by demand and manufacturers remain indecisive about making a transition to green energy, traditional energy capacity is constrained and new energy can’t make up for the shortfall. As a result, supply-demand contradictions have emerged in coal and electricity consumption.
We believe that a more critical reason for the recent power shortage is that power capacity cannot match electricity demand. From January to August 2021, industrial output increased by 13.1%, but raw coal output rose by only 4.4% year on year (YoY). As a matter of fact, despite energy conservation and emission reduction targets, this year’s gross power generation has been higher than that of any year in the past decade. 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.
This year, industries that have seen the fastest growth in power consumption — all exceeding 20% — include textiles, computers, general equipment, and electrical machinery, stimulating a YoY increase of 1.9 percentage points in overall electricity consumption. These industries are all export-oriented. In the first eight months this year, exports grew by 33.7%; in every single month, China’s YoY increases in imports and exports have been both topped expectations. In particular, the previous downtrend in imports and exports was reversed in August, according to the latest data. Since the Delta virus halted production in Southeast Asia, China has become almost the only major producer in the world.
Despite the impact of energy conservation and emission reduction measures, another key to the tight power supply is that the downturn in traditional energy prices in the past few years has posed great pressure on the survival of coal enterprises.
|Global coal prices are climbing|
The debt default of Yongcheng Coal & Electricity Holding Group in Henan last year remains fresh in people’s memories. How can a coal company that fails to pay its debt have the funds to expand its production capacity? Coal capacity has been hurt by multiple factors, including China’s cutting overcapacity and structural adjustment over the past few years, the investigation of coal-related corruption over the past 20 years in Inner Mongolia, and damage to transport infrastructure from natural disasters this year.
After the COVID-19 outbreak, prices of global bulk commodities and coal have risen. However, production capacity cannot be increased in a short time. Since industrial manufacturing and imports and exports have grown substantially, coal and power consumption would likely suffer a supply-demand imbalance this year, even if there were no requirements for energy conservation and emission reduction requirements. High energy consumption is also a great contributor to the Chinese government’s shutdown of cryptocurrency mining in May this year. China’s power demand this year is beyond expectations.
It is a remarkable fact that lower imports of steam coal (thermal coal) from Australia is not blocking improvement in the power supply. This year, the expansion of coal imports from Indonesia, Colombia, Russia, South Africa, and other countries has offset a considerable part of the import gap from Australia. However, the thermal coal import volume has decreased compared with last year.
As the prices of bulk commodities such as thermal coal and natural gas go up, electricity prices in Europe and the U.S. have been rising continuously, while the EU’s electricity price is twice that last year. Meanwhile, the electricity prices in Italy, Spain and Germany have grown by more than 1.5 times. The price growth in America is relatively under control thanks to its ample yield of natural gas.
|Italy's electricity prices rose by 17.4% last week|
As opposed to market pricing for energy and electricity in these countries, energy prices in China reflect the market, but electricity prices, which are controlled by the government, have remained unchanged for many years. This leads to the current power shortage. Given the array of constraints and excessively low capacity of the power generation system, rationing becomes almost inevitable.
However, the conspiracy theory popular online recently that we are playing a long game is absurd. It is a falsehood that China would eliminate low-end energy-intensive manufacturing industries and export inflation to the U.S. by reducing production and forcing up prices. Though high-quality development is a long-term national policy in China, economic development still highly relies on the manufacturing and exporting industries based on the present economic downturn. An artificial shutdown will go against the laws of economics which will cause domestic inflation and consumption reduction. To resolve the problem, it is better to start by adjusting the price of electricity.
|Iran maintains some of the world's lowest electricity prices|
The negative influence caused by power rationing on energy-intensive manufacturing industries and some service industries cannot be eliminated in the short term. Maintaining economic growth in the fourth quarter requires national policy support.
Xia Chun is managing director and chief economist of Noah Holdings International Limited.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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