Caixin
Sep 28, 2021 08:15 PM
ECONOMY

What’s Behind China’s Regional Power Outages

A high-voltage power transmission tower is installed in Harbin, Northeast China’s Heilongjiang province, in November 2020. Photo: VCG
A high-voltage power transmission tower is installed in Harbin, Northeast China’s Heilongjiang province, in November 2020. Photo: VCG

Many regions across China have been in the grip of a power shortage in the past few weeks. In the central province of Hunan, some building facade lighting and billboards are being turned off during peak hours. In the southern trade hub of Guangdong, some factories have been ordered to shut down for up to a week. In Northeast China, residents are experiencing sudden power blackouts that last for hours.

While it’s not the first time grid operators have been forced to suspend power supply and ration electricity, previous measures tended to be limited to industrial users. But this time, electricity cuts are being felt by both industry and residents alike.

An export boom, lack of coal and local government efforts to curtail industrial energy use and meet carbon reduction targets have contributed to this new wave of electricity cuts, which could further drive up costs of industrial production and disrupt the global supply chain, analysts said. Here are the key things you need to know about the most recent power cuts.

What’s behind the latest power cuts?

Some provinces are cutting power to certain users and rationing electricity to others because their supplies can’t meet demand, which has been inflated by strong manufacturing output and exports.

China’s total electricity output is not slowing, but the country is producing and exporting more  (link in Chinese) goods, as the pandemic has halted production in Southeast Asia, said Xia Chun, chief economist of Noah Holdings Ltd., a wealth management company. Export-driven sectors including textiles, computers and electric machinery are driving the increase in electricity consumption, he said.

In the first eight months, value-added industrial output in China grew 13.1% year-on-year (link in Chinese), but raw coal production rose just 4.4% (link in Chinese), official data show.

Coal fuels about 67% of China’s power generation, but a severe shortage due to production capacity cuts since 2016 and Beijing’s tough stance on cutting carbon emissions has contributed to the power crunch, according to a Monday research report by Nomura International (Hong Kong) Ltd.

That factor, as well as increased demand, limited imports and tightening supervision of production safety following a series of deadly coal mining disasters, have rapidly pushed up coal prices.

Soaring coal costs and the state-led electricity price setting regime have squeezed profits at power companies, discouraging production, the Nomura report said.

A year-on-year decline in hydroelectric generation also contributed to the power crunch, analysts with investment bank China International Capital Corp. Ltd. (CICC) wrote in a Sunday research note.

While some provinces don’t have a supply shortage, use of electricity by industrial users has been reined in to meet the central government’s targets for controlling energy consumption. For years Beijing has set targets for local governments to downsize energy consumption and improve energy efficiency, but many provinces are failing to meet this year’s targets.

An August notice (link in Chinese) by the National Development and Reform Commission (NDRC) showed that about two-thirds of all provincial-level regions missed their targets in the first half of 2021. Local governments that missed the targets have since been limiting production and energy use in a bid to hit the targets in the third quarter, with some rolling out tough measures. The eastern province of Zhejiang, for example, asked dozens of textile companies (link in Chinese) last week to halt production because the province needs to meet energy targets.

Meanwhile, some local governments misunderstood Beijing’s 2030 target to peak carbon emissions and rushed to launch energy-intensive projects before that deadline, also contributing to the power crunch, said Wang Yiming, a vice chairman of the think tank China Center for International Economic Exchanges.

 Read more  
Opinion: Supply/Demand Mismatch, Price Caps to Blame for China’s Power Shortage

The impact on the economy

The power shortage will impact the supply side of the economy, thus pushing up prices. It will continue driving up China’s producer price index (PPI), a gauge for prices of goods circulated among manufacturers and mining companies that already hit a 13-year peak in August, multiple economists expected. Some also predicted that a higher PPI will lead to higher inflation in consumer prices.

Meanwhile, economic growth could be dragged down. Nomura cut its forecast for China’s year-on-year GDP growth in the third and fourth quarters of the year to 4.7% and 3%, respectively, from 5.1 and 4.4%, citing the power crunch. The country’s GDP respectively grew 18.3% and 7.9% in the first two quarters amid a strong recovery from fallout of the Covid-19 pandemic.

The power shortage in the world’s second-biggest economy and largest manufacturer will also disrupt the global supply chain, causing shortages in textiles, toys, machine parts and more, and could push up global consumer inflation, the Nomura report said.

When will this pass?

Economists differ on how long they expect the power shortage will last.

The CICC analysts said the energy consumption control targets will still squeeze industrial production in the fourth quarter, but the impact will slightly tail off compared to September.

Nomura expects the power shortages to ease to some extent in October and more after November’s United Nations Climate Change Conference and the 2022 Beijing Winter Olympics in February, when the government may ease its emission reduction campaign.

A report by Morgan Stanley predicted a top-down intervention in late October to ease power cuts and preserve economic growth.

Macquarie Group Ltd., an Australian financial service provider, said it’s uncertain at this point how long the shortage will last because the government may prioritize decarbonization over economic growth.

Household power consumption remains a priority, however. Authorities are taking actions to stabilize coal supplies for the winter, with the NDRC on Friday meeting (link in Chinese) with representatives from major coal-producing cities and companies to secure medium-to-long-term supply contracts.

Yu Hairong contributed to this report.

Contact reporter Zhang Yukun (yukunzhang@caixin.com) and editor Lin Jinbing (jinbinglin@caixin.com)

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