Caixin
Oct 22, 2021 08:40 PM
OPINION

Opinion: Will Power Shortages Be the New Norm for China?

Will China’s power shortages get out of hand, or will things get back to normal? Despite energy being vital to stable economic activities, power rationing has been adopted in nearly 20 provincial-level regions since August, making this fall stand out for having the most severe power shortages in a decade. This, combined with production restrictions, is having an impact on already dampened demand from the supply side, and adds considerable downward pressure to the economy.

What’s unusual about this round of power shortages is that it takes place when the economy is weakening rather than overheating. Fundamentally, there are two possible reasons for this. The first is insufficient total power supply, especially due to restrictions on coal production. The other is the deterioration of the power demand structure, especially reflected in an increase in energy-intensive industrial production. Will the introduction of measures to guarantee supply and stabilize the price of coal ease power shortages? If so, will industrial production remain limited under “dual control” (controlling both the total amount and intensity of energy consumption) goals?

Will the coal shortage and power rationing remain?

More than 70% of China’s electricity supply is generated by thermal power, and whether the gap in coal supply and demand can be addressed is still key to easing power shortages. In fact, coal production, especially off-balance-sheet capacity, has been limited since the beginning of this year due to multiple factors including tougher safety supervision and environmental protection policies, coal-related anti-corruption campaigns and penalties for overproduction.

As production capacity in Inner Mongolia and other major coal-producing areas is unlocked, fourth-quarter output is estimated to increase by about 55 million tons. That, coupled with weakening macroeconomic momentum, is expected to narrow the gap between coal supply and demand. It is worth noting that recent reforms to gradually liberalize electricity prices are conducive to easing profound price distortions caused by a long-standing situation where coal prices are determined by the market but electricity prices are controlled by government. However, compared with an astonishing increase in coal prices this year, the impact of changes in electricity prices will remain moderate and marginal.

Will there still be production restrictions and shutdowns?

Even if the coal shortage and power rationing problems are eased, will industrial production still be limited in the future under the constraint of “dual control” of energy consumption? Energy consumption per unit of GDP fell by only about 2% in the first half of the year, still a long way from the targeted 3% decline for the whole year. Despite the large-scale restrictions on power supply and factory production in the third quarter, the overall reduction in energy consumption is not significant based on indicators such as the amount of electricity used, which will make the work of energy reduction arduous in the fourth quarter.

It is worth emphasizing that energy consumption per unit of GDP is closely related to changes in industrial structure, given that the technology won’t significantly improve in the short term. Since the pandemic, China has been highly dependent on the industrial sector and overseas market demand, which has inevitably led to a substantial increase in energy consumption per unit of GDP. As the services industry recovery is slowing, industrial production growth in the fourth quarter will have to slow down significantly to meet the energy reduction target set at the beginning of the year.

On the whole, there is great pressure to achieve this year’s target of “dual control” of energy consumption, and, coupled with the possible impact of this year’s cold winter, the electricity will first and foremost be supplied to safeguard people’s livelihoods. Industrial production restrictions, especially in energy-intensive sectors, may continue in the fourth quarter.

 Read more  
Cover Story: How China Stumbled Into a Giant Energy Shortage

Wu Ge is chief economist of Changjiang Securities Co. Ltd.

This article has been edited for length and clarity.

Contact editor Heather Mowbray (heathermowbray@caixin.com)

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