China faces its worst electricity shortage in a decade. It’s a problem for the whole world
Nearly a dozen Chinese provinces have said they have faced a power crisis in recent weeks, including some of the country’s most important engines for economic growth.
Guangdong province – a manufacturing hub responsible for $ 1.7 trillion, or more than 10%, of China’s annual economic output and a greater share of its foreign trade – has been rationing its electricity for more than a month. The restrictions have forced businesses across the province to shut down a few days a week. Some local authorities warn that electricity rationing could last until the end of the year.
It’s not just Guangdong. At least nine provinces have said they face similar problems, including Yunnan, Guangxi and the manufacturing hub of Zhejiang, forcing regional authorities to announce power cuts in an area of China the size of China. United Kingdom, Germany, France and Japan combined.
The electricity crisis even contributed to the slowdown in the growth of factory activity in China in June, the country’s National Bureau of Statistics admitted on Wednesday.
This is the worst energy shortage in China since 2011, when droughts and soaring coal prices prompted 17 provinces or regions to reduce their electricity use. Power plants are reluctant to produce a lot of electricity when the coal they burn is expensive: Beijing controls the cost of electricity, so producers can’t just raise their prices.
This time around, the post-pandemic commodity boom and inclement weather are once again forcing coal-fired power stations to cut back on production, while hampering hydropower. But there is one key difference: China is also grappling with how to respond to pressure from President Xi Jinping for a carbon neutral China by 2060. This ambitious target for the world’s largest coal consumer has leads the country’s coal mines to produce less, resulting in higher prices, according to Yao Pei, chief strategist at Chinese brokerage firm Soochow Securities.
A punch to the economy
The shortages could deliver a punch that could deflect China’s fragile recovery, while creating new problems for global supply chains that are already struggling to cope.
“Power rationing will inevitably hurt the economy,” said Yan Qin, senior carbon analyst for Refinitiv.
An electricity shortage could reduce production in virtually all sectors of the economy, including major construction and manufacturing sectors. These companies used nearly 70% of China’s electricity last year, according to the National Bureau of Statistics, and were the main drivers of the recovery in 2021.
Guangdong-based Chengde New Material, one of the country’s largest stainless steel producers, told customers late last month it would shut down two days a week until the electricity no longer needs to be rationed. The company expects production volumes to decrease by 20%, to as much as 10,000 tonnes steel per month.
“Businesses are not happy with this,” said Klaus Zenkel, president of the European Union Chamber of Commerce in southern China. He said that up to 80 of Member companies may have been affected by government orders to suspend operations a few days a week, adding that domestic manufacturers have also been forced to stagger production. Some companies have even started renting expensive diesel generators to keep operations going, he said.
Power rationing in the key metal-producing province of Yunnan has even caused a drop in the supply of some types of metals, including aluminum and tin, according to government data and independent research.
Production cuts and the prospect of missed delivery times across China also risk stretching an already tight global supply chain. Guangdong alone is a manufacturing hub that accounts for a quarter of China’s total trade, including clothing, toys, and electronics.
“He [the power shortage] could add to shipping delays that can be felt around the world, ”said Henning Gloystein, director of energy, climate and resources at Eurasia Group.
“The shortage of electricity can lead to a reorganization of working hours for local manufacturers, which calls into question the speed of delivery. [and] so the rest of the supply chains, ”said Lara Dong, senior director of electricity and renewables for Greater China at IHS Markit.
High demand and extreme weather conditions
Experts attribute the scale of the energy crisis to a multitude of issues, ranging from high energy demand to extreme weather conditions.
Beijing’s infrastructure-focused economic stimulus package is very carbon intensive, according to Lauri Myllyvirta, chief analyst for the Energy and Clean Air Research Center. In the first five months of the year, electricity consumption in southern China exceeded pre-pandemic levels, up 21% from the same period in 2019, according to China Southern Power Grid, a large public grid operator.
Unusually hot weather in some areas has resulted in increased demand for electricity as people make more use of air conditioning and refrigeration.
Meanwhile, there is enormous pressure on energy production. Renewable energy sources, such as hydropower, have been hampered by the drought. Yunnan province’s main hydroelectric hub, for example, is struggling to retain the water it needs in its reservoirs, according to Myllyvirta.
Nationwide security check ahead of Communist Party’s 100th anniversary Thursday has led to massive suspensions of coal mines across China, exacerbating tensions over coal supplies.
“Political stability is the top priority now until the end of July,” Qin said.
China has also struggled to consolidate its overseas supply. Coal is very expensive to import, according to Gloystein of Eurasia Group, who said prices more than doubled last year.
Gloystein also pointed out that trade tensions with Australia – which in 2019 was responsible for nearly 60% of China’s thermal coal imports – have created tension. Beijing imposed trade barriers against Australian coal last year after Canberra called for an independent investigation into the origins of Covid-19.
Since then, China has imported more coal from Indonesia and South Africa to fill the gap, but that has not closed the gap.
“This has left some Chinese utilities running out of fuel for their power plants,” Gloystein said, adding that it was difficult to secure additional short-term supply in places like Indonesia.
Shortages could continue
Power shortages are expected to continue for at least the next few months, especially as demand remains high during the hot summer months. Qin of Refinitiv said there are “still significant risks” that southern and central China will need to continue rationing electricity, especially if the weather is warmer than normal.
The government also has other options. Gloystein suggested that China could remove barriers against Australian coal, although “that would make Beijing look rather weak.”
And finally, the authorities may have to think about giving in on certain climate objectives. He suggested Beijing could “bring back online” power plants that were shut down earlier this year to tackle excessive pollution.
Qin said power shortages are likely to remain a problem “quite often” for at least some time. China appears determined to control dirty energy and is trying to increase its use of renewable sources and reduce the use of fossil fuels.
“The problem facing China’s electricity supply is how to meet both the growing needs for electrification and the goal of decarbonization,” Qin said, adding that while China is developing many sources of electricity, renewable energy, these sources are not yet as stable as those that use fossil fuels. .