China rust-belt province warns of more shortages in energy crisis

© Reuters. FILE PHOTO: A chimney of a China Energy coal-fired power plant is pictured in Shenyang, Liaoning province, China September 29, 2021. REUTERS/Tingshu Wang

By Muyu Xu and Shivani Singh

BEIJING (Reuters) -The largest provincial economy in China's northeast rust belt on Monday warned of worsening power shortages despite government efforts to boost coal supply and manage electricity use in a post-pandemic energy crisis hitting multiple countries.

The energy crisis gripping the world's second largest-economy and top exporter is expected to last through to the end of the year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter because coal supply is expected to fall short this winter.

Liaoning province issued its second-highest alert level for power shortages for the fifth time in two weeks on Monday, warning that the shortfall could reach nearly 5 gigawatts (GW).

The biggest economy and largest consumer of power among the three provinces making up China's rust-belt industrial region, Liaoning has been hit by widespread power cuts since mid-September. A level-two alert indicates a power shortage equivalent to 10-20% of total demand for power.

The rebound in global economic activity as coronavirus restrictions are lifted has exposed shortages of fuels used for power generation in China and other countries, leaving industries and governments scrambling as the northern hemisphere heads into winter.

"The biggest power shortage could reach 4.74 gigawatts (GW) on Oct. 11," said a notice issued by the department responsible for industry in the province.

An order to curb power use had been put in place from 6 a.m. (2200 GMT on Sunday), it said.

The province also issued level-two alerts for each of the last three days of September, when the daily power shortage reached as much as 5.4 GW, leaving hundreds of thousands of households without electricity and forcing industrial plants to suspend production.

The drop in output from power plants followed tightening supply and soaring prices for coal, which is used to generate more than 70% of electricity in the region.

Wind farms have also been idled because of slow wind speeds, a province-backed newspaper reported. Wind power made up 8.2% of Liaoning's power generation in 2020, National Statistics Bureau data shows.

COAL SHORTAGE

The energy crisis, which has led to fuel shortages and blackouts in some countries, has highlighted the difficulty in cutting the global economy's dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.

China will "strictly control" coal-fired power generation projects and "strictly limit" the increase in coal consumption over the 14th Five-Year plan period from 2021-2025 while making a phased reduction in consumption in the next five-year plan, Vice Premier Han Zheng said in a joint statement issued on Monday after environment and climate dialogue between China and the European Union.

China is taking steps to try to alleviate tightness in the domestic coal market by pushing local mines to increase output, ING analysts said in a note to clients on Monday.

Shanxi province and the Inner Mongolia region, two of China's biggest coal producers, ordered more than 200 of their mines to expand production capacity and prioritise coal supply to power plants in northeastern provinces, including Liaoning.

However, about 60 coal mines in China's largest coal-mining province, Shanxi, have been closed and several railway lines disrupted since Friday after heavy rain caused flooding. The Shanxi government has not disclosed how much production capacity those closed mines represent.

Meanwhile, high coal costs continue to pressure utilities. China's thermal coal futures rose 8% to hit a daily upper trading limit shortly after trade started on Monday.

More than 70% of China's coal-fired power plants are loss-making because of high coal costs, Citi analysts said in a note on Friday.

A report by Moody's (NYSE:MCO) Investors Service said: "China's electricity cuts will add to economic stresses, weighing on GDP growth for 2022. And the risks to GDP forecasts could be larger as disruptions to production and supply chains feed through."

The National Development and Reform Commission (NDRC), China's state planner, on Monday said it has been urging power companies to boost coal inventories. It will hold a news briefing on Tuesday at 10:30 a.m. (0230 GMT) on tariffs for coal-fired power.

Last week China said it would allow coal-fired power prices to fluctuate by up to 20% from base levels, instead of 10-15% previously.