Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Explainer-What is behind China's power crunch?

CommoditiesSep 29, 2021 04:15AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Electricity transmission towers are pictured near Beijing’s Central Business District (CBD), China September 28, 2021. REUTERS/Tingshu Wang

By Shivani Singh and David Stanway

BEIJING (Reuters) - China is in the grip of a power crunch as coal supply shortages combined with strong power demand from manufacturers, industry and households push coal prices to record highs and trigger widespread curbs on usage.

Climate watchers have been at pains to say Beijing's tougher environmental curbs are not to blame for the current energy crunch. Indeed, China has focused on cutting power consumption, not coal output.

Instead, China's heavily controlled power pricing system prevents its generators from passing on their soaring coal costs to consumers, leaving them with no choice but to suffer losses or reduce output.

HOW LONG HAS THERE BEEN A POWER SUPPLY PROBLEM IN CHINA?

China has often struggled to balance supply and demand, with central planners often underestimating demand growth, leaving many provinces at risk of power cuts during the summer and winter peak consumption seasons.

This year, a perfect storm of factors - including some coal supply disruptions and surging demand from industries and households - have caused power shortages throughout the country. However, the country's rigid pricing system is seen as the major culprit.

WHY IS CHINA'S PRICING SYSTEM BEING BLAMED?

One of China's worst power supply crises took place in the winter of 2010-11, when fierce snowstorms disrupted coal supplies and damaged power transmission infrastructure.

However, power plants - concerned about their profitability - made the shortages worse by running down their stockpiles in order to prolong price negotiations with coal suppliers.

Though China has since allowed power tariffs to fluctuate if coal costs reach a certain level, struggling generators are still not at liberty to raise prices in a timely manner in order to avoid losses.

Some policymakers warned in 2019 that China needed to build more coal-fired power plants in order to head off power shortage risks over the 2021-2025 period, but existing generation capacity has remained heavily underutilised, suggesting that many plants lack the economic incentives to go all out to boost output.

WHAT HAPPENED TO CHINA'S PLANS TO CURB INDUSTRIAL POWER USE?

The recent shortages have come about despite Beijing's efforts to curb heavy industrial power usage.

Provincial authorities in Inner Mongolia and Guangdong have both ordered industries - including energy-intensive aluminium smelters - to reduce electricity use.

However, it was revealed that 10 provinces and regions - including major coal producers like Inner Mongolia - had still failed to meet existing energy efficiency targets in the first half, largely as a result of a post-lockdown recovery that analysts say relied on energy intensive heavy industry.

But despite the curbs, China's total power generation through August of 2021 was still 10.1% greater than in the same period in 2020, and nearly 15% more than in the same slot in 2019 as utilities across the country cranked up power to meet surging industrial demand.

HOW ARE REGIONS NOW LIMITING POWER FOR CERTAIN USERS?

Power rationing is currently taking place in at least nine provinces and regions. Local governments in major manufacturing hubs like Zhejiang, Jiangsu, and Guangdong provinces have asked factories to limit power usage or curb output.

Some power providers have sent notices to heavy users to either halt production during peak power periods that can run from 7 a.m. and 11 p.m., or shut operations entirely for two to three days a week.

Others have been told to shut until further notice or a particular date, including soybean processing plants in Tianjin in eastern China which have been shut since Sept. 22.

WHICH INDUSTRIES HAVE BEEN IMPACTED BY THE POWER SHORTAGES?

The impact on industries is broad and includes power-intensive sectors like aluminium smelting, steel-making, cement manufacturing and fertiliser production.

At least 15 listed Chinese firms that produce a range of materials and goods - from aluminium and chemicals to dyes and furniture - have reported that their production has been disrupted by power curbs.

China's seasonal output of key industrial products https://fingfx.thomsonreuters.com/gfx/ce/mopankbamva/ChinaSeasonalIndustrialProducts.png

Residential users have also been hit, with households in parts of northeast China told to limit use of water heaters and microwaves to conserve power. Elevators and traffic lights were also reportedly affected in some parts of the northeast.

WHAT HAS BEEN BEIJING'S RESPONSE TO THE POWER CRUNCH?

The NDRC said on Friday it will work to resolve the power shortages, but did not provide any specific details on what steps it would take.

One major near-term challenge for Beijing is its ongoing trade dispute with Australia, the world's second-largest coal exporter, which has greatly curbed coal shipments to China just as local authorities stepped up safety standards that have slowed production at Chinese coal mines following a series of accidents.

A senior official in northeast China's Jilin province urged authorities to try to source more coal from Mongolia, Russia and Indonesia in order to address the supply gap.

China thermal coal prices https://fingfx.thomsonreuters.com/gfx/ce/gdpzyqjlwvw/ChinaThermalCoalSep272021.png

Another factor is a global shortage of natural gas, as a number of major economies look to stock up on the fuel simultaneously following the easing of COVID-19 restrictions.

Even so, the State Grid Corporation of China said on Monday it would "go all out to fight the battle of guaranteeing power supply" to customers and would dispatch more power across its network.

Explainer-What is behind China's power crunch?
 

Related Articles

Oil heads for sixth weekly gain amid supply concerns
Oil heads for sixth weekly gain amid supply concerns By Reuters - Jan 28, 2022 3

By Rowena Edwards London (Reuters) -Oil prices rose on Friday, heading towards a sixth consecutive weekly gain, as geopolitical tensions continue to raise supply concerns. Brent...

Crude Oil Higher; Sixth Consecutive Week of Gains Looms
Crude Oil Higher; Sixth Consecutive Week of Gains Looms By Investing.com - Jan 28, 2022

By Peter Nurse    Investing.com -- Oil prices pushed higher Friday, set for another week of gains, helped by continued geopolitical tensions between Russia and Ukraine and with top...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email