China’s Power Scarcity – Short Pain or Structural Crisis? 中国电荒——阵痛还是结构性危机?

Read Time:9 Minute, 6 Second

By Cheng Rui 成睿

NANJING, CHINA —  September-October is typically the peak production season for private enterprises in China, but in 2021 a shadow was cast over the early-autumn boom. A massive nationwide power scarcity began in mid-September, and the “pulling and restricting” electricity policies in several major manufacturing provinces have negatively impacted production capacity throughout the Chinese economy. Power supplies were so scarce, particularly in northeast China, that emergency civil power shutdowns were needed to secure the grid. As a result, people were living in fear and anxiety of unwarned power outages.

中国,南京 —— 在中国,每年的9月到10月是企业的生产旺季。但今年,从9月中旬开始的全国范围内大规模的“电荒”以及几个制造业大省“拉闸限电”的举措为今年的黄金生产季蒙上了一层阴影。在中国东北以及一些其他地区,电力供应一度匮乏到需要紧急关停居民用电来保障电网安全。一段时间内,人们生活在无预警断电的恐慌之中。

The implications of this power scarcity are deeper than many imagine. In addition to salient factors such as soaring coal prices, this period of power scarcity reflects two more fundamental trends: the rigidity of China’s current pricing system for coal-fired electricity; and the diminishing flexibility of the entire power system, brought about by China’s energy transition under its “double carbon” targets (carbon peaking by 2030 and carbon neutrality by 2060). The recent spell of power scarcity has left a deep impression on those who were directly impacted and implored international audiences to learn more about China’s power system.


Jin, a Hopkins-Nanjing Center (HNC) student who lives in Lu’An City in Anhui Province, said he experienced several unannounced power outages of nine to ten hours each from September 30-October 6. “The apartment went dark all of a sudden. Elevators were disabled. Our family had to climb more than ten floors in the dark to go out and return home.”


The power outages were not limited to the northeast. As early as May this year, power supply tensions were felt in southern China as well. Since mid-May, private enterprises in 17 of the 19 cities in Guangdong Province were forced to implement the  “orderly power supply” policy. This policy started with “open six, stop one” (i.e., companies ceased production for at least one day per week) before expanding to “open five, stop two” and later “open four, stop three.” Guangxi, Yunnan and other provinces have also developed their own orderly power plans. Implementation was initially arranged by local governments and power companies, but by mid-September the nationwide power supply scarcity forced some provinces to take a broad-brush approach – directly shutting down all manufacturing enterprises in their jurisdictions – to ensure the normal operation of the power grid.


The impact of these emergency power outages was lethal for some businesses. According to an anonymous source at The American Chamber of Commerce in Shanghai, exporters that relied on the electric grid had to continue paying their employees and also pay breach of contract penalties of almost 300% of their original  contracts. Companies also had to bear the hidden costs of raw material depreciation, employee turnover, and loss of future orders. The emergency power needs of enterprises could only be temporarily relieved by renting generators. Thus, unexpected power outages also caused serious safety issues. A company in Liaoning Province suffered a blast furnace gas poisoning incident due to the shutdown of the exhaust system caused by a sudden outage. 


According to Roger Rauger, Professor of Energy, Resources and Environment at the HNC, coal played an important role in these outages. “The causes of the power scarcity are very complex; it’s about China’s energy mix, its economy and even its politics, but a key element of the problem is coal.”


China is a major coal-burning country. According to statistics from the International Energy Agency (IEA), China’s share of coal-fired power generation was as high as 64% in 2020. Such a coal-dominated power system is bound to be impacted by changes in coal prices. From April-July of 2021, coal spot prices rose from 629 RMB per ton to nearly 840 RMB per ton due to global commodity inflation and the post-pandemic recovery of major economies. Since September, the weekly increase in coal spot prices has continued to rise. Coal futures also rose sharply, with the main futures closing price of power coal on the Zhengzhou Stock Exchange rising from 671 RMB per ton to 1982 RMB per ton from January-October. 


The Bohai-Rim Steam-Coal Price Index shows the rapid rise of coal since the end of 2020.


Steam Coal Futures on Zhengzhou Commodity Exchange (ZCE) skyrocketed in the second half of 2021.


Since China’s electricity prices are fixed by the government, the power market is not able to effectively transfer rising coal prices to the demand side. As a result, the pressure from rising coal prices has been concentrated on electricity providers. According to a report released by the China Electricity Council, in some of the electricity generation corporations, more than 70% of the thermal power plants were losing money in the first half of 2021. With such high coal prices, companies that produce coal-fired electricity have been losing money for every kilowatt-hour of electricity they generate.


Most of China’s power generation enterprises are state-owned enterprises (SOEs) and are not necessarily driven primarily by the profit motive on an institutional level. Even so, the salary and promotion of employees in SOEs are directly linked to business performance in the current appraisal mechanism. Thus, these SOEs are reluctant to generate power because power generation is reducing profits, thereby damaging employees’ prospects for career advancement. 


There are many reasons for the spike in thermal coal prices, including international inflation, the closure of coal mines, and increased demand brought about by the improvement of the conditions of the Covid-19 pandemic. But the power scarcity is not all about coal. In order to achieve carbon neutrality, China is accelerating the installation of hydropower, wind power, and other clean power equipment. Wind power in Inner Mongolia and hydropower in Yunnan have provided effective supplements for the power system during the peak season in the past few years. But due to this year’s climate anomalies and the reduction of snow and ice melt water in the Himalayas, the power generation capacity of Inner Mongolia and Yunnan is significantly lower than previous years, which exacerbated electricity supply tensions. 


The instability of renewable energy sources increases the volatility of power supply. Such volatility can exacerbate the hazards that episodic events, such as climate disasters and economic crises, can bring to energy supply. These issues manifested themselves in Texas’s power scarcity earlier last year. In addition to the isolation of Texas’s electric grid from the rest of the country, another reason for the scarcity was the sudden snowstorm that damaged some of the state’s power generation and transmission facilities. The shutdown of wind and solar power, which together generate nearly 30% of Texas’ electricity, during extreme weather exacerbated the strain on Texas’s power supply.


Several structural problems have contributed to the electricity scarcity. These problems include conflicts between competing policy objectives, such as the market-based coal prices and fixed electricity prices; the unstable supply of renewable energy amidst the push for carbon neutrality; the pressure of economic growth targets; the pressure to reduce emissions under the “dual control” policy; and even energy competition between different regions within China. China’s wind, hydropower, and solar resources are often located in undeveloped provinces in the west, and these provinces tend to keep clean power in their own provinces due to the pressure of carbon neutral targets and their own economic development. Keeping clean power in western provinces hinders the implementation of the “West-East Power Transmission”  project, which aims to transmit electricity from China’s west to its east and further modify the broader landscape of energy and economic development. 


In order to avoid normalized electricity shortages in the future, institutional changes are needed: a new electricity pricing system needs to be established, more stringent carbon emissions constraints need to be established, and China’s nascent carbon trading system needs to be strengthened to promote local economic transformation. 


To get to the root of the problem, technology needs to make great strides. Professor Zhao Liang, Vice President of the Institute of Natural Resources at Nanjing University, believes energy policy should be formulated with energy security as the first priority, so currently China cannot quit burning coal. Thus, the development of CCUS (Carbon Capture, Utilization and Storage) technology in China is particularly important to achieve the goal of carbon neutrality. Professor Raufer believes that with the significant increase in the installed capacity of renewable energy generation devices in various countries, technologies such as power storage and intelligent grid deployment will become the key to stable renewable energy output.


On the bright side, 2021’s power scarcity has accelerated China’s power sector reform. Since October, the Development and Reform Commission of China has sent signals indicating the marketization of electricity prices for commercial and industrial users. The corresponding market, regulatory and technical systems are currently being determined. It is envisioned that in the future, all commercial and industrial electricity in China will be traded through the electricity market, especially the electricity spot market. These market mechanisms may be able to effectively guide enterprises to stagger production in a way that maintains steady supply for consumers. 


Power sector reform is difficult to implement because it involves the interests of many parties, including power plants, the State Grid, local governments, and commercial and industrial consumers. In the short-term, the likelihood of regular, recurring power outages is unclear. 


China’s widespread power scarcity was a reminder that economic production – as well as daily life for ordinary people – will be changed and challenged in the coming years. While national governments will adjust their own energy mix, humanity at large will be called to a more primal, elemental task: cooperation.


Cheng Rui is reporting from Nanjing, China.


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