China's coal crisis won't end soon. Know why ?

China, the global powerhouse, is in the midst of an unprecedented power crisis, of a magnitude not seen in the last 20 years.

Industrial activity has understandably reduced vastly with the power rationing in place. The country is staring at major power outages, with winter approaching and heating requirement set to rise.

Emission norms play role

The ongoing energy crisis in China has spread from factories to homes, with the government showing more intent to cut power supplies to industrial units.
Consequently, the country had to shut down units ranging from aluminium smelters to textiles, and even food processing.

The government’s strict measures to reduce emission norms have also played a key role in aggravating the current situation.

Several Chinese provinces are implementing power cuts as they have already missed central energy consumption targets and are under pressure to reduce power consumption, while some are facing an actual shortfall of electricity.

Accordingly, these provinces can be divided based on their intention to curb power supply.
Provinces like Jiangsu, Zhejiang, Yunnan, Shaanxi, and Ningxia are mainly cutting down on power supply to industrial sectors, forcing energy-intensive factories to cut production to lower the whole province’s energy consumption figure.

On the other hand, north-eastern provinces like Guangdong, Hebei, Qinghai, Anhui and Hunan are doing so because of supply shortage and steep rise in coal prices.

How it all started?

China was the first to recover from the pandemic, and was flooded with export orders, as most countries were grappling with Covid.

Consequently, in the first 8 months, China’s power consumption surged 13.8% y-o-y, with the rise mostly seen in the industrial sector.

Moreover, skyrocketing thermal coal prices dented operational feasibility of coal-fired power plants, which were still recovering from the aftermath of the Australian coal ban.
It is worth noting that coal prices have jumped almost 70% so far this year, whereas power feed-in tariffs have remained unchanged.

The country, on its part, did raise domestic coal production by 5% y-o-y to 2.89 billion tonnes (bn t) during Jan-Aug’21 compared to 2.75 bn t in Jan-Aug’20. But, lower power productions from hydro-stations have added more burden to the coal-fired plants.
As a result, the mismatch in supply has caught the entire power system off-guard, resulting in severe electricity outages across the country.

Measures to ease power crunch

China’ National Development and Reform Commission (NDRC) is working with relevant parties to take multiple measures to strengthen the adjustment of supply and demand.
These include all efforts to increase coal production under the premise of ensuring safety, commissioning of high-quality production capacity, moderate increase in coal imports, and maintaining a certain scale of emergency reserve resources.

Keeping the criticality of the situation in mind, Chinese utilities have been urged to procure coal through medium- and long-term contracts. Notably, the country’s coal imports have dropped 10% y-o-y to around 210 mn t during Jan-Aug’21 due to the higher prices in the global market.

NDRC and the General Office of China National Railway Group Ltd have issued a notice requesting that the term coal contracts should be fully covered by railway transportation capacity to speed up coal deliveries.
Moreover, the policy maker has also identified strict implementation of market-based power pricing of “base price + fluctuations” for coal-fired plants, to mitigate the supply-demand gap by allowing more electricity to enter the market for transactions.

Outlook

Power cuts have triggered social concerns about energy supply in winter. Chinese households are even looking at the upcoming chaos intently.

In fact, Guandong province has taken an extreme measure of advising residents to cut down on air conditioner usage and to rely on natural light instead of using home lighting appliances.

In China, thermal power generation gradually increases from the month of November with the onset of winter and attains highest total during December. The trend is expected to continue this year as the country prepares itself for the winter season which lasts till March.

Officials from the Chinese government have estimated that electricity demand this winter is expected to exceed the peaks of this summer and last winter.

Total installed capacity nationwide this winter is likely to reach about 2,400 GW (Giga Watt), an increase of about 200 GW y-o-y, of which at least 1,200 GW can be used to meet peak demand, NDRC said, adding that the effective peak load will increase by more than 60 GW in winters.

To tide over the situation the government has ordered the country’s top State-owned energy companies - from coal to electricity and oil - to secure supplies for this winter at all costs.

The latest efforts indicate that the government is adamant on ensuring a stable supply of energy, particularly to the residential sector. But, in the process, global supply chains are likely to suffer altogether.