China’s generators are struggling to keep the country’s lights on. More than half of the country’s provinces are now rationing electricity, disrupting the daily lives of tens of millions and threatening further disruption for stretched global supply chains. 

The main problem hasn’t been a shortage of power generating capacity, but rather the soaring price of coal, on which China remains overwhelmingly reliant for energy. As prices have risen, power generators have found it unprofitable to keep operating, thanks also to government-imposed caps on the electricity prices they could charge. 

Other factors, including the power consumption reduction targets different provinces are pursuing and instability in renewable energy supplies, have contributed to the crunch.

The disruption may continue for months, with the effects becoming more severe as China enters the winter season. How Beijing decides to respond could have lasting implications for China’s energy supply long after the current shortage. Climate change activists are closely watching to see how the energy crunch will affect China’s long-term commitments to phasing out fossil fuels.

This week, The Wire delves into China’s energy shortage, looking at the reasons behind the shortage and its global implications. 

CAUSES

Beijing may have set the ambitious goal of making China carbon neutral by 2060, but right now coal still accounts for almost 60 percent of the national energy mix. China mines and burns more than half of the coal consumed globally every year, with around 90 percent of the coal burned in China’s power plants mined domestically. 

Coal futures on the Zhengzhou Commodities Exchange were recently trading at $275 per tonne, a 200 percent increase from the same time last year. A confluence of factors hitting China’s coal-mining heartland has pushed prices to all-time highs: 

In Shanxi and Shaanxi, two of China’s most important coal-mining provinces, torrential rain and floods this month have destroyed roads, displacing nearly two million people and forcing at least 60 coal mines offline. Longer-term factors had already caused some miners to moderate their output, such as an amendment to China’s criminal code that went into effect in March, which raised the penalties for mining-related accidents. In Inner Mongolia, once the largest coal-producing province in China, an anti-corruption campaign targeting the industry has coincided with an 8 percent decline in output in 2020 and consecutive monthly declines from December to July this year.

The coal price surge has put China’s vast network of coal-powered generators in a tough position. To guarantee stable electricity prices for factories and other commercial operators, the National Development and Reform Commission (NDRC) has historically capped how much generators can raise rates to within 10 percent of a set benchmark price. But as generators’ input costs have soared, plants have been unable to recoup their costs, and many have simply shut down. 

Beijing has responded with bold changes to its electricity regulations. On Tuesday, the NDRC announced it would loosen electricity price controls for commercial and industrial users, allowing coal generators to raise prices by up to 20 percent. For energy-intensive industries, the price cap has been lifted altogether. The national policy change comes after several provinces, including Guangdong, Shandong, and Shanghai, announced similar policies weeks earlier. 

Those cap increases should be high enough to allow generators to break even if coal prices stabilize, according to David Fishman, manager at The Lantau Group, an energy consultancy. But longer term, cap raises mean factories will have to come to terms with greater volatility in the cost of energy, which might encourage some to consider outsourcing production elsewhere. 

“China had some of the cheapest industrial tariffs in Asia and it’s been like that for a long time,” says Fishman. “This is a cost component that seems like it’s going to become more volatile. It’s definitely going to rise. And they’ll just have to decide if it’s a tolerable cost component.”

WHAT IS ‘DUAL CONTROL’?

China’s attempts to ramp up coal production have alarmed its climate critics. The timing certainly doesn’t help, just weeks before the beginning of the COP26 global climate summit. While it might make sense for China to fire up its coal-powered generators to keep the lights on and factories running, it’s also a step back from Beijing’s ambitious goals of reaching peak emissions by 2030 and carbon neutrality by 2060.

That goal has amplified the importance of China’s “dual control policy,” which sets concurrent targets for national energy consumption and energy intensity.¹Energy intensity is a measure of the energy efficiency of an economy. High intensity indicates a high cost of converting energy into GDP.

In mid-September, the NDRC released an effective ‘report card’ of provinces’ progress in reaching its dual control targets. The report uses traffic-light colors to represent the provinces’ progress towards reaching their goals. Seven provinces were ranked “dual red,” indicating they were falling short on both energy goals.

Provincial authorities have tried to meet their energy targets by mandating selective factory closures or limiting their operating hours. “If you are in a high-intensity, high-consumption industry, you are targeted for power curbs. It’s the blueprint for power scarcity,” says TLG’s Fishman. Those sectors include heavy industry such as steel, concrete, and chemical production.

Longer-term, Fishman argues that the energy shortage could encourage faster investment into renewables. “If you’re a large investor and you’ve undertaken a commitment for some type of renewable energy procurement, these power markets provide a pretty clear path,” he says. “You have expensive coal, you have power users desperate for something that is cheaper, and it’s going to incentivize more construction.” 

UPENDED IMPORTS

Although imported coal normally accounts for only 10 percent of China’s total coal consumption, the domestic shortage has forced generators to clamor for options abroad. That has sent coal futures in some of China’s biggest import markets soaring, such as in Indonesia, where shares in the country’s largest producers have skyrocketed. Shares in Australian coal producers have experienced a similar uptick as China has temporarily walked back its informal sanctions on the country’s coal. 

The extraordinary demand for coal has also resulted in eyebrow-raising shipping routes, such as a several-thousand mile circuitous journey taken by a shipment of coal from neighboring Kazakhstan to coastal Zhejiang. So urgent is the need to replenish coal stocks, China has turned to far flung markets with which it has had little previous trade in coal, including Mozambique and South Africa.

Coal isn’t the only fossil fuel China is buying up in a hurry. In the first eight months of this year, China accounted for 80 percent of the world’s growth in demand for liquified natural gas (LNG), according to Nikos Tsafos, chair in energy and geopolitics at the Center for Strategic and International Studies’ Energy Security and Climate Change Program. 

That comes as much of the U.K. and mainland Europe contends with its own gas shortage that stems in part from supply shortages among European suppliers. Most of China and Europe’s suppliers don’t overlap, with one exception being LNG from Qatar. “The number one decline in European LNG imports has been from Qatar,” says Tsafos. Meanwhile, Chinese imports of Qatari LNG have grown, with the majority of its supply now exported eastwards.

“Chinese demand has been essential in absorbing the supply of gas,” says Tsafos. “China is the indispensable consumer, no doubt about that.”

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