Power Crunch Poses Challenges to China’s Economic Recovery as Winter Approaches

Factories have been closed and the daily lives of tens of millions of people have been affected. It is the worst electricity shortage China has faced in a decade. (Source: Kevin Frayer/Getty Images)

A nationwide blackout

Zhang Kai works at a household hardware manufacturing company located in the southern city of Yangjiang, Guangdong province. Responsible for following up with clients and maintaining the company’s website, the 23-year-old said in a recent interview with Pandaily that he has seen a 30% jump in orders compared to figures from this time last year. With orders surging from countries including Japan, South Korea and across Western Europe, Zhang and his colleagues dedicated themselves to keeping the export-oriented factory humming even during the National Day holiday which spanned from October 1 to October 7.

However, on the last day of the so-called “Golden Week,” when Zhang walked into his company in the morning, he found out that the facility’s electricity had been cut off. “Our factory is situated in a government-owned industrial park,” he said. “But we didn’t get any adequate notice before the blackout took place.” In the end, Zhang left the office and took an unexpected day off, while some factory workers stayed to perform manual processes without electric machines involved.

Celendo Optical Technology (Huizhou) Co., Ltd. is another manufacturing plant in Guangdong whose production was interrupted by emergency power rationing policies. An internal document seen by Pandaily showed that the Huizhou-based lens maker received an order from the local power transmission authority to shut down its machines for three days per week since mid-September.

And Guangdong, the country’s southern economic powerhouse, was not alone.

SEE ALSO: Power Crunch Causes Key Suppliers of Apple and Tesla to Stop Production in Eastern China’s Jiangsu Province

According to a note by analysts at BofA Securities, at least 20 provinces – accounting for more than two-thirds of China’s gross domestic product (GDP) – have reported power rationing and production cuts as of October 1. Social media posts about residents in the country’s northeastern rust-belt industrial region, which covers Liaoning, Jilin and Heilongjiang provinces, experiencing unannounced power outages went viral on the Twitter-like platform Weibo. Factories have been closed and the daily lives of tens of millions of people have been affected. It is the worst electricity shortage China has faced in a decade since the country stabilized its power grid in the 2010s.

China’s energy paradox

China’s fast recovery from the coronavirus has helped the country grab a larger share of global markets from other manufacturing nations where pandemic-induced factory closures continue. To fill surging overseas orders, manufacturing plants across China are running in full swing, stimulating electricity consumption. As China remains highly dependent on coal, which accounted for 58% of the country’s total energy consumption in 2019, growing electricity usage caused demand for the black stuff to increase by 11% in the first half of 2021, official data showed.

Burgeoning power demand has partially contributed to a breakneck rally for coal, along with other factors including skyrocketing global gas prices and supply disruptions to some of the world’s largest coal exporters. The most-active January Zhengzhou thermal coal futures hit a record high of 1,982 yuan ($262) per ton on October 19, representing a 260% rise year-to-date.

(Source: manyanu.com)

While coal prices are dictated by the market, the electricity prices paid to generators are tightly limited by the government, as Beijing is concerned that passing on higher costs to consumers will lead to inflation and lower living standards. Lauri Myllyvirta, the lead analyst at the Centre for Research on Energy and Clean Air, argued that it doesn’t make economic sense for coal power plants to keep producing electricity. To avoid generating at a loss, plants would claim they have a technical issue or failed to purchase the coal they need, Myllyvirta said.

Besides the chaotic supply and demand game, the reasons for the power crisis can also be traced back to China’s “green development” reform.

China has in recent years strengthened its resolve to overhaul the country’s economic structure and achieve more sustainable development by cutting back on the proportion of coal consumption used to generate electricity from more than 80% in 2017 to 51.8% in 2019. Renewable energy, including hydropower and wind, has seen its market share rise from 20% in 2012 to 29.5% in 2020. But the pivot from coal to renewables appears to be a bumpy ride due to the variable nature of the latter.

A severe drought hit Yunnan province this summer, which usually accounts for roughly a quarter of China’s total hydro generation, making it harder to retain the water local hydro plants need in the reservoirs. According to the China Electricity Council, water-generated power output in August declined for the third month in a row. The official Xinhua News Agency also reported that wind power output in Liaoning, where the installed wind power capacity has reached 10 million KWh, abruptly fell to 70,000 KWh in September due to poor weather conditions.

Before the winter chill

Zhang from the hardware product manufacturer said that the recent power crunch had added further stress to a difficult time for the company, as it was already grappling with a diminished labor force and rising raw material costs. “Prices for plastics have climbed over 100% year-to-date, while steel prices have gone up by 60%,” Zhang said. “Things became increasingly dramatic amid power rationing, with the price tags for materials changing every week in September.” He also speculated that the soaring costs for raw materials were part of a domino effect created by the electricity crisis, as some of the local suppliers, from which Zhang’s company usually purchased steel, were recently ordered by local officials to reduce their production capacity.

The massive energy crunch has caused pain to the world’s second largest economy, overlaid with other headwinds including supply chain disruptions and an ongoing property crisis. According to official data released on October 18, China’s GDP expanded 4.9% in the third quarter, compared with the same period last year, missing a 5.2% forecast from analysts polled by Reuters and marking the slowest growth since the second quarter of 2020.

“The domestic economic recovery is still unstable and uneven,” Fu Linghui, spokesperson for the national National Bureau of Statistics, told a briefing. “The challenges of keeping the economy running smoothly have increased.”

Fu added that the energy shortage is just temporary, and that its impact on the Chinese economy is “controllable.” “Viewed overall, a trend for economic recovery and high-quality development will not change,” Fu remarked. “The country has the ability and conditions to meet the annual economic growth target.” China set a modest annual GDP growth target of above 6% in March.

(Source: China Daily)

But many analysts have lowered their China growth expectations amid concerns about the adverse impact of the recent power crunch. Ting Lu, Chief China Economist at Nomura said in an interview with CNBC that he expects the country’s GDP to rise 7.7% this year, down from 8.2% as previously forecast, citing production interruptions at Chinese factories. Analysts at Goldman Sachs trimmed their 2021 GDP growth forecast to 7.8% from 8.2%, given “recent sharp cuts to production in a range of high-energy intensity industries.”

With the early winter chill settling across China’s northern region, the electricity crisis is on the verge of worsening if cold weather boosts power demand and keeps fuel prices high. Characteristics of La Niña – a weather pattern that typically brings colder-than-normal temperatures to the Northern Hemisphere – have emerged in the Pacific, Bloomberg reported. China is expected to enter La Niña conditions this month, with regions including Heilongjiang, Shaanxi and Inner Mongolia beginning the mainly-coal-fuelled winter heating season from 10 to 17 days earlier than in previous years, Xinhua News Agency said on Friday.

The arrival of what is likely to be a very harsh winter has placed ensuring energy supply during the heating season high on Chinese officials’ agenda, prompting the government to order coal mines to ramp up production. The National Development and Reform Commission (NDRC) said on October 19 that mines nationwide should “produce as much coal as they can” through the fourth quarter of 2021, adding that shutting down coal mines is strictly prohibited. The top economic planning body also said that it is aiming for a 12 million ton/day rate of coal output, up from 11.14 million tons per day in September.

This market intervention obviously stands in sharp contrast with Beijing’s green ambitions, as some regions just recently urged coal mines to curb production earlier this year in an attempt to reduce carbon emissions. The country’s decision-makers have also been made keenly aware of the various conflicts between environmental protection and citizens’ quality of life. On October 24, the State Council issued a guideline for different segments of the country’s economy on how to peak carbon emission by 2030 and reach carbon neutrality by 2060, while emphasizing that energy security and people’s livelihoods should be considered.

On the other hand, the government has also stepped up a market-oriented reform of electricity pricing to help loss-making power plants pass on the high costs of coal. The NDRC said earlier this month that all coal-fired electricity would be priced through market trading “in an orderly manner” starting October 15, allowing electricity prices to rise by up to 20% against a benchmark, compared to a current cap of 10%. The policy shift has produced immediate results. As of October 19, power prices in provinces including Jiangsu, Shandong, Hubei and Shanxi have climbed nearly 20%, according to the economic planner.

In the face of soaring coal prices, the NDRC announced on Tuesday that it is considering setting up a “price formation mechanism” in the coal market, in its latest bid to ease the energy crisis. The most-traded contract on the Zhengzhou Commodity Exchange fell as much as 7.6% Tuesday to 1,207 yuan a ton, down 39% from last week’s peak of 1,982 yuan, marking the lowest intraday price in almost a month, Bloomberg reported. State intervention yields quick results once again.