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CHINA: Power shortages reflect price controls, “campaign-style” climate efforts

Table of Contents

  • The combination of surging coal prices and inflexible, government-controlled electricity prices has imposed financial losses on coal-fired power plants, prompting them to cut production.
  • Political pressure on provincial governments to meet ambitious targets on cutting carbon emissions are an additional factor, despite the Politburo’s warning against “campaign-style” emissions reduction efforts.
  • The factory shutdowns may disrupt manufacturing supply chains: ten Taiwanese producers of semiconductor-related equipment announced temporary closures to factories in Jiangsu province.

At least 20 provinces have imposed rationing on electricity consumers. Large industrial users are most affected, especially producers of steel, cement, aluminum, and petrochemicals, but rationing has also affected some light manufacturing. In some areas of northeast China, the hardest-hit region, even residential consumers have suffered power cuts.

Price controls cause shortages

Surging coal prices are the biggest factor behind power rationing. Zhengzhou- traded thermal coal futures hit an all-time high on 30 September. Coal still accounts for about two thirds of Chinese electricity production, but government control over power tariffs prevents generators from passing higher costs onto consumers. Instead of losing money on each unit of power produced, generators prefer to cut production, leading to shortages. Some power plants have cited maintenance as a pretext for reducing production or shutting down entirely.

The China Electricity Council, a state-controlled industry group, diagnosed the surge in coal prices as arising from a “perfect storm” of discrete factors. A regulatory crackdown on unsafe coal mines has forced some Chinese mines to close and delayed approvals for others to expand production. A typhoon in Southeast Asia has delayed the shipping coal imports from Indonesia. In Inner Mongolia, a major coal-producing region, anti-corruption investigations have ensnared several coal producers. Electricity production rose by 11.3% year-on-year in the January-to-August period amid strong demand, while coal production only increased by 4.4%.

Beijing’s unofficial ban on imports of coal from Australia, which previously supplied about two thirds of China’s total coal imports, may also be contributing to higher prices, but this appears to be a secondary factor. Australia has been able to re-direct most of its coal exports to other countries, and Chinese domestic coal prices have not diverged substantially from China’s global benchmarks, suggesting that market fundamentals are more important than trade restrictions.

The National Development and Reform Commission (NDRC), China’s state planning agency, said on 29 September that it would “take multiple measures to strengthen the adjustment of supply and demand.” Normal rules restrict price increases to 10% above a benchmark, but following the NDRC statement, Guangdong province announced that producers would be permitted to raise tariffs on industrial users by up to 25% during peak hours, which run from 11am to noon and 3 to 5pm. Hunan province plans to launch a trial program in October to link industrial power prices to coal prices. Other provinces are likely to follow suit.

“Campaign-style” emissions reduction

Pressure to meet ambitious targets for reducing energy consumption and carbon emissions are also contributing to shortages. As previously discussed, emission reduction has become a top-level political priority. In August, the NDRC published a report card assessing various provinces’ progress towards meeting annual targets for energy consumption and energy intensity – defined as the amount of energy used to produce an additional unit of GDP. The report used a stoplight system to grade each province’s status. Twenty provinces were graded red for energy intensity. Seven provinces, including the manufacturing powerhouses of Guangdong, Jiangsu, and Fujian, were graded “dual red,” meaning they are substantially behind on both metrics.

Despite the pressure to cut energy use and emissions, the Politburo has warned local governments against “campaign-style” emissions-cutting efforts. This term refers to sudden regulatory actions that are effective in the short term but too draconian to be sustainable. Central leaders want a more targeted approach focused on the least efficient producers within the highest-intensity sectors like steel, nonferrous metals, cement, and petrochemicals. But power shortages may be providing local governments with a pretext to impose indiscriminate, campaign- style controls designed to meet year-end targets.

Supply-chain impact

Power rationing will add to downward pressure on growth and upward pressure on inflation. China’s official Purchasing Managers Index for manufacturing showed the sector contracting modestly in September, the first contraction since the height of the country’s Covid-19 outbreak in February 2020. Though the government’s 2021 GDP growth target of “above 6%” is not in danger, several economists have cut growth forecasts for the fourth quarter due to both power shortages and distress in the housing market.

Of greater concern than the macroeconomic impact is potential supply-chain disruptions. Earlier this week, at least ten Taiwan-based producers of semiconductor-related equipment who manufacture in Jiangsu province announced they would close until the end of September due to power rationing. Power shortages could also affect production of textiles, toys, machine parts, and electronic components.

Outlook

Rationing will likely ease somewhat in October. Harming a priority industry like semiconductors is a textbook case of “campaign-style” excess, and local officials are unlikely to persist with such measures. But shortages affecting commodity industries may continue, depending on the scale of power tariff adjustments and the trajectory of coal prices. The China Coal Industry Association warned on 1 October that it is “not optimistic” about coal supplies for the peak winter heating season. In regions where energy targets are more important than coal prices in creating shortages, some rationing could last through the end of the year.

It remains unclear whether the recent brownouts will accelerate permanent, market-based reform of electricity pricing. Reform is a complex, politically difficult task that requires balancing the interests of generators, grid operators, and consumers. Policymakers have discussed such reforms for years and implemented various pilot programs, but progress has been slow.

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CHINA: Power shortages reflect price controls, “campaign-style” climate efforts

The combination of surging coal prices and inflexible, government-controlled electricity prices has imposed financial losses on coal-fired power plants, prompting them to cut production.