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China’s Power Crisis Will Affect Industries Worldwide

China’s Power Crisis Will Affect Industries Worldwide

Thursday, 14 October, 2021 - 05:00

A villain is emerging in China’s efforts to rein in its energy prices: inefficient, power-hungry industry.


With flooding in the coal hub of Shanxi province driving prices up to 1,508 yuan ($234) a metric ton even as the government tries to kickstart extra production, further measures are clearly needed to prevent more generators cutting off their turbines and causing blackouts through the cold of northern China’s winter. That means a crackdown on the factories that still consume the lion’s share of electricity.


Industry makes up only 25% of grid demand in the US, but in China it’s fully 59% of the total — more than all the country’s homes, offices and retail stores put together. Cheap power has been an essential tool of development, and the government has traditionally encouraged major users with electricity tariffs that get cheaper the more you consume. With about two-thirds of the grid powered by coal, the cost of digging up the black stuff has determined how much industrial users pay for their power.


The problem is that coal isn’t getting any cheaper. After a sustained period of deflation prior to 2016, when a glut of dangerous and unregulated mines was closed down, annualized costs jumped 40% in 2017. They didn’t really fall again until Covid-19 struck, and they’ve since rebounded with a 57% increase from 12 months ago in August.


Such increases might be tolerable if end-users were turning this power into high-value goods — but all too often, that’s not the case. China now consumes more electricity per capita than the UK and Italy, but comes nowhere close in terms of economic output. Determined to hit President Xi Jinping’s targets on peaking emissions by 2030 and hitting net zero by 2060, Beijing’s policy makers have fixed on so-called “dual high” sectors — those whose energy consumption and carbon emissions are both elevated — as the culprits. These are many of the industries that have grown fastest in recent decades, such as cement, steel, base metals, oil refining, chemicals, and glass. They collectively account for more than half of China’s emissions.


Under revised rules issued by the economic planners at the National Development and Reform Commission this week, residential and agricultural consumers will still buy power at fixed tariffs and smaller users will see electricity costs fluctuate within a band. “Dual high” sectors, on the other hand, will see no guardrails on the prices they pay. As a result, all the cost of balancing utilities’ books will fall on their shoulders. This will reduce the demand pressure on the grid and encourage inefficient users to upgrade to add more value, Wan Jinsong, the NDRC’s director of prices, told a press conference Tuesday.


This sounds like a neat solution — but we shouldn’t underestimate the way ripples will spread. In recent decades, the world has become hooked on cheap Chinese power for making a host of its goods. About half of all metal is produced in China and nearly a fifth of all oil is refined there. Energy-hungry products from aluminum to solar panels to Bitcoin depend on the country's low industrial power tariffs to keep their own prices down. With electricity costs for dual-high industries set to rise, we may not have seen the end of the inflationary pressures flowing through the global economy from those flooded Shanxi mines.


If Beijing wants to manage this transition without crippling the economy, it’s going to need to release pressure on the supply side of the energy system at the same time as taking measures to reduce demand growth.


That’s where renewables come in. At the same time that price curbs are being removed from dual-high industries, so capacity curbs are being lifted from zero-carbon power generation. Provinces previously faced absolute limits on the amount of electricity they were allowed to consume, a factor that may have contributed to the most recent cuts. In the future, those bars will be removed for renewable generation, giving governors a strong incentive to switch away from constrained, inflationary coal-fired energy to unlimited, fixed-cost wind and solar.


With zero-carbon electricity already cheaper than most existing operating coal power plants, those changes may be just the spur to wean China from its addiction to solid fuel. The bulk of generation will be able to move to wind, solar, hydro and nuclear. Thermal power plants will increasingly find themselves ramping up and down to capture daily peaks in demand, with differential pricing through the day giving them the opportunity to make profits after the sun has set and when the wind drops.


All that’s needed to make this system work more efficiently is for Beijing to unleash the formidable investment appetites of its provincial governments on the banquet of cheap zero-carbon power now available. Until now, China has shied away from the sort of rapid transition that it, and the global climate, needs. The teetering state of its coal-fired power system ought to be just the catalyst to accelerate that shift.


Bloomberg


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