China is facing a severe electricity crisis that has disrupted the lives of millions... What are the reasons?

More than half of China's provinces have rationed electricity in the past two weeks, disrupting the daily lives of tens of millions of people, and at the same time last September saw a decline in industrial production for the first time since China began to recover from the closures due to the pandemic. "Covid-19".

The American Foreign Policy website published an analysis of the real causes of the electricity crisis in China, which it attributed to the large production of coal and the imposition of cheap prices for it. The writer described this crisis as the worst electricity crisis that China has faced in a decade.

He said that the direct reason is that China still relies heavily on coal, which generates 70% of the country's electricity, adding that the electricity prices paid to generators are set by the central government, while coal prices are set in the market, so when coal prices rise, it does not raise Regulators electricity prices, it would not make sense for coal power plants to continue to provide electricity, as they could avoid generation at a loss by claiming that they had a technical failure or by failing to buy the coal they needed to run, both of which happened in the run-up to the current crisis.

The writer also added to the reasons what he called a series of political gaffes and ill-considered market interventions after the beginning of the pandemic, saying that the crisis has greatly eased China's continued dependence on coal, even as its market share in renewable and nuclear energy continues to increase.

Electricity price regulation

He pointed out that the government's regulation of electricity prices aims to protect electricity users from price risks, a subsidy that comes at the expense of those who generate electricity, adding that Beijing is usually slow to raise prices because the public is affected by that.

He said that China's recovery from the first economic shock of the epidemic relied excessively on construction and heavy industry, causing coal demand to increase by 11% in the first half of 2021, and this short-term trend was in sharp contrast to Beijing's calls for a "green environment." and pledges to reduce emissions.

The increase in demand for coal meant that the market would always be tight, but the government's attention was focused on combating producer price inflation, but raising electricity prices did not fit that agenda, so when fuel prices began to rise against the backdrop of the global recovery and sharp demand in China The government took measures that amounted to an implicit ban on raising coal prices, and was even considering setting an official price cap, meaning that Chinese coal miners could not charge the higher prices others would get in the overseas market.

Failure to raise electricity prices and roll back increases in coal prices means that coal producers will reduce coal purchases, leading to lower stocks. Months.

And Beijing's attempt in late 2019 to introduce price flexibility appears to have made matters worse, as power plants were given the ability to negotiate long-term contracts with electricity distribution network operators within a certain price range, and this could have allowed factories to negotiate higher profit margins. , but as some already warned in January 2020, it had the opposite effect because, given that China had excess capacity for coal-fired electricity, it was the grid operator who had the power to influence pricing, while generators bid and were forced to lower them. .

The impact of negotiations between grid operators and power stations, and government pressure to keep prices low, can be seen in the little pricing data available: the average prices paid for each listed company that provided data fell in the first and second quarters of 2021, even as coal prices rose.

More than half of China's provinces have legalized electricity in the past two weeks (Reuters)

government measures

Government measures to cut electricity bills in 2020 will likely have put more pressure on network operators to negotiate lower prices, and ironically, the presence of too many coal-fired power plants has contributed to the energy crisis.

Effectively, regulators allowed power plants to drain stocks in a gamble to avoid higher electricity prices, and that gamble failed spectacularly.

A long list of alternative and false explanations has emerged within China, as distribution network operators have sought to attribute these problems to rising demand, and opponents of climate action have blamed energy rationing on local government attempts to meet energy consumption targets or broader climate goals.

The international media has alluded to attempts to switch from coal to renewables as a factor in the blackout, and has devoted disproportionate attention to whether China's ban on Australian coal imports is contributing to the situation.

In all fairness, many of these factors have led to electricity rationing before, but none of these reasons comes close to explaining why there is now power shortages, across the country, even as the central government is doing its best to restore full supply.

The writer added that state media blamed the volatility of wind power for the outage, noting the decline in production in one province, however, wind, solar and nuclear power achieved record production in the period from July to August last, as it increased by 16% and 10%, respectively, from that time last year, easing pressure on coal supplies.

In the short term, he said, in order to restore electricity supply to its previous rate and to continue it through the winter season, it is necessary to increase coal supply and energy prices.

Central planners in Beijing are already taking steps in this direction, at the same time the crisis should be seen as alarming evidence of the economy's weakness in the face of fossil fuel prices, and the transition to carbon-neutral energy should be accelerated, the best that can happen in this case is an increase Carbon-free generation capacity that is not affected by fuel prices.

The government's regulation of electricity prices aims to protect electricity users from price risks (Reuters)

Economic crisis

The writer explained that the crisis has been brewing for months and cannot be resolved overnight. Coal purchases have lagged behind demand and inventories have fallen since early 2021.

He said the current power outages affect the entire economy, including retail, services and high-tech manufacturing, which the government relies on to support economic growth as the real estate sector slows after Beijing moves to roll back the construction stimulus and impose targeted credit limits for the real estate sector.

He noted that, as always, the danger is that once the acute crisis is resolved, the government will resort to the old playbook of more wasteful construction projects to prop up the economy, which would lead to another increase in emissions and further delay the economic transition away from growth. paid by the construction sector.

He concluded by saying that the most important is not external noise, but rather how Beijing interprets events internally. It is expected that central planners will soon issue a key document that sets goals and measures to reach the peak of carbon dioxide emissions before 2030, and this will give the rest of the world a sense of China's ambitions before the next climate summit in Glasgow, Scotland, only then will we know how the energy crisis will affect China's determination to tackle climate change and finally move away from coal.