China’s drought: implications for domestic power supplies and international oil and coal markets

In my column two months ago I examined how the gradual rise in the rate of GDP growth in the last few months of 2009 was causing a resurgence in demand for energy in China. Statistics from the first three months of 2010 confirm that China’s economy is indeed back on track with annualised GDP growth estimated at 11-12%. In January and February industrial output was up by 20% compared to the same period last year, fixed investment by 27%, retail sales by 18%, and exports by 45%. Continuing investment in infrastructure is expected to push steel demand up by 10-12% this year. This is good news in the short-term for the government and for the people benefitting from this economic activity, but signs of strain in the energy system were becoming apparent by late March.

At the beginning of February the government announced that the power and gas shortages experienced at the end of 2009 had eased. This may have been the case, for these disruptions were caused by unusual and short-lived weather conditions. But no sooner did one short-term problem disappear when more profound pressures on the energy system started to make an unwelcome re-appearance.

Energy statistics released since February show clearly that demand is accelerating. Power consumption rose 40% in January year-on-year, driven mainly by industry. Demand for electricity is expected to grow by 9% in 2010, according to official announcements, but unofficial forecasts place this at 15%.

In January and February, imports of crude oil rose by 17% and 58% respectively compared to the same periods last year. This built on a rise of 14% for the whole of 2009, taking total crude oil imports for the year to 204 million tonnes, or 4 million barrels per day. Preliminary reports indicate that China’s domestic production of crude oil remained level or may even have fallen slightly in 2009 compared to 2008.

Coal production reached 270 million tonnes in January 2010, a rise of 57%, but over the year coal output is expected to grow just rise about 10%. Imports of coal are forecast to reach 100 million tonnes in 2010 down from the record 125 million tonnes in 2009. Such is the importance of coal in China’s energy mix that small changes in demand for energy could easily drive this year’s imports above last year’s.

Behind all of these  statistics lies a more ominous, but not unexpected trend: a slow-down in the rate of decline of national energy intensity. In 2005 the government announced that it intended to reduce energy intensity by 20% between 2006 and 2010.
An understandably slow start resulted in a  decline in energy intensity of just 1.79% in 2006. But this accelerated to 4.04% and 5.2% in 2007 and 2008 respectively, putting the country on track to achieve the goal of a 20% reduction, provided improvements continued in 2009. Provisional data for the year 2009 show that the rate of decline of energy intensity slowed to a mere 2.2%. This is a direct consequence of the economic stimulus package. Unless there is a substantial revision of the economic or energy statistics for 2009, this set back calls into doubt the country’s ability to meet its self-imposed target for 2010.

Looking ahead to the current year, signs of strain are already appearing in the power sector. Zhejiang Province, for example, is forecasting a 9% growth of demand for electricity this year and expects to see a shortage of peak power capacity during the summer.

But the real problems in China’s power sector lie in the far south of the country, where prolonged drought has seen sustained and continuing drops in the levels of reservoirs. The South China Grid spans five provinces, from west to east: Yunnan, Guizhou, Guangxi, Guangdong and Hainan. Though Guangdong Province possesses about 50% of this region’s generating capacity, most of which is thermal, it relies on imports of electricity from the provinces to the west where about 50% of the capacity takes the form of hydro-electricity.

Already in January, Yunnan Province stated that its exports of power to other provinces would be reduced by nearly 10% in 2010 as it struggles to meet its own demand which rose by 15% in 2009. By February, hydro-electricity production was 24% lower than in the same month last year, and the province may need to import electricity from the east.

Guizhou had been expecting to export more power to Guangdong this year, for 8 GW out of its total of 25 GW generating capacity is for export. Yet the Guizhou Qianyuan Power Company has said that the water flow to its hydro-electric plants fell by between 30% and 60% in the first three months of the year.

In Guangxi Province, China’s second largest hydro-electric dam, the Longtan Power station with a capacity of 6.3 GW, could be forced to stop generating by the end of April.  In the first three months of 2010, this plant generated 60% less electricity in than in same period last year.

Meanwhile Guangdong Province is seeking emergency power supplies from Hong Kong as demand for electricity has risen by 20% in the first two months of the year compared to the same period in 2009.

Though the South China Grid is now connected to the national grid and can import electricity from provinces to the north, these provinces too are being hit by the drought. In Sichuan Province, for example, the Xichang Power Company is generating 40% less power than same period last year.

Although the situation will be eased gradually once the rains arrive in May, there is almost certain to be severe shortages of electrical power throughout the hot summer period when demand reaches an annual peak. These shortages will most probably effect not only much of southern China but also some of the coastal provinces of eastern China.

Though the thermal power plants can raise their output hours in an attempt to compensate, their ability to do so will be constrained by the capacity of the coal industry to extract and deliver the additional required coal supplies to the power stations. Given that the coal industry is already having to raise annual production by about 300 million tonnes from the three billion tonnes in 2009, raising this level of production yet further is likely to be difficult. The constraints on transporting this coal from the north of the country to the south are even greater.

As a consequence of these shortages, the international energy markets should therefore expect to see an increased demand for both coal and oil. Additional coal will be needed to address the need to run the coal-fired plants in southern China for more hours than usual during the wet summer months. Additional oil will be needed if the manufacturers in Guangdong and other provinces react to the power shortages by purchasing and operating diesel generators in order to keep their businesses running. This is exactly what they did in 2003 and 2004 when most of the county was gripped by prolonged power shortages. As a result, oil imports to China rose by more than 30% each year, taking the international markets by surprise.

The lesson is: in order to forecast oil imports to China, do not just look at the transport sector, look at the power sector.

Philip Andrews-Speed is Professor of Energy Policy at the Centre for Energy and Mineral Law and Policy at the University of Dundee, Scotland.

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