China’s Energy Crisis: Unstoppable Force Meets Immoveable Object

China’s Energy Crisis: Unstoppable Force Meets Immoveable Object

China’s current energy supply crisis has numerous precedents. The most notable was in 2003 when, once again, the lights were going out across the country. At that time the cause lay in a combination of the government’s decision in 1999 to ban the construction of new power stations and the surge in economic growth that began in 2002.

Once again, we have the unstoppable force of the market meeting the immoveable object of the state and its plan. This situation arises from China’s energy sector being stranded between the market and the plan. When a clash occurs, energy users suffer. The key difference between today’s crisis and earlier ones is that it occurs in the context of the low-carbon energy transition.

The State

Let’s start with the state. To address climate change, the government has imposed ‘dual control’ targets for all provinces and regions that take the form of annual ceilings on energy consumption and energy intensity. Around 20 provinces and regions are on track to exceed at least one of these ceilings, and the worst offenders are in the coastal provinces of south and east China.

Over the last few months, the government has suspended production at many coal mines on safety or environmental grounds, as well as continuing the longstanding programme of permanently closing smaller mines. The likelihood of coal shortages started to become evident as early as April 2021. The shortage has been exacerbated by the ban on imports from Australia. Despite sourcing from other countries, coal imports from January to August 2021 were down 10% of the same period last year.

The state also imposes constraints on the power sector. Although a growing amount of electricity is traded on provincial power markets, many of these markets are not very efficient yet. A large amount of power continues to be sold in line with annual plans at agreed tariffs. These ‘on-grid’ or wholesale tariffs can only rise by 10% during the year. In addition, household power prices remain tightly controlled at low levels.

The Market

Switching now to the market, economic growth and exports continued to accelerate through much of 2021. This caused electricity demand over the period January to August 2021 to rise by 13.8% compared to the same period last year. At the same time, domestic coal prices have more than doubled over the last year, and coal provides more than 60% of the nation’s electricity. Facing high coal prices and insufficiently flexible on-grid tariffs, coal-fired power stations have had little incentive to generate as they lose money for every kWh produced.

In late September 2021, an estimated 220 GW of coal-fired power capacity in the region of the State Grid Corporation was not operating; about 20% of the nation’s total installed coal-fired capacity. It was claimed that half of this idle capacity was under maintenance, while the rest was unable to obtain coal supplies. .

Looked at another way, the average utilisation hours for coal-fired plants in China over the period January to August 2021 was just 2,988 hours or 51%. Though marginally higher than over the same periods of 2019 and 2020, it is far below what is claimed to be the minimum economic operating threshold at today’s coal prices of 5,500 hours (95%).

The shortage of coal supplies and their high cost has also resulted in coal stocks at power stations being just 80 million tonnes, compared to 120 million tonnes at this time last year.

And, the Weather

The weather has also played a part. An unusually hot summer boosted demand for air conditioning, a drought in southwest China cut back hydropower production, and the northeast suffered a short-term decline in wind power generation in September 2021.

What is being done?

As is to be expected, the state has stepped in. On 29th September, the National Development and Reform Commission set out its response. Coal mines should increase production even if it means exceeding their annual quotas. Unspoken was the likelihood that mines where production had been suspended could restart operations. Coal imports will rise. The last week of September saw a sharp increase of import from Indonesia. Even some Australian coal was unloaded from ships that had been waiting in port for a year. The priority should be to send coal to power stations and district heating plants, and pre-existing supply contracts should be honoured.

In turn, power plants should build up their coal stocks in time for winter and the grid companies should prioritise electricity supply to households. Local governments will need to work with the grid companies to decide how to allocate limited power supplies to different sectors of the economy and should encourage industries to save energy. Meanwhile, on-grid tariffs are being allowed to rise by 10% and Shanxi Province is providing electricity to 14 other provinces. It can do this because it has lots of coal and coal-fired power stations and its power market is more efficient than others. To boost natural gas supplies for heating and power generation, the national oil companies are seeking to purchase LNG on the spot market, despite the soaring prices.


Very briefly, this energy crisis will put further downward pressure on an already slowing Chinese economy. Many factories and plants have suspended production. Some are reverting to diesel generators. Small enterprises have been particularly badly hit, as they were during the pandemic last year. As a result, the manufacturing purchasing managers’ index for September 2021 was 49.6, reflecting the first contraction since February 2020.

The international impacts will include continuing upward pressure on the prices of coal and natural gas, as well as of oil if the use of diesel generators grows. And, if you thought that supply chain interruptions for manufactured goods were already intolerable, the situation is going to get a lot worse before it gets better. I am sure that there will be many other consequences that I do not have the space to address here.

How quickly the energy supply situation in China will stabilise is unclear, as is the implication for the nation’s total carbon emissions in 2021.  In the short-term, the central government has to tread a narrow path between maintaining social stability and keeping to its climate change mitigation strategy.




Print Friendly, PDF & Email