China’s security of energy supply: the importance of domestic resilience

Over the New Year period, both Northeast Asia and Northwest Europe were experiencing winter temperatures which were substantially lower than usual. Having spent the holiday period in Beijing before travelling back the United Kingdom in early January, I was to experience the weather in both places. I was lucky in that my domestic energy supplies were not interrupted at either location. Neither was my journey from China to the United Kingdom delayed. But the similarity of the conditions in both countries reminded me how little attention governments pay to ‘resilience’ in the energy sector. These days, great attention is paid to issues relating to climate change and clean energy, and to the international dimensions of security of energy supply, but the routine task of ensuring ‘resilience’ always seems to be left at the bottom of the list of priorities.

In everyday usage the word ‘resilience’ means the ability to recover quickly from a shock. In the context of energy supply, ‘resilience’ means the ability to ‘keep the lights on’ despite the occurrence of a sudden and unexpected event; or at least to keep the duration of any interruptions to energy supply sufficiently short so as not to affect household living conditions or economic activity.   This is no simple task in an industrialised or industrialising economy. Resilience cannot be achieved through rhetoric and a few vague policy instruments. Rather it requires governments to work with the energy industries to put in place specific systems and incentives.

This winter, the cold weather hit both central China, as early as November, and northern China, in December. Though the disruption to energy supplies was less dramatic than in 2008, a number of cities and regions had to take measures to cut or reduce electricity and gas supplies to industries and offices. Coal stocks at power stations sunk to as low as just eight days of requirement, down from the usual fifteen days. A few power stations have been closed through a lack of coal. Hydro-electric power plants are generating at a lower level than usual. CNPC was obliged to buy ‘expensive’ gas from a new LNG terminal in Shanghai, and then to sell it ‘cheaply’ into the national grid.

All this is happening after China has taken great strides to enhance in security of energy supply on the international front. For example, it has just achieved a fifteen-year ambition to build an import pipeline to bring natural gas from Turkmenistan to eastern China. New oil and gas import pipelines have been built from Kazakhstan and are planned from Myanmar, and the oil import line from Russia will soon be completed.

The current disruption in domestic energy supplies reflects the coincidence of two unforeseen trends or events. Not only has the weather been unseasonably bad, but China’s economy was starting to pick up rapidly in late 2009. Industrial output grew by 19% in November compared to 10% over the first eleven months of 2009.

As I wrote in this column two years ago, after snow storms in southern China caused massive disruption to energy supply: “The supply of thermal electricity comprises a complex chain of players including the coal mining companies, the transport companies (rail, road and water), the power stations, the grid companies and the end-users. This chain is only as robust as its weakest links. A shortage of capacity or an unwillingness to operate at full capacity in any one of the links in the chain undermines the ability of the system to deliver the electricity required. This is so in any supply chain, but is particularly applicable to the power industry because electricity cannot be stored in large quantities.”

This winter has exposed a number of weaknesses in China’s energy supply resilience, some of which are longstanding and some are relatively new.

The shortages of coal at the power stations may be attributed to a number of factors. As the country’s demand for coal has continued to rise, the mining companies have had to go to increasingly remote locations in the far north of China to find new deposits, for example in Inner Mongolia and Ningxia. The more hostile winter conditions here increase the risk of disruption by bad weather of both the mining operations and of the transportation of coal by rail to the centres of demand far to the south and east. Further, the continuing policy of closing small-scale coal mines on safety and environmental grounds has constrained the coal industry’s output capacity. Indeed, in 2009, China’s net imports of coal reached 90 million tonnes, which is a dramatic change from 2001 and 2003 when net coal exports exceeded 80 million tonnes.

The power sector itself continues to struggle to meet peak demand, especially in winter, despite continuing rapid growth in total capacity. The year 2009 saw the generating capacity grow 10% from 795 GW to 875 GW, an addition of 80 GW. A further 70 GW is planned for 2010. During 2009, total power consumption grew by 6%, far less than the growth of total capacity. Most of this growth of demand came from the service and household sectors, not from industry. The problems arose from a surge of demand at the end of the year: 27% in November, compared to November 2008.This is likely to have arisen from a combination of increasing economic activity and response to the cold weather.

To understand this response to the cold weather, one needs to recall the history of household heating in China. In the second half of the twentieth century, heating systems for households and offices were only constructed in cities and towns which lay to the north of the Yangtze river. Those living to the south went without heating. In the north, the heating was generally delivered through district heating systems fuelled by coal or by coal gas. These have been progressively adapted to use natural gas.

To the south of the Yangzte river, no infrastructure for district heating or for gas distribution existed in most cities. As households and businesses have become more affluent they have installed air-conditioners which not only provide space cooling in the summer, but can also provide heating in the winter. Thus, in the last few years we have started to see a peak of electricity demand in the winter as well as one in the summer; and both peaks place great stress on the power system. However, in winter, China’s power industry has less ability to react to demand peaks. Why? Because the hydro-electric generating capacity is key to supplying peak demand in central and southern China, and it can produce much less electricity in the winter as water levels are lower than in the summer. This problem is exacerbated in very cold, dry winters such as the one we are seeing this year.

Those regions with natural gas supply and with gas-fired power stations should be able to meet peak demand, but they require an adequate supply of gas. Despite the growing capacity of the domestic gas pipeline network and its links to Central Asia, the system lacks the ability to react to sudden surges of demand. One reason is that emergency gas storage is still scarce in China. The second reason is that it is not feasible to suddenly increase production at the gas fields. Thus the government has asked Russia to increase shipments of LNG to the new Shanghai LNG import terminal and has forced CNPC to buy the gas, despite the fact that it will make a financial loss selling it into the domestic market at a relatively low prices.

Achieving resilience in domestic energy supply is a continuous activity. As the domestic energy sector grows and evolves, the nature and location of the vulnerabilities is constantly changing. As much vigilance needs to be expended on domestic resilience as on the longer-term challenges of international supply security and climate change; and these three aspects of energy policy need to be addressed in a coordinated manner, lest actions to address one priority seriously undermine performance under another priority. In a country such as China, with such a rapid rate of increase of economic growth and of energy demand, addressing these three challenges in a coherent manner is indeed a most difficult task.

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

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