China’s energy crisis: what caused the crunch?

Workers ordered to take the stairs, manufacturers forced to cut production drastically in the lead up to Christmas and households left for days without power. China’s electricity crunch has alarmed authorities and panicked businesses.

On Thursday Beijing ordered more coal miners to expand production dramatically, raising doubts about China’s promises to transition to green energy and achieve peak carbon emissions by 2030.

But analysts said policies to tackle climate change were not to blame for the shortages, and instead pointed a finger at policy confusion and coal supply problems.

What caused the shortages?

Although coal-fired power still accounts for about 70 per cent of China’s electricity, there has been a lack of investment in the fuel.

Beijing has been slowly closing coal mines and power plants for years for both environmental and safety reasons, but recently there have been other disruptions too.

The vast majority of the nation’s domestic supply comes from Shanxi and Shaanxi provinces, and Inner Mongolia. An anti-corruption campaign in the coal industry in Inner Mongolia has disrupted supplies since last year, while mines were closed to allow the sky to clear for events such as the Communist party’s 100th anniversary and September’s national games, China’s mini Olympics, in Shaanxi.

Safety concerns highlighted another cause of the crunch: overlapping policymaking. This year China increased the punishment for miners who failed to comply with safety guidelines, which made pit bosses reluctant to expand production.

This was despite an order from China’s state council, the national cabinet, as early as May to increase coal production. “There seems to be a lack of co-ordination,” Shan Guo, a partner at Plenum China Research, said.

The directive was issued despite China’s “dual control” strategy aimed at lowering energy consumption and intensity — or the amount of power used per percentage of gross domestic product. The policy has been in place for years but gained greater significance after Xi Jinping made his dramatic climate pledges.

Provinces have been racing to meet strict energy consumption targets under the policy and in some cases have restricted financing to power projects that entail high energy consumption. Provinces that failed to meet targets in the first half of the year responded by rationing power usage.

High coal prices, as well as government controls on how much producers can charge, further restricted energy supplies.

Domestic supply accounts for 90 per cent of China’s coal consumption but disruptions to imports still have an effect.

Beijing imposed sanctions on Australian coal last year after Canberra called for an investigation into the origins of coronavirus.

Those sanctions and “the floods in Indonesia [and] the new outbreak of the pandemic in Mongolia all contributed to the weakened coal import this year”, IHS Markit’s Lara Dong said.

Even the economic rebound from the pandemic played a part, exacerbating shortages in southern manufacturing hubs.

David Fishman, an energy consultant with Lantau Group, said renewables had yet to reach sufficient scale to replace coal and a lack of rain had disrupted hydroelectric power, which helps supply southern provinces.

What is the impact?

With more than 20 provinces affected, there is a risk that the crunch will weigh on the country’s GDP, as factories crucial to the global supply chain cut production and industries linked to construction experience restrictions.

Energy intensive sectors such as metals and cement production are expected to be among the worst hit.

Factories are worried about fulfilling year-end orders. Klaus Zenkel, head of the EU Chamber of Commerce in South China, said some of his members were relying on diesel generators to operate.

“Companies are quite concerned the situation is out of control. It may happen the customer will turn away and try to find other suppliers in different areas of China,” he said.

The rationing has also affected some residential users, making authorities nervous about the potential for social unrest, especially as the nation enters winter. “Power cuts to households could become a political issue, which is something policymakers don’t want to see,” Shan Guo said.

What is the solution?

The government has ordered state-owned energy companies to secure supplies for the winter and told miners to raise output. In addition, China’s banking and insurance regulator called on financial institutions to increase their risk tolerance for loans to coal plants.

The country is also attempting to increase imports.

There is anxiety, though, among environmental campaigners that a rise in coal production and coal-fired power will threaten the country’s green goals.

Analysts said there was little alternative in the near term. IHS Markit’s Dong said authorities had to balance environmental concerns over coal with the need for energy security. “It’s rare [that] multiple goals can be met at the same time. That’s why we call it an energy dilemma.”