China’s energy crisis: what caused the crisis?

Workers were ordered to climb the stairs, manufacturers were forced to cut production drastically as Christmas approached, and households were without power for days. The electricity crisis in China has alarmed authorities and panicked businesses.

Beijing on Thursday ordered more coal miners to dramatically increase production, raising doubts about China’s pledges to switch to green energy and peak carbon emissions by 2030.

But analysts said climate change policies were not to blame for the shortages, and instead pointed to political confusion and coal supply issues.

What caused the shortages?

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

Beijing has been slowly shutting down coal mines and power plants for years for both environmental and security reasons, but recently there have been further disruptions.

The vast majority of the country’s domestic supply comes from the provinces of Shanxi and Shaanxi and Inner Mongolia. An anti-corruption campaign in the coal industry in Inner Mongolia has disrupted supplies since last year, as mines have been closed to allow the skies to clear for events such as the 100th anniversary of the Communist Party and the national September games, the Chinese mini-games, in Shaanxi.

Security concerns have highlighted another cause of the crisis: policy overlap. This year, China has increased penalties for miners who fail to comply with safety guidelines, which has made mine managers reluctant to increase production.

This despite an order from the Chinese State Council, the national cabinet, in May to increase coal production. “There seems to be a lack of coordination,” said Shan Guo, partner of Plenum China Research.

The directive was issued despite China’s “double-check” strategy to reduce energy consumption and intensity – or the amount of energy used per percentage of gross domestic product. The policy has been in place for years, but gained prominence after Xi Jinping made his dramatic climate commitments.

Provinces have made efforts to meet strict energy consumption targets as part of the policy and, in some cases, have limited funding to energy projects that involve high energy use. Provinces that failed to meet their targets in the first half of the year responded by rationing electricity consumption.

High coal prices, along with government controls on how much producers can charge, have further restricted energy supplies.

Domestic supply accounts for 90 percent of China’s coal consumption, but import disruptions are still having an effect.

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

These sanctions and “the floods in Indonesia [and] the new pandemic outbreak in Mongolia has all contributed to the weakening of coal imports this year, ”said Lara Dong of IHS Markit.

Even the economic rebound from the pandemic played a role, exacerbating shortages in manufacturing centers in the south.

David Fishman, energy consultant at Lantau Group, said renewables had not yet reached a scale sufficient to replace coal and the lack of rain had disrupted hydropower, which helps supply southern provinces. .

What is the impact ?

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

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

Factories are concerned about the fulfillment of year-end orders. Klaus Zenkel, head of the EU Chamber of Commerce in southern China, said some of its members rely on diesel generators to run.

“Businesses are very concerned that the situation is getting out of hand. There may be times when the customer turns away and tries to find other suppliers in different parts of China, ”he said.

Rationing has also affected some residential users, making authorities nervous about the potential for social unrest, especially as the country enters winter. “Household power cuts could become a political issue, which policy makers don’t want to see,” Shan Guo said.

What is the solution?

The government ordered state energy companies to guarantee supplies for the winter and asked miners to increase production. In addition, China’s banking and insurance regulator has called on financial institutions to increase their risk tolerance for loans to coal-fired power plants.

The country is also trying to increase its imports.

However, environmental activists fear that an increase in coal production and coal-fired electricity could threaten the country’s green goals.

Analysts said there was little short-term alternative. Dong of IHS Markit said authorities need to balance environmental concerns over coal with the need for energy security. “It’s rare [that] several goals can be achieved at the same time. This is why we call it an energy dilemma.