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There was a lot of attention given to rising energy costs in China in September. The recent “shortage” brought on by China’s electricity controls in 2021 was very different from energy shortages and electricity controls that occurred in the past.
In the last 20 years – five times – electricity controls often happened during a peak time of electricity consumption (during the hottest and coldest weather), lasted less than one month, affected only industrial production and on a much smaller scale. This time, the electricity controls and energy shortages were triggered by actions taken by provincial governments working to achieve their assigned Key Performance Indicator (KPI) to lower carbon emissions.
China does not have a shortage of coal to generate electricity. The country produces the largest amount of coal in the world. However, the quality is not particularly good so China imports a small portion of good-quality coal from abroad. The trade friction with Australia has only had a minor impact on available coal supplies. Australia accounts for less than 2% of China’s total coal consumption so this issue only affected the market price for a short period of time.
Now the Chinese government is driving to lower the country’s dependence on coal. They have announced the country’s intentions to reach carbon neutrality by 2060. Weaning itself off of coal will be a gradual process, but the central government has quantitative goals for each provincial government to achieve.
These goals used to be soft targets with no hard punishments, but in September 2021, the goals became hard targets, which changed how the local government treated them. Speculation on the futures market took advantage of that during the electricity shortage to push up the price. The skyrocketing coal price caught the eye of the central government as it caused market disruptions and imposed heavy burdens on household utility costs, especially during the winter. The central government then cracked down on the sudden surge in energy commodity prices, including coal, by flooding the market with an enormous amount of coal inventory. This increased the margins in the futures market drastically. Along with with a criminal investigation into the speculation, these actions brought prices back down in October and November.
China’s domestic coal price is market-based, while its electricity price is set by the National Development and Reform Commission (NDRC). So, when coal prices soar, electric companies are less motivated to generate electricity since it is not profitable and, in some extreme cases, the more they produce, the more money they lose. Still, since large electric companies are all state-owned enterprises (SOEs), it is only some of the small electric companies that become reluctant to produce. Accordingly, the impact is typically not that big, and may only last a few days or a few weeks maximum – normally during the summer heat.
This time, the shortage was more severe than previous years, partially due to the overlap between the timing of extreme weather, soaring coal prices and booming goods exports, which kept manufacturing running strong. But as indicated above, the most important factor behind the shortages was the carbon emission quota/reduction KPI.
In the past, electricity controls only affected industrial production, and household electricity is seldom affected, so many people in China are not even aware there is electricity control. But that was not the case this time, with half of the nation affected and many people’s lives impacted for a few weeks. There were examples of incidents in September 2021 when the electricity control cut traffic lights in some northeastern cities and created chaos.
In recent years, China has established a plan to diversify and optimize its energy, including the target of a percentage of green energy usage and carbon emissions goals. CO2 carbon emissions reduction is part of this plan.
There are KPIs on every level of government to reduce carbon emissions and increase new clean energy usage, and the KPI is used in evaluating the political achievements of each government and person in charge.
Before 2019, the KPI was comparatively easy to reach and no hard punishments were handed out. Inner Mongolia was the only province that failed to achieve its KPI in 2019.
In 2020, the KPI became less stringent due to Covid-19 and other concerns. Thus, energy consumption in 2020 only declined 0.1% year over year, which left more work to be done in 2021 to catch up.
In the second half of 2021, nine provinces failed to achieve their KPIs, including Qinghai, Guangxi, Guangdong, Fujian and Jiangsu. These provinces received a Level 1 warning, and each provincial government and the officials in charge were called on to take responsibility, which triggered a chain reaction by the government to control energy usage and carbon emissions to guarantee the KPI can be reached in future assessments.
There are several factors that pushed up energy usage in 2021:
Now every level of government is taking carbon emission KPIs seriously. Several detailed policies have been issued to guarantee higher energy usage efficiency and lower carbon emissions per unit of gross domestic product (GDP) and to promote the usage of new, cleaner energy sources. It is reasonable to assume the tight balance of coal/electricity supply – the government is able to control the supply of coal in general – will last for a few years during the energy structure transitioning, and green energy investment in China will burgeon.