China’s energy crisis may just be getting started, and no less than its economic growth and its green energy future hang in the balance.
The problems started in late August when power curbs and outages began to affect at least 20 provinces in the country. Last week, residential blackouts started happening in China’s northeast.
And there is little immediate relief in sight for China’s power woes, given the global surge in coal and natural gas prices and rising energy demand, not to mention potentially extreme weather.
China is the world’s biggest producer and consumer of coal, and right now its inventories are at record lows. To ensure adequate energy supplies as winter sets in, China has loosened restrictions on coal mining operators in its coal belt region stretching from Shaanxi to Inner Mongolia and prioritised shipments to regions in need.
As factories are idled to comply with power restrictions, analysts are trimming their estimates for China’s economic growth.
Goldman Sachs this week slashed its forecast for China’s full-year economic growth to 7.8 percent from its earlier call of 8.2 percent.
Others, like Nomura and Fitch, have also lowered forecasts, while some are still crunching numbers but expecting lower targets.
But some analysts see a potential silver lining in China’s current dependence on the world’s dirtiest fossil fuel.
Though coal currently accounts for nearly 57 percent of China’s energy mix – and its reliance on fossil fuel is likely to increase in the coming months, the problems being worked out in China’s power markets and energy supplies may end up accelerating the country’s pivot to greener more sustainable energy.
“I think in the short term China must ensure a sufficient supply of coal, to avoid power shortages, especially in the winter,” Dimitri De Boer, chief representative in China for environmental organisation ClientEarth, told Al Jazeera.
“However, this episode also highlights the limitations of relying on imported coal. It is clear to the central government that the energy mix urgently needs to be diversified, and that the rollout of renewable energy must be as fast as possible,” he added.
Headwinds to power market reform
China’s power market has been in a state of slow-motion reform since 2015. The headwinds range from a variety of provincial-level roadblocks from coal interests to pricing that does not adequately reflect supply and demand, problems with transferring power between provinces, a lack of power storage options, and limited uptake of renewables like wind and solar.
“There are quite a few areas of policy that have exacerbated the situation,” Michael Davidson, assistant professor at the University of California San Diego and a China energy policy expert, told Al Jazeera. “First and foremost is the incomplete liberalisation of the power market.”
That partial stifling of free-market forces are reflected in a reluctance to allow energy prices to fluctuate and for higher energy costs to be passed on to end users.
“I think a big part of the story is prices,” Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, told Al Jazeera. “The missing link is price distortions with benchmark prices being capped and international prices being so high. Coal generators are reluctant to import coal and suffer the losses that ensue.”
The biggest effects of power rationing have been felt by higher polluting and energy-consuming facilities in provinces trying to reel in energy consumption – industries such as steel, aluminium, chemical fibre and cement, according to David Fishman, a Chinese power sector analyst at Lantau Group in Shenzhen.
But the pain felt by big polluting sectors could actually be beneficial in reducing emissions and coal demand, says De Boer.
“New energy-intensive projects will be rigorously controlled, which will contribute to both reducing the demand for coal, and also to meeting climate goals,” he said.
Those goals currently include an attempt to peak carbon emissions before 2030 and to achieve carbon neutrality by 2060.
Davidson said the current power crunch could cut both ways when it comes to Beijing’s climate coals, with the appetite for renewables potentially taking a hit in the short term, but provinces formulating more robust long-term decarbonisation plans.
“Generally speaking, when you have energy reliability problems, people don’t flock toward renewables,” Davidson said. “Hopefully it has a muted impact balanced by this longer-term vision and there will be more careful, thoughtful deliberation about resource adequacy.”
One potential positive for power market reforms stemming from the current crisis have been efforts to address energy price distortions.
Guangdong province adjusted the upper limits of monthly power trading prices by 10 percent, meaning that end users of the energy would bear the cost instead of power generators, according to Fishman. But it remains to be seen to what degree other provinces will follow that lead, due to factory-level effects and inflationary fears.
“I think passing on power costs to end users is the greatest thing since sliced bread,” Fishman said. “End users do not think it is great to pay more for power, so there is going to be resistance there.”
While a 10 percent increase does not reflect the full power costs that would really need to be passed through to end users to encourage more energy efficiency, it does send important signals that consumers do need to bear some of the burden, said Meidan.
“It’s an important step, but it’s not going to solve the problem,” she said.
Reactions to previous, smaller power shortage crises, like ones that occurred in the provinces of Hunan, Jiangxi and Zhejiang late last year do give some hope that interest in renewables, particularly on-site sources, said could increase, Qin Yan, a lead analyst at Refinitiv, based in Norway.
“Last December, when there were shortages in Hunan, we already heard of immediate interest in rooftop solar power,” she said. “What’s happened in China is more of a coal logistics issue and overall domestic production [from renewables] is going up.”
Qin is less optimistic about whether government targets laid out in the current 14th Five-Year Plan would be boosted to increase renewable energy targets. And prospective caps on coal capacity and coal consumption, which have not been formally outlined yet, could be in limbo.
But that does not mean China will abandon its carbon peak and neutrality goals, she said.
“That’s long term, for in ten years, so that’s already been defined,” Qin said. “China has committed to this.”
As for the short-term, analysts expect China’s power challenges could stretch into the spring. While months of high temperatures in places in the south like Guangdong should ease soon, challenges could arise depending on how severe winter weather is in North China.
“I’d say pray for a mild winter,” Qin said. “If the weather gets extreme and there’s low wind and it’s very cold, I think there’s some blackout risk again.”
Source: Al Jazeera