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Explainer-What is behind China’s power crunch? By Reuters

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© Reuters. Electricity transmission towers are pictured near Beijing’s Central Business District (CBD), China September 28, 2021. REUTERS/Tingshu Wang

By Shivani Singh and David Stanway

BEIJING (Reuters) – China is in the grip of a power crunch as coal supply shortages combined with strong power demand from manufacturers, industry and households push coal prices to record highs and trigger widespread curbs on usage.

The current energy crisis is not due to Beijing’s stricter environmental regulations, according to climate watchers. China’s focus has been on reducing power consumption and not increasing coal production.

China’s tightly controlled power pricing system, which China has instituted, prevents generators from passing their rising coal prices to consumers. This leaves them with little choice than to either suffer losses or decrease output.

HOW LONG IS CHINA’S POWER SUPPLY PROBLEM OLD?

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China is known for its inability to maintain balance between supply and demand. China’s central planners frequently underestimate demand growth. Many provinces are at risk for power outages during summer peak consumption periods.

Power shortages have been caused by a combination of a number of factors this year. These include disruptions to coal supply and an increase in household and industrial demand. The main culprit is China’s rigid pricing system.

WHY IS CHINA’S PRICING SYTEM BLAMED

China experienced one of its worst power supply crisis in recent years. In the winter of 2010, fierce snowstorms caused disruption to coal supplies, and also damaged transmission infrastructure.

Power plants, concerned about their profits, made things worse by decreasing their stocks to delay price negotiations.

China now allows power tariffs to change if the cost of coal reaches a certain amount, but struggling generators cannot raise prices quickly to protect their business.

In 2019, some policymakers declared that China should build more coal-fired electricity plants to counter power shortages. However, the existing capacity of these plants has been heavily underutilized, indicating that few plants have the financial incentives to increase output.

What happened to China’s plans to curb industrial power usage?

Despite Beijing’s best efforts to limit heavy industrial power use, the recent shortages are now inevitable.

Both Guangdong and Inner Mongolia have ordered their industries to cut down on electricity consumption.

It was discovered that 10 regions and provinces, including the major producers of coal like Inner Mongolia, had failed to reach their energy efficiency goals in the second half. This is largely due to a post lockdown recovery, which analysts believe relied heavily on heavy industrial.

However, China’s total electricity generation in August 2021 was 10.1% higher than it was in the same time period in 2020 and almost 15% greater than the slot in 2019. This is because utilities in China increased power production to keep up with rising industrial demand.

HOW DOES REGION POWER LIMITATIONS AFFECT CERTAIN USERS NOW GO?

Power rationing currently takes place in nine provinces or regions. In major manufacturing areas like Zhejiang or Jiangsu provinces, local government has asked factories for power rationing to curb their output.

Heavy users have been notified by power companies to either reduce power usage during peak hours (which can last between 7 a.m. to 11 p.m.) or stop operations altogether for 2 to 3 days.

Some others have been asked to stop production until further notice.

WHAT INDUSTRIES ARE NOW IMPACTED BY POWER SHORTAGES

It has broad implications for industries, including power-intensive ones like cement production, aluminium smelting and steel-making.

At least fifteen listed Chinese companies that make a variety of goods and materials, including aluminium and chemicals as well as furniture and dyes, have said that power cuts caused disruptions in their production.

China’s seasonal output of key industrial products https://fingfx.thomsonreuters.com/gfx/ce/mopankbamva/ChinaSeasonalIndustrialProducts.png

Residential users have also been hit, with households in parts of northeast China told to limit use of water heaters and microwaves to conserve power. Some parts of the northeast were also reported to have lost traffic lights or elevators.

WHAT HAS BEIJING ACTUALLY DONE TO RESOLVE THE POWER CRUNCH’S QUESTION?

Although the NDRC stated that it is working to solve power shortages on Friday, it did not give any details about what it would do.

Beijing’s ongoing trade dispute, Australia being the second largest coal exporter in the world, is an immediate challenge. It has also severely curbed Chinese coal shipments. Meanwhile, local authorities are increasing safety standards which have slowened production at Chinese coal mines after a string of incidents.

To address the shortage of coal, Jilin Province in northeast China has urged officials to look into sourcing more coal from Mongolians, Russias and Indonesia.

China thermal coal prices https://fingfx.thomsonreuters.com/gfx/ce/gdpzyqjlwvw/ChinaThermalCoalSep272021.png

Another factor is a global shortage of , as a number of major economies look to stock up on the fuel simultaneously following the easing of COVID-19 restrictions.

The State Grid Corporation of China stated Monday that it will “fight the battle to guarantee power supply to customers” and will dispatch more power through its network.



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