Bloomberg News,
(Bloomberg) -- The energy crisis is chastening governments around the world, not least in China. Record coal prices have helped propel factory inflation there to a 26-year high and officials have had to promise that homes will be kept warm this winter come what may.
The other pledge of note from a briefing in Beijing on Wednesday is that the government won’t duck its international carbon commitments. President Xi Jinping is keen to adopt the mantle of climate leadership, so that had to be said when the crucial COP26 negotiations open in Scotland in just two weeks. But it’s difficult to square with the scramble to mine, buy and burn ever more of the dirtiest fossil fuel to keep the lights on at home.
But it isn’t an empty promise either, as shown by the sweeping ambition of the renewables mega-hub planned for western China that was also announced this week, and which in its first phase alone will host more wind and solar power than all of India.
China will have to juggle the contradictory pressures of ensuring domestic energy security and meeting its international climate obligations for some time to come. The former is clearly winning out in the short term, and comments earlier in the week from Premier Li Keqiang suggest that anyone hoping for an advancement of China’s carbon targets in Glasgow is probably going to be disappointed.
But what’s increasingly obvious -- and foreshadowed by the desert mega-project -- is that China’s abundant reserves of coal have created a dependency that has made the country vulnerable and which it will try and end as soon as it can. One paradox to emerge is that energy security is hardly served by a system that is actually reliant on raising imports to deliver sufficient supply.
So, once the current crisis passes, and even if China has heaps of coal to spare, the calculation will probably become ever clearer. Coal’s stranglehold on the energy mix will need to be broken. Preventing future power shortages won’t mean tapping more of those reserves, but accelerating instead the development of substitutes that aren’t dependent on foreign suppliers and won’t spoil the atmosphere.
Today’s Chart
China is likely to slash fuel exports due to the power crisis, as more gas-to-oil switching prompts refiners to hoard supplies for use at home. Domestic diesel demand is on the rise and fewer shipments would come just as other Asian nations are set to consume more of the fuel as their economies rebound.
The crisis could push Beijing to accelerate its shift to clean energy
Updated: 14 Oct 2021,
David Fickling, Bloomberg
It’s likely to fuel inflation globally as Chinese imports get costlier
A villain is emerging in China’s efforts to rein in its energy prices: inefficient, power-hungry industry.
With flooding in the coal hub of Shanxi province driving prices up to $234 a metric tonne even as the government tries to kickstart extra production, further measures are clearly needed to prevent more generators cutting off their turbines and causing blackouts. That means a crackdown on the factories that still consume the lion’s share of electricity.
Industry makes up only 25% of grid demand in the US, but in China it’s fully 59% of the total—more than all the country’s homes, offices and retail stores put together. Cheap power has been an essential tool of development and the government has traditionally encouraged major users with electricity tariffs that get cheaper the more you consume. With about two-thirds of the grid powered by coal, the cost of digging up the black stuff has determined how much industrial users pay for their power.
The problem is that coal isn’t getting any cheaper. After a sustained period of deflation prior to 2016, when a glut of dangerous and unregulated mines was closed down, annualized costs jumped 40% in 2017. They didn’t fall again until covid struck, and they’ve since rebounded with a 57% increase from 12 months ago in August.
Such increases might be tolerable if end-users were turning this power into high-value goods. But all too often, that’s not the case. China now consumes more electricity per capita than the UK and Italy, but comes nowhere close in terms of economic output. Determined to hit President Xi Jinping’s targets on peaking emissions by 2030 and hitting net zero by 2060, Beijing’s policymakers have fixed on so-called “dual high" sectors—those whose energy consumption and carbon emissions are both elevated—as the culprits. These are many of the industries that have grown fastest in recent decades, such as cement, steel and glass. They collectively account for more than half of China’s emissions.
Under revised rules issued by economic planners at the National Development and Reform Commission this week, residential and agricultural consumers will still buy power at fixed tariffs and smaller users will see electricity costs fluctuate within a band. [But] “dual high" sectors will see no guardrails on the prices they pay. As a result, all the cost of balancing utilities’ books will fall on their shoulders. This will reduce demand and encourage inefficient users to upgrade to add more value, Wan Jinsong, NDRC’s director of prices said. This sounds like a neat solution, but we shouldn’t underestimate the way ripples will spread. In recent decades, the world has become hooked on cheap Chinese power for the manufacture of a host of goods. About half of all metal is produced in China and nearly a fifth of all oil is refined there. Energy-hungry products from aluminium to solar panels depend on the country’s low industrial power tariffs to keep their own prices down. With electricity costs for dual-high industries set to rise, we may not have seen the end of the inflationary pressures flowing through the global economy from those flooded Shanxi mines.
If Beijing wants to manage this transition without crippling the economy, it’s going to need to release pressure on the supply side of the energy system at the same time as taking [steps] to reduce demand growth.
That’s where renewables come in. At the same time that price curbs are being removed from dual-high industries, so capacity curbs are being lifted from zero-carbon power generation. Provinces previously faced absolute limits on the amount of electricity they were allowed to consume. In the future, those bars will be removed for renewable generation, giving governors a strong incentive to switch away from constrained, inflationary coal-fired energy to unlimited, fixed-cost wind and solar.
With zero-carbon electricity already cheaper than most existing coal power plants, those changes may be just the spur to wean China from its addiction to solid fuel. The bulk of generation will be able to move to wind, solar, hydro and nuclear. Thermal power plants will increasingly find themselves ramping up and down to capture daily peaks in demand, with differential pricing through the day giving them an opportunity to make profits after the sun has set and when the wind drops.
All that’s needed to make this system work more efficiently is for Beijing to unleash the formidable investment appetites of its provincial governments on the banquet of cheap zero-carbon power now available. Until now, China has shied away from the sort of rapid transition that it needs (as does the world’s climate). The teetering state of its coal-fired power system may just play the catalyst.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies
The problem is that coal isn’t getting any cheaper. After a sustained period of deflation prior to 2016, when a glut of dangerous and unregulated mines was closed down, annualized costs jumped 40% in 2017. They didn’t fall again until covid struck, and they’ve since rebounded with a 57% increase from 12 months ago in August.
Such increases might be tolerable if end-users were turning this power into high-value goods. But all too often, that’s not the case. China now consumes more electricity per capita than the UK and Italy, but comes nowhere close in terms of economic output. Determined to hit President Xi Jinping’s targets on peaking emissions by 2030 and hitting net zero by 2060, Beijing’s policymakers have fixed on so-called “dual high" sectors—those whose energy consumption and carbon emissions are both elevated—as the culprits. These are many of the industries that have grown fastest in recent decades, such as cement, steel and glass. They collectively account for more than half of China’s emissions.
Under revised rules issued by economic planners at the National Development and Reform Commission this week, residential and agricultural consumers will still buy power at fixed tariffs and smaller users will see electricity costs fluctuate within a band. [But] “dual high" sectors will see no guardrails on the prices they pay. As a result, all the cost of balancing utilities’ books will fall on their shoulders. This will reduce demand and encourage inefficient users to upgrade to add more value, Wan Jinsong, NDRC’s director of prices said. This sounds like a neat solution, but we shouldn’t underestimate the way ripples will spread. In recent decades, the world has become hooked on cheap Chinese power for the manufacture of a host of goods. About half of all metal is produced in China and nearly a fifth of all oil is refined there. Energy-hungry products from aluminium to solar panels depend on the country’s low industrial power tariffs to keep their own prices down. With electricity costs for dual-high industries set to rise, we may not have seen the end of the inflationary pressures flowing through the global economy from those flooded Shanxi mines.
If Beijing wants to manage this transition without crippling the economy, it’s going to need to release pressure on the supply side of the energy system at the same time as taking [steps] to reduce demand growth.
That’s where renewables come in. At the same time that price curbs are being removed from dual-high industries, so capacity curbs are being lifted from zero-carbon power generation. Provinces previously faced absolute limits on the amount of electricity they were allowed to consume. In the future, those bars will be removed for renewable generation, giving governors a strong incentive to switch away from constrained, inflationary coal-fired energy to unlimited, fixed-cost wind and solar.
With zero-carbon electricity already cheaper than most existing coal power plants, those changes may be just the spur to wean China from its addiction to solid fuel. The bulk of generation will be able to move to wind, solar, hydro and nuclear. Thermal power plants will increasingly find themselves ramping up and down to capture daily peaks in demand, with differential pricing through the day giving them an opportunity to make profits after the sun has set and when the wind drops.
All that’s needed to make this system work more efficiently is for Beijing to unleash the formidable investment appetites of its provincial governments on the banquet of cheap zero-carbon power now available. Until now, China has shied away from the sort of rapid transition that it needs (as does the world’s climate). The teetering state of its coal-fired power system may just play the catalyst.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies
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