China’s electricity crisis will affect everyone around the world

Flooding in the coal hub of Shanxi province is raising prices by up to $234 a metric ton, even as the government is trying to kickstart additional production, and to prevent more generators from cutting their turbines and causing blackouts. More measures are clearly needed. This means that those factories that still consume a large part of the electricity will be prosecuted.

The industry makes up only 25% of grid demand in the US, but in China it accounts for 59% of the total – more than all homes, offices and retail stores in the country. Affordable electricity has been an essential tool of growth and the government has traditionally incentivized major users with electricity rates that become 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 electricity.

The problem is that coal is not getting cheaper. After a sustained period of deflation prior to 2016, when a glut of dangerous and unregulated mines were closed, annual costs increased by 40% in 2017. They didn’t fall again until Covid hit, and have since rebounded with 57%. Increase from 12 months ago in August.

Such growth may be tolerable if end users are turning this power into high value goods. But very often this does not happen. China now consumes more electricity per capita than the UK and Italy, but comes nowhere close in terms of economic output. Determined to achieve President Xi Jinping’s goals of reaching the highest emissions by 2030 and net zero by 2060, Beijing’s policymakers have fixed on so-called “dual highs” areas – those whose energy consumption and carbon emissions are both soaring. are – as criminals. These are the many industries that have grown the fastest in recent decades, such as cement, steel and glass. They are collectively responsible for more than half of China’s emissions.

Under the revised rules released by economic planners at the National Development and Reform Commission this week, residential and agricultural consumers will still buy power at fixed rates and smaller users will see electricity costs fluctuate within a band. [But] The “dual high” areas will see no railing on the prices they pay. As a result, all the cost of balancing the books of utilities will fall on his shoulders. This will reduce demand and encourage disabled users to upgrade to add more value, said Wan Jinsong, NDRC’s director of prices. It sounds like a neat solution, but we shouldn’t underestimate the way waves propagate. In recent decades, the world has become accustomed to cheap Chinese electricity to manufacture many goods. About half of all metal is produced in China and about one-fifth of all oil is refined there. Energy-hungry products from aluminum to solar panels depend on the country’s low industrial electricity rates to keep their prices down. With electricity costs for industries doubly high set to rise, we may not have seen the end of the inflationary pressures flowing through the global economy from the Shanxi mines.

If Beijing wants to manage this transition without crippling the economy, it will need to release pressure on the supply side of the energy system at the same time as [steps] To reduce demand growth.

This is where renewable energy comes in. At the same time prices are being curbed from double-high industries, therefore curbing capacity from zero-carbon power generation. The provinces had previously faced absolute limits on the amount of electricity they were allowed to consume. In the future, those bars for renewable generation will be removed, giving governors a strong incentive to move away from limited, inflationary coal-fired energy to unlimited, fixed-cost wind and solar power.

With zero-carbon electricity already cheaper than most existing coal power plants, these changes could be just the impetus to break China’s addiction to solid fuels. The bulk of the generation will be able to be transferred to wind, solar, hydropower and nuclear. Thermal power plants will increasingly find themselves ramping up and down to capture daily peaks in demand, with different pricing during the day giving them the chance to make profits after the sun goes down and when the wind hits.

For this system to work more efficiently, Beijing needs to free up the formidable investment appetite of its provincial governments on the banquet of cheap zero-carbon electricity now available. So far, China has shied away from the kind of rapid transition it needs (as has the world’s climate). The shoddy state of its coal-fired power system may only play a catalytic role.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies