This time the gloom started at 6 a.m. on September 26. That’s when Mr. Yang, a Taiwanese entrepreneur who has been running a factory in Kunshan for nearly 20 years, Jiangsu Province, received an emergency phone call about an impending power cut.

Fellow Taiwanese entrepreneurs told him that the industrial area’s “grid workers” who are in charge of maintaining basic services, had virtually all been mobilized. They were calling all factories to notify them that the electricity supply would be rationed starting the same day, and that all work was to be halted from noon.

It was not that power would be cut, they were told, but the entrepreneurs were advised “you’d better not use any electricity”, says Yang. Only if a factory needed to use electricity to prevent safety issues could an oral application for continued power use be filed, they were told.

“Nothing had been put down in writing; there were no documents,” recalls Yang in an interview with CommonWealth Magazine. Even on day three after factory work had come to a standstill, he had not seen any official notification in writing.

It was not the first time that China had implemented large-scale power rationing schemes in the past year. But the suddenness and scope of the measure this time caught many off guard, thwarting timely preparation.

Late last year, Zhejiang, Hunan, and Jiangxi provinces suddenly announced power rationing schemes. This happened just as relations between China and Australia soured over Australia’s demand for a probe into the origin of the COVID-19 pandemic, which sparked China to ban imports of Australian coal. Therefore, speculation was rife that China did not have enough coal to keep its many coal-fired power plants running.

Less than half a year later, power shortages occurred in southern Guangdong Province. After the mid-autumn festival in mid-September, the industrial power supply was suddenly rationed in coastal Jiangsu Province, where many Taiwanese companies are located. More than 100 Taiwan-invested companies were affected. In late September, two thirds of the provincial-level administrative divisions collectively announced power rationing. Even the provinces in the northeast, where the heating period had begun, completely halted power supply both for industrial and residential use.

A Chinese utility operator described the situation as a perfect storm unfolding.

A thorough analysis of the power shortage shows that the causes behind it differ from region to region. On top of that, several short-term causes happened to coincide, aggravating the situation. The long-term reality that China might face as it weans itself off coal to transition to renewable energy sources is that “power shortages” might become the new normal.

Local governments order production halts to meet carbon reduction targets

First of all, Jiangsu, where most Taiwanese factories are located, does not lack electricity but has failed to meet energy-saving targets.

Last September, Chinese President Xi Jinping announced at the United Nations General Assembly that China would strive to reach “peak coal” by 2030 and become “carbon-neutral” by 2060. These ambitious and early targets caught many by surprise.

In order to reach these targets, China began to implement “dual control of energy consumption” more strongly this year. This means that businesses that are high power consumers have their power supply restricted and production capacity curbed. In the first half of this year, almost half of China’s 31 provincial-level divisions, including Jiangsu, failed to meet targets.

Taiwanese entrepreneurs in Kunshan, Jiangsu Province, point out that the COVID-19 pandemic has disrupted the supply chains in Southeast Asia. As a result, orders are being switched to production plants inside China. At the same time, demand in North America and Europe is exploding as the pandemic situations there abate. With factories ramping up capacity to meet skyrocketing demand, Jiangsu Province has already now overshot its energy consumption targets.

In early September, the local government called a meeting with factory operators, allocating energy-saving targets but not implementing them yet. Therefore, the order to halt operations hit them out of the blue. “We cannot use the electricity that the local government generates, but we are also not allowed to use electricity generated by our in-house generators,” laments one Taiwanese entrepreneur.

When ordering a production halt, the local governments are tarring everyone with the same brush, apparently aiming to give the central government a dose of its own medicine.

Qin Yan, senior modeling analyst with Refinitiv Perspectives, a London Stock Exchange Group business, covers the Chinese power market. She observes that China is still in the process of discussing “peak carbon” implementation proposals. These schemes for achieving the carbon dioxide emissions peak before 2030 are currently being discussed at the provincial level, she points out.

“At the local level, they still think that the economy takes the lead; what they are doing now is more like playing games with the central government, telling it ‘You are setting such strict carbon reduction targets, look what you are doing to our industrial production’,” says Qin in describing the attitude on the ground.

The present power rationing is meant to deliver a warning to the central government. Why are the local governments strangling an economic lifeline to haggle over carbon reduction targets? It’s because strong economic performance during the first half of the year has left them with considerable confidence and bargaining power.

Skyrocketing coal prices turn power generation into a loss-making business

China has set an annual economic growth target of only six percent for this year. But in the first half of the year, national GDP growth outperformed expectations with a growth rate of 12.7 percent thanks to strong orders from abroad. During the same period, industrial sector electricity consumption increased at an even higher rate of 16.5 percent.

The massive increase in electricity consumption on the back of a vigorous economic recovery is not good news for a China that hopes to reduce electricity generation in coal-fired power plants.

Despite a steady increase of renewable energy sources, around 70 percent of China’s electricity still depends on coal-fired power plants. More than 90 percent of the coal that China consumes is mined domestically. But many small- and medium-sized coal mines have been closed in recent years due to accidents and the need to meet carbon emission reduction targets. Moreover, even though there are coal mine operators who want to expand production, such applications are generally turned down.

The price of imported coal, used in the past to balance domestic supply shortages, has gone through the roof as international commodity prices keep soaring and summer typhoons cripple sea transport.

With both demand and supply out of control, the coal price nearly doubled in China in September year-on-year.

The distorted pricing mechanism in China’s power generation market also contributed to the need for “electricity rationing”: The coal market follows market prices, whereas electricity consumption is charged based on a uniform official utility rate.

“Some coal-fired power plants incur a loss of 0.1 yuan per kilowatt hour of generated electricity. Therefore, they deliberately go into the inspection and maintenance period to cut losses,” explains Qin, the analyst. As a result, the northeast of China is experiencing large-scale power cuts.

In fact, the Northeast has seen an exodus of industry and people in recent years, so that virtually no industrial power consumers remain. This March, the China Electricity Council, a power industry association, even predicted that the Northeast would count among the few areas in China with “ample electricity supply year-round”. Therefore, it came much to everyone’s surprise that even electricity supplies to private households were restricted there, often apparently without prior warning. Photos posted on social media showed people trapped in elevators and lights going out in hospital operating rooms.

After more than 20 administrative divisions were hit by power cuts, the central government declared in late September that first and foremost the coal price must be adjusted. But it still emphasized the need to “use energy in an orderly manner”, hinting that the power supply was still unbalanced.

“Major commodity prices cannot be adjusted in a few days,” notes Hui Shan, chief China economist at Goldman Sachs. Pointing to various remaining uncertainties, she predicts that “electricity rationing can be expected to continue for several months”.

Power shortages to become the new normal in China in the coming 5 years

The latest economic forecasts by major investment banks expect that the current power crisis could shave one to two percentage points off China’s annual GDP growth rate.

Is China truly willing to sacrifice economic growth for the sake of achieving peak carbon emissions and carbon-neutrality?

An article in the March edition of Energy, a magazine under the State Council, concluded that China could face power shortages to the order of more than 100 million kilowatts during the current five-year plan that began this year, if electricity demand growth remains stable and no new coal-fired power plants go online.

This means that, should China stick to its current carbon reduction path and targets, power shortages and power rationing could become the new normal for the coming five years.

Taiwanese entrepreneurs are already aware of this trend. Steven Hsu-hui Tsung, president of the Kunshan Taiwanese Business Association (KSTBA), observes that China definitely faces power crunches as supply cannot keep up with demand. But he points out that China’s policy and regulations are very clear despite the economic challenges that power shortages and power rationing present: “Customers as well as upstream and downstream suppliers must consider how to move toward green manufacturing step by step.”

Tsung cites an example “The most famous is the Apple supply chain. The Apple suppliers don’t complain; they go along with the policy and are proud to become an Apple supplier.” He suggests that Taiwanese-invested and foreign-invested businesses transition to new alternative energies and learn how to run their companies sustainably with limited resources.

But there are even bigger problems facing China. During the past year, the government has abruptly and harshly implemented policies instead of promoting them in an orderly, gradual manner, ranging from tightly monitoring Internet technology companies and the education sector to enforcing carbon emission reduction. China vows it wants to be a proponent of an ecological civilization, but taking a curve while going too fast might just drive the country straight into darkness.
 

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Translated by Susanne Ganz
Edited by TC Lin
Uploaded by Jane Chen