On Tuesday morning, Premier Li Keqiang presided over a meeting in Zhongnanhai to address China’s severe power shortages and rolling blackouts.
As has been picked up by some media, the premier instructed the National Development and Reform Commission (NDRC), Ministry of Industry and Information Technology (MIIT), and all local governments to go “all out” to ensure needed power supply and to protect the public’s livelihood. Ensuring power supply, Li said, must now be regarded as the most important and urgent political task at present.
Here is what that means:
From what we understand, Li stated that blackouts in residential areas are not to be regarded as a part of China’s “dual control” policy that sets targets on total energy consumption and intensity and warned that any official who oversees a sudden blackout in residential areas without prior notice will be removed from office and held legally liable.
Li stressed that electricity demand for high-tech companies must be absolutely guaranteed, even while it would be necessary to continue to impose power cuts on high energy consumption enterprises, as well as for enterprises temporarily relocated to China from Vietnam, Malaysia, and other ASEAN countries due to the Covid Delta variant.
Some provinces, he said, have been too rigid in meeting emissions reduction targets, in the process triggering harmful undulations for industrial production, and they would need to carry out the country’s “dual controls” and “dual restrictions” more prudently, with power outages only used as a last resort, and with advance warning, to prevent overall grid risks.
The NDRC reported to Premier Li that the causes of the power shortages were largely two-fold.
First, the central government has vowed to cut “energy intensity” – the amount of energy consumed per unit of economic growth – by around 3% in 2021, but only 10 of 31 provinces had managed to achieve their targets for the first half of 2021, and so the laggards massively stepped up the enforcement of emissions curbs to catch up.
Second, (and in a perhaps more positive spin), the NDRC noted that China’s manufacturing orders are experiencing a sharp backlog of orders, going out to 2023, which is putting further strain on electricity demand.
As to more specific measures, our understanding is that China’s State Council approved an immediate expansion of coal imports, mainly from Russia, Mongolia, and Indonesia. (Note – Indonesia is China’s largest coal supplier, followed by Russia and Mongolia. China imports roughly 300 million tons of coal, which is around 10% of its total consumption).
The State Council also asked 20 provincial governments to implement differential electricity pricing for power usage peaks and valleys as part of a peak shifting power supply policy, and to provide subsidies to power generating enterprises.
It also urged coal producers to seek out and secure additional supplies. Having said that, officials privately note the challenges in implementing that. High coal prices they say have discouraged power plants from increasing inventories or generating more electricity, and now everyone is rushing for more coal, further exacerbating the price pressures, such that even with the price of thermal coal now over $200, it is still hard to find adequate supplies.
Furthermore inventories, in Guangdong for example, are already quite low, in that case covering less than a week of demand, and total coal inventory in China’s major power-generation groups we are told stands only at 11.31 million tons – just meeting demand for around two weeks.
On the industrial side, sources warn that under the current circumstances, the MIIT will severely restrict the output of sectors with heavy electricity consumption such as steel, cement, copper, aluminum, dyes and paper going forward.
This is estimated to take at least one percentage point off value-added industrial output.