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After maintaining power supply security during two decades of
robust growth, in September 2021, China started to experience a
serious power shortage, with two-thirds of provinces employing
different degrees of load-shedding measures—and not during the
summer or winter peak demand seasons.
This marks an energy crisis for China. Natural gas, as a premium
and relatively scarce fuel with inadequate storage capacity to
provide peak winter supply, frequently experiences supply
curtailment to nonresidential sectors during winter seasons.
However, as natural gas only accounts for 8% of China's primary
energy mix and 4% of the power capacity mix, power rationing has a
much more profound repercussion on the market operation and
economic activities.
In an emergency meeting at the end of September, Chinese Vice
Premier Han Zheng, who oversees the energy sector and industrial
production, ordered state-owned energy companies to "secure energy
supply at all costs." In a meeting with foreign diplomats, Premier
Li Keqiang also reportedly reaffirmed China's efforts to maintain
economic growth and supply chain stability.
"Securing supply at all costs," however, may not mean literarily
that. On 29 September 2021, China's National Development and Reform
Commission (NDRC) issued a detailed response to reporters'
questions on the plan to secure energy supply this winter and next
spring. On 8 October 2021, Premier Li Keqiang led an executive
meeting at the State Council to discuss short-term energy supply,
confirming the key points in the NDRC's report.
Most of the tools that the NDRC listed to secure power supply
are measures to increase fuel supply, particularly from domestic
sources. Coal, being the largest share of fuel for power
generation, was discussed before natural gas. Price signals and
cost passthrough are also an option, given that thermal power
profitability or the lack thereof in the current spot price
environment was an important factor leading to the current power
generation shortage. Indeed, on 11 October 2021, the NDRC followed
up with a specific policy to allow coal-fired power generation
prices to deviate within 20% of the current benchmarks, up from the
previously allowed 15% lower band and 10% higher band. However, the
updated price range will help improve coal-fired power's financial
performance but is still not enough to bring power plants back to
profitability, as coal prices have tripled in the past year.
More importantly, even with the measures listed above, the NDRC
still indicated that power rationing will remain the tool of last
resort to balance power supply and demand with guaranteed supply to
the residential sector in the coming winter season. Power rationing
will apply first and foremost to dual-high projects—projects
with high energy consumption and high emissions, then to other
industrial power users.
The multi-pronged approach to deal with the energy crisis is a
common practice in China. Consistent with the general prevailing
supply security policies, domestic production—whether for coal
or natural gas—will serve as the backbone of the supply
increase to support thermal power generation. The coal-fired power
tariff adjustment will help but does not fundamentally solve the
profitability problem of thermal power plants or change the
coal-versus-gas comparison in generation profit in the current spot
price environment. Power rationing remains a distinct risk this
coming winter. In addition, it also helps with the fulfilment of
the "dual-control" targets of energy consumption and energy
intensity. As a result, the impact of the current policy direction
to alleviate the power shortage issue on spot purchases for coal
and gas from the global market is limited.
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Jul 01
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