China, faced with rising electricity demand and surging coal and natural gas prices , is cracking down on power consumption amid emissions reduction targets that the national government has set to ensure blue skies at the Winter Olympics in Beijing beginning February 4, 2022, as it did with the 2008 Olympics. Unfortunately, cracking down on power consumption will lead to further supply chain shortages that were first noticed after economies opened from coronavirus lockdowns. Beijing has ordered aluminum smelters, textile producers, soybean processing plants, and other factories to lower output or shut down. China’s power shortages have caused economists to cut the country’s economic expansion in the last three months of this year to 3 percent, from 4.4 percent previously. It is hard for an economy to grow with inadequate energy.
China is at risk of a severe shortage of coal and natural gas used to heat homes and power factories this winter. While it has had to ration power in the colder months before, it has never had to do it with global prices of fuels at such high levels. The power crisis has even begun to affect homes as the Guangdong province has urged residents to rely on natural light and limit air-conditioner use, after cutting power to some factories. Yunnan Aluminum Co., a $9 billion producer, curtailed output due to pressure from Beijing. Overall industrial use consumes 70 percent of the electricity in China, led by mostly state-owned producers of steel, cement and aluminum.
Soybean crushers that process soybeans into edible oils and animal feed were ordered to shut down recently in the city of Tianjin. Smaller companies too have been ordered to curb or halt activity. The end result could be a shortage of everything from textiles to electronic components that would affect global supply chains and negate profits of many multinational companies.
In the city of Dongguan, a major manufacturing hub near Hong Kong, a shoe factory that employs 300 workers rented a generator for $10,000 a month to ensure that work could continue. Between the rental costs and the diesel fuel for powering it, electricity is twice as expensive as when the factory was purchasing power from the electric grid. Due to noise complaints from neighbors, the factory had to turn off the generator for two days recently. Prices for shoe components (e.g. insoles) have also increased (30 to 50 percent from last year) due to increased labor costs and raw material prices.
China’s Electricity Demand and Coal Prices
Compared with 2020, China’s electricity demand this year is growing at nearly twice its usual annual pace. Orders for the smartphones, appliances, exercise equipment, green energy products and other manufactured goods from China’s factories were major factors in the increased electricity demand. As electricity demand increased, the price of coal to generate that electricity also increased as it accounts for two-thirds of China’s electricity generation. China’s thermal coal futures have surged, repeatedly setting records, as concerns over mine safety and emissions constrain domestic output and as China continues to ban coal shipments from Australia because of on-going trade disputes. Meanwhile, natural gas prices have surged to seasonal highs as countries try to outbid each other for supplies.
Despite the fuel cost increases, Chinese regulators have not let utilities raise rates enough to cover the increased fuel costs. Chinese electric utilities have adjusted output by either leveling their output despite higher demand, operating below full capacity, or closing for maintenance. The Beijing Electric Power Industry Association and 11 coal-fired power companies are petitioning authorities to raise electricity rates to avoid bankruptcy amid escalating coal prices. Coal-fired power companies can only raise rates by 10 percent to accommodate increasing operational costs as a large part of electricity prices are fixed by the government. Last year, the National Development and Reform Commission, the country’s top economic planning agency, prohibited all rate increases.
China’s electricity shortage is starting to exasperate the supply chain problems that arose from the COVID-19 pandemic. The sudden restart of the world economies has led to shortages of key components like computer chips and has helped provoke a mix-up in global shipping lines, putting in the wrong places containers and ships that carry the components. Multiple semiconductor suppliers for Tesla, Apple and Intel, which have manufacturing plants in the Chinese mainland, recently announced they will suspend their factories’ operations to follow local electricity use policies. Goldman Sachs estimated that as much as 44 percent of China’s industrial activity has been hit by power shortages.
While China’s problems are mainly internal, its power problems are contributing in part to higher prices in Europe. The increase in LNG prices in China, for example, has had energy distributors send ships to Chinese ports rather than European ports.
China’s Emission Requirements for the Olympic Games
Tangshan, China’s top steel hub, will help to ensure blue skies for Beijing’s Winter Olympics by capping steel output and ordering other measures to lower emissions. The city’s steelmakers are a regular target when authorities in the nearby capital want blue skies for high-profile events. Tangshan is about 150 kilometers (93 miles) from the Bird’s Nest stadium that will host the opening ceremony. Tangshan, which accounts for 8 percent of global steel output, is expected to drop its air pollution by at least 40 percent in the days leading up to and during the Olympic Games. During the games and opening and closing ceremonies, Tangshan’s hourly concentrations of PM2.5 should not exceed 75 micrograms per cubic meter. Other measures to boost air quality include curbs on heavy vehicles and cement production, and switching more transport to clean fuels.
China is facing a power squeeze from a shortage of coal supplies, tougher emissions standards, and strong demand from manufacturers and industry that have triggered widespread curbs on usage. Factories have stopped operations due to power shortages and government mandates to meet energy and emissions reduction goals in order to clear the air for the upcoming Olympic Games. Economists predict that production interruptions at Chinese factories would make it harder for many stores in the West to restock empty shelves and could contribute to inflation and shortages in the coming months.
As the United States depends on China for a lot of materials and component parts, this shortage could result in fewer Christmas presents, but more concerning, it would mean a slower start to President Biden’s climate goals as the necessary wind turbine and semiconductor parts as well as solar panels will not be available from China in the near future, which would impact his timetable to reach net zero. Further, his infrastructure plans will be curtailed too as cement, aluminum and steel are being impacted by the emissions cuts and power shortage as well. Americans often simply take energy for granted because it is typically affordable and available. China and Europe are showing what happens when it is not.