Right on the heels of the collapse of one of its real estate giant Evergrande, China is facing another crisis. There is a serious power crunch in the country. Factories have halted operations and there is a real risk of an economic slowdown.
Experts estimate 44% of the industrial activity in China, which is the world’s second-largest economy, is impacted due to this power shortage.
Termed as one of China’s worst power crisis, the shortage is not confined to only the commodities market, though. The unprecedented power crunch has left millions of Chinese, particularly in northern parts, without electricity.
Street lights and traffic lights have stopped working, while many are using candles to light their shops and homes.
Let’s look at how China has come to face such a debilitating power crunch and how it will impact the global community.
Among the most affected are a number of provinces and regions in northeast China, trading powerhouse Guangdong in the south and Zhejiang, which have been in the grip of power shortage for weeks now.
Jiangsu, Zhejiang and Guangdong – a trio of industrial powerhouses which account for nearly 1/3rd of China’s economy – have been the worst hit.
Widening power shortages in China have halted production at numerous factories, but what is the reason behind this power crunch and why did China fall upon a crisis of this kind?
Reasons Behind The Power Crunch
Restrictions on power use in homes have only just taken effect. However, China’s massive industrial base has been wrestling with power usage curbs since at least March.
Many parts of the world are reopening after pandemic-induced lockdowns, greatly increasing operations at China’s electricity-driven export factories.
Since the demand for electricity has risen, the demand for coal has risen too. Higher demands have led to a surge in coal prices.
New York Times has said that Chinese regulators have not let utilities raise rates enough to cover the rising cost of coal. So the utilities have been slow to operate their power plants for more hours.
Because electricity demand has risen but the prices haven’t, power plants are operating below full capacity and unwilling to lose money by increasing electricity.
Two-third of China’s electricity comes from burning coal, which China is trying to curb to address climate change.
Chinese President Xi Jinping, while talking at a UN summit in 2020, promised that the country would reduce its carbon intensity which is the emission of carbon dioxide per unit of GDP by more than 65% by 2030. China is world’s top producer of CO2 and other pollutants and Chinese efforts to reduce greenhouse emissions is an important step in tackling climate change.
A point to note however is that the reasons for power shortages in the south of China are different form the North. Southern China is running low on hydropower, whereas the north is suffering from the increase in coal prices.
The global supply chains, which are still reeling from last year’s pandemic lockdowns will certainly have to bear the brunt of the power crunch as well.
The impact on industries is broad and includes power-intensive sectors like aluminium smelting, steel-making, cement manufacturing, and fertiliser. At least 15 listed Chinese firms that produce a range of materials and goods from aluminium and chemicals to dyes and furniture – have reported that their production has been disrupted by power curbs.
Reportedly, Several Apple and Tesla suppliers have suspended production at some Chinese factories for a number of days to comply with tighter energy consumption policies, putting supply chains at risk in the peak season for electronics goods.
The Guardian says analysts are foreseeing a shortage of exported goods such as smartphones, toys, textiles and machine parts, which has also made them reconsider their forecast for China’s 2021 economic growth.
While there are several ways China can come out of this power crisis, there are challenges in implementing those solutions as well.
Possible Solutions & Challenges
Coal imports could have been a solution since China has been a major importer. But Australia, the world’s second-largest coal exporter, has curbed coal shipments to China due to trade tensions.
Finding new sources of coal imports seems challenging too. BBC has reported that Russia is already focused on its customers in Europe, Indonesian output has been hit by heavy rains and nearby Mongolia is facing a shortage of road haulage capacity.
Completely relying on alternate, renewable sources for electricity generation is also risky. For instance, hydropower production in China depends on rain. A delayed start to the monsoon decreased hydropower generation in southern China that forced authorities to begin power rationing.
Other sources of renewable energy like wind, solar and nuclear energy have only recently started growing because China still relies on coal for more than half of its power.
So, what is China doing to resolve the crisis?
China’s economic planner, the National Development and Reform Commission has outlined a number of measures to resolve the problem, with energy supplies in the northeast of the country as its main priority this winter.
The measures include working closely with generating firms to increase output, ensuring full supplies of coal and promoting the rationing of electricity.
The China Electricity Council, which represents generating firms, has also said that coal-fired power companies were now “expanding their procurement channels at any cost” in order to guarantee winter heat and electricity supplies.
China has been the largest exporter of goods for more than a decade. If the power crisis persists, the second largest economy in the world will have to restrict productions and subsequently global supply is bound to experience a shock.