Since September 2021, there have been ongoing power outages and power rations in various parts of China, involving more than 10 provinces such as Jiangsu, Guangdong, Zhejiang, Anhui, Shaanxi, Guizhou and Yunnan, affecting the industrial chain in many fields including steel, cement, chemical industry, textile, printing and dyeing, chemical fiber, electronics and so on. Its ripple effect has spread to consumers around the world. With the arrival of large shopping events such as China's Double Eleven and Double Twelve, North America's Black Friday and Christmas, the problem of supply chain shortages has become more evident.  The power shortage demonstrates the tension between China's electricity supply and demand and reaching its environmental goals. This article will analyze the reasons behind this tension while looking at how China can continue to act as "global factory" while maintaining its carbon neutrality goals.

The cascade effects of power shortages

There are two main reasons for power curtailment, namely the rise in global coal market prices and the implementation of the dual control policy of energy consumption in order to achieve carbon peak and carbon neutrality. First of all, the coal market price has reached a new high in recent months, according to the China Coastal Thermal Coal Procurement Price Index (CECI) jointly released by Chinese Power Enterprises, from September 16 to September 23, the price of thermal coal reached 1086 yuan / ton, nearly doubled year-on-year, up 56.26%^[1] from the beginning of the year. This led to losses for coal power companies, and a decreased willingness to generate electricity leads to a decline in power generation. Secondly, in order to maximize the role of marketization and better ensure the safe and stable supply of electricity, the National Development and Reform Commission issued the "Notice on Further Deepening the Market-oriented Reform of Feed-in Tariffs for Coal-fired Power Generation" in October 2021, encouraging all coal-fired power generation to enter the electricity market and expanding the range of electricity prices up and down to 20%. However, due to the unchanged "double high" dual control targets, high-energy-consuming enterprises are not within the scope of electricity price control, and their electricity prices can rise and fall with the market, meaning the cost of electricity may increase significantly^[2].

Provinces across the country utilized different strategies with power shortages, where Guangdong, Jiangsu, Fujian and other manufacturing heavy provinces have adopted strict rolling blackout and power curtailment requirements. Guangdong Province has implemented the "open two closed five" electricity consumption plan since September 16, while Jiangsu issued a half-month power curtailment order from September to early October, to stop most factories from operation^[3]. The power cut has directly affected the supply chain of many global companies, such as the computer chips, crystal plates and circuit components used in Apple's mobile phones, which are produced and processed in the areas most affected by the power ration^[4]. Automobile manufacturing plants in the Northeast Regions have also been stopped due to the forced shutdown of nearby tire factories^[5], resulting in the lack of production of finished vehicles. Official data showed in September 2021, Chinese factory output shrank to below February 2020 levels, the lowest since the Covid-19 lockdown crippled the economy. The Goldman Sachs report estimates that as much as 44 percent of the country's industrial activity will be affected by power shortages in 2021. Due to the impact of power cuts, the report also expects China's economy to have a slower growth of 7.8% this year, down from the previous forecast of 8.2%^[6].

In an article published in October by the New York Times, it mentioned of a consumer in Seattle, USA, who was refunded for production problems caused by power cuts after buying electronics from Chinese manufacturers that summer^[7]. This case shows that although the prices of products produced in China are preferential, the instability of the supply chain directly affects consumer confidence in Chinese manufacturers.

Power shortages brings transition opportunities

How can businesses respond:

Chinese companies use 59% of the grid, more than households, offices and commercial electricity combined^[8]. Manufacturing in China tend to require 10 to 30 percent more energy than its western counterparts^[9]. From a business perspective, its top priorities are to mitigate the impact of power shortages to ensure production capacity through a number of actions, including improving equipment efficiency and increasing use of renewable energy. First is to reduce its own electricity demand by improving energy efficiency. For example, the steel industry can improve steelmaking efficiency through technological improvements. Currently, China's steel mills use more electricity each year than all households in the country combined, accounting for about one-sixth of China's greenhouse gas emissions. Domestic steel companies still rely on coal furnaces to melt iron ore to make steel. Meanwhile, steel companies in the EU and the US have turned primarily to producing steel in highly efficient electric arc furnaces that can melt a mixture of scrap and iron ore. Chinese companies need to improve their technology by switching to similar electric arc furnaces and collect scrap to reduce their dependence on electricity and carbon emissions.

Second, in addition to improving energy efficiency, businesses can reduce the power consumption from the grid by building their own renewable energy generation facilities; or reduce or neutralize its carbon emissions by purchasing "green electricity" or green certificates. In addition, companies can also reduce their own demand and dependence on electricity by installing renewable power devices and energy storage equipment in the factory area, and have the ability to better cope with power curtailment and blackouts.

How can governments respond:

The Chinese government's emergency "dual control" to power curtailment is not a short-term policy, but a long-term one. Especially after announcing the stop on new overseas coal power projects this year, it reflects the determination for China to change it's carbon reduction-oriented energy structure, and the energy transformation focused on eliminating coal will be the main approach to achieve the double carbon target. As the world's second-largest economy and most productive country, China also accounts for 20% of the world's carbon emissions. The world economy needs China to reduce carbon while still maintaining the quality and speed of production^[10].

A report published in December by the Peking University Energy Research Institute examined different ways for China to achieve its carbon neutrality goals, showing different roadmaps that include a significant increase in renewable energy and supply, grid stability, and a steady decline in coal power generation. From the predictions in the report (Figure 1), by 2035, the development of renewable energy will accelerate, the overall power generation structure will gradually reduce its dependency on fossil fuel, and will be extended to coastal areas with high electricity demand through technologies such as offshore wind energy to alleviate the demand for long-distance energy transportation and increase the stability of renewable energy. By 2030, the development of hydropower will be mostly complete, but the number of scattered smaller scale nuclear energy developments will rise, to meet the electricity demand of rural areas^[11].

Figure 1: Changes in the composition of power generation and new power generation in the near and medium term

According to a separate report from the California-China Climate Research Institute, China's carbon emissions will peak between 2020 and 2030 and then fall sharply, but reducing coal generation is the most important link. Based on a variety of compatible scenarios for global warming of 1.5°C, the report notes that China's share of non-fossil power generation will need to reach around 90% by 2050, nearly three times more than the current 31%. The report also highlights the importance of electrification in various fields, with corporate electrification rates likely to reach 40-70% by 2050. Currently, in order to achieve the goals of the 14th Five-Year Plan, the industrial sector needs to improve energy efficiency by 15% over the next five years, and the overall electrification rate needs to reach 5% in the same period^[12]. As can be seen in the two reports, under the global carbon neutrality goal, China's power shortage problem can be solved through long-term efforts to improve energy efficiency and reduce electricity demand through active electrification by businesses, as well as the increase in the proportion of renewable energy generation in the power system and the reduction of dependence on coal power.

Conclusion

From the cascading reactions of this year's power and production rationing, it has triggered a global questionable perspective of Chinese company's future development and the energy transformation of China's power sector. The author believes that China has the ability to achieve energy conservation and emission reduction while continuing to develop its industrial supply chain and continue to sit firmly in the position of "global factory". But it requires governments, businesses, and consumers around the world to invest in it. Government policy incentives, positive transformation of businesses and consumers' willingness to pay for green products are the most effective ways to achieve carbon neutrality.

Note： 

[1] 拉闸限电的情况还会持续多久？链接：https://new.qq.com/rain/a/20210926A0DL3I00

[2] 国家发展改革委关于进一步深化燃煤发电上网电价市场化改革的通知。链接：http://www.gov.cn/zhengce/zhengceku/2021-10/12/content_5642159.htm
[3] 多省限电政策一览 9月水泥产量或大幅下降，链接：https://m.thepaper.cn/baijiahao_14698321

[4] 限电潮蔓延全国，各大企业皆受影响，产生已被限制三成以上。链接：https://view.inews.qq.com/a/20211102A053I900
[5] Keith Bradsher, China’s Power Problems Expose a Strategic Weakness. Oct. 13, 2021, Link: https://www.nytimes.com/2021/10/13/business/china-electricity-shortage.html

[6] China's growing power crunch threatens more global supply chain chaos, Link: https://edition.cnn.com/2021/09/28/economy/china-power-shortage-gdp-supply-chain-intl-hnk/index.html

[7] 同5
[8] Ariel Cohen，China’s Energy Crisis Deepens With Potentially Fatal Consequences，Oct 19， 2021  链接：https://www.forbes.com/sites/arielcohen/2021/10/19/chinas-energy-crisis-deepens-with-potentially-fatal-consequences/?sh=33854191163a

[9] 同5
[10] 北京大学能源研究院，华北电力大学，电力部门碳排放达峰路径与政策，2021年12月

[11] 同10

[12] California-China Climate Institute (CCCI)，July 2021，Getting to Net Zero China Report。链接：https://ccci.berkeley.edu/sites/default/files/GTZChina-Sept2021-FINAL.pdf

Author：Pan Yiren

Translation: Pan Yiren

This article is an original article of the Rock Environment and Energy Institute. Please contact us to obtain the appropriate authorization to reprint. For cooperation and authorization, please send an email to: liying@reei.org.cn

* This article was edited and published by the author in Chinese, because the author accepted an invitation from China Daily.