Energy & Resources

Lights outs

Why have Chinese cities faced power outages?


Coal prices are surging

Readers who are wondering how they will cope with the new  Covid-19 lockdowns being imposed in a number of countries at the beginning of 2021 might spare a thought for the Indian sailors trapped aboard two merchant ships outside Chinese ports since last summer.

The Jag Anand and the Anastacia were carrying Australian coal to the ports of Jingtang and Caofeidian in Hebei province. The Chinese authorities have not allowed either ship to dock and the Indian press says that they have not permitted the crews to be replaced either. So the seamen have been stuck offshore for months.

Australia’s Sydney Morning Herald reports that four members of the Anastacia are on suicide watch. Some of the crew has been at sea for 18 months with no shore leave. One of them tells the newspaper that a colleague has “become a lunatic person…. [he] sleeps all day and stays awake all night, disturbing other crew members by making crazy noises, banging on the floor, whistling”.

According to Kpler, a data supplier to energy markets, there are a further 50 vessels carrying Australian coal that are stranded in Chinese waters. The Chinese authorities say that the boats are free to depart at any time. But they are not allowed to dock.

Australian media reckons the disruption to deliveries is retaliation for Canberra’s call last April for an independent investigation into the origins of Covid-19. China’s Global Times didn’t counter the claim directly, although it hardly denied the speculation that the hold-ups are politically motivated. “If Canberra stubbornly refuses to mend ties with China, then Australian businesses could lose more market share to companies of other countries,” it warned.

The newspaper added that “incessant media reports surrounding the diminished coal trade between Australia and China have given local suppliers from other markets more incentive than ever to look to benefit from Australia’s refusal to respect China’s sovereign rights and lawful interests.”

However, replacement supplies from countries like Mongolia, Russia and Indonesia have been slow to materialise, exacerbating China’s worst coal shortages in a decade. This first became evident via electricity outages in mid-December, with Hong Kong’s South China Morning Post now reporting that coal supplies have continued to dwindle “at an alarming rate” during the first week of January.

The shortfall stems from a perfect storm created by colder-than-normal weather; local authorities trying to meet end-of-year emission targets; the restrictions on Australian imports; power producers balking at higher coal prices; an anti-corruption drive resulting in border checks on the Mongolian border; a spate of mining accidents; and a faster-than-expected economic rebound from Covid-19.

In Chongqing, for example, coal mining has been suspended following another fatal accident on December 4. This has accelerated national plans to phase out smaller (and typically more dangerous) mines with annual outputs of less than 300,000 tonnes.

As a result, three eastern provinces began to experience power outages in mid-December. In Hunan and Jiangxi, the whole province was impacted. In Zhejiang, the disruption was mainly confined to the cities of Wenzhou and Yiwu, where streetlights were shut off for several nights and companies were told to keep the heating off until the temperature got close to freezing.

“How is it that I’m freezing like a dog here in the south, while they’re basking in greenhouse-style heat up in the north?” a bemused citizen told Phoenix News (a reference to the fact that China has long had different policies for building heating north and south of the Yangtze River, shaped by the harsher winters in the northern provinces).

In Hunan’s capital Changsha, workers reported that they had to climb multiple flights of stairs after the elevators were switched off in their buildings. But at least it helped them to stay warm.

Netizens have been unimpressed – albeit few attribute the problems to China’s dispute with Australia. Some believe the country’s energy mix is wrong. “We shouldn’t just be focusing on clean energy,” commented one. “China still needs coal to meet its power needs.”

Another said: “This is down to local governments trying to meet their KPIs [key performance indicators] because we’re coming to the end of the 13th Five-Year Plan.”

Wang Han, chief economist at Industrial Securities, told Tencent News that Hunan and Zhejiang are running into significant problems reaching energy self-sufficiency targets too. He said that Zhejiang manages a 71.2% ratio of its power needs, and Hunan 80.8%.

More developed, wealthier provinces in the east of the country also tend to rely more on imported coal, which is of higher quality. While thermal coal imports accounted for 4.17% of the national average in 2019, the ratio is closer to 10% in the more economically advanced areas.

By November imports from Australia were down 90% year-on-year – at a time when domestic demand is rising as China’s economy picks up steam. The Purchasing Managers Index (PMI) hit a three-year high of 52.1 in November, before dropping slightly to 51.9 the following month. All these factors have created a supply/demand imbalance that’s pushed up prices and brought in the speculators. The price of higher-quality thermal coal from Shanxi is trading at about Rmb700 per tonne in the spot market, which is up about a third since mid-2020 and nearly double where it was at the market’s bottom in 2016.

The authorities have responded by halting the publication of some coal contract prices, blaming “chaotic conditions” and speculation. The China Electricity Council is no longer updating its pricing index and the China Coal Transportation and Distribution Association has called a halt on publishing spot prices for thermal coal in the Bohai Rim, where much of the coal is shipped.

Coal producers are now rushing to speed up the signing of their 2021 contracts in the hope that this will lock in higher prices for the longer term. However, as Caixin magazine argues, this only exacerbates a fundamental challenge in the local energy sector: coal prices float freely, but power producers mostly sell electricity on fixed prices set by the government (we first discussed this anomaly in 2009; see WiC3). Ergo power firms face operating losses in periods when coal prices rise significantly (like now).

Ifeng agrees that fluctuations in prices can then spill over into electricity disruption. In an editorial it concluded that “recent power outages are a warning call for us to think about pushing forward further reforms in the power pricing system”.

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