Explainer | China’s power crisis: why is it happening, how bad is it, and what if it continues into the freezing winter months?
- China relies on massive amounts of coal to keep people warm, but some provinces can’t even keep the lights on amid high prices, production cuts and Beijing’s determination to cut emissions
- Some industrial powerhouses in the world’s second-largest economy are forcing factories to slash production, posing a risk to GDP growth and global supply chains
Why is China in the midst of a critical power crunch?
China experiences power shortages from time to time, and these are often the result of a conflict between market-oriented coal prices and government-controlled electricity rates.
On January 1, 2020, the central government implemented a new mechanism for controlling the price of electricity across the country, intended to prevent wild price fluctuations. A notice by China’s economic planner, the National Development and Reform Commission (NDRC), stipulated that provincial authorities were permitted to lower the price of electricity by as much as 15 per cent, or raise it by as much as 10 per cent, from a fixed starting point.
However, the NDRC, which is solely in charge of the national electricity pricing mechanism, said that the range could be revised, depending on market conditions. Generally speaking, though, even if there is increased demand for electricity, coupled with other factors such as a shortage of thermal coal needed to create that electricity, the price for end-users – from average citizens to large industrial firms – typically does not increase by more than 10 per cent.
Meanwhile, the price of coal is not similarly regulated in China, and it recently hit record highs because it is priced according to market forces such as availability and demand.
As a result, power companies have been unwilling to produce adequate power, because it is simply less profitable.
According to research by financial services group Macquarie Capital, China saw its power production increase by 11 per cent from January to August, year on year, but its coal production was only up only 4 per cent during this period.