DIESEL FUEL SHORTAGES are following China’s widespread electric power shortages as factories turn to diesel-powered generators to keep production going and wholesale prices higher than retail ones cause refineries to cut back production.
Petrol stations in many parts of China are reportedly rationing diesel, with lorry drivers reporting having to wait days in some cases to refuel, being limited to small quantities or being charged extra to fill up.
Lorries are the often overlooked underbelly of supply chains, so these latest fuel shortages and prices rises will put further pressure on already strained global supply chains.
Wholesale prices of petrol and diesel have risen by around one-fifth over the past month. They are now above government-set retail prices, leading to production cutbacks at refineries, as at power plants when coal and natural gas prices jumped.
Diesel output was down 4.4% in the first nine months of this year compared to the same period a year earlier, although it ticked up in September. Reserve inventories have been run down by about one-fifth. Meanwhile, retail prices have increased by 30% this year. Export supplies are being diverted to the domestic market.
The power and fuel shortages are pushing up producer prices — by a record 10.7% in September — although this has yet to work through to retail prices. Consumer price inflation rose just 0.7% in September.
In part, consumption is being depressed by lockdowns to contain a new wave of Covid-19 outbreaks that have spread to 11 provinces over the past ten days.
REPEATED POWER BLACKOUTS are a sign of misfiring economic management that does not reflect well on governments. Electricity shortages have hit many regions of China over the past month, affecting manufacturing, traffic and street lighting, and homes, often without warning. Sixteen out of 31 provinces have begun rationing electricity, and the northeast faces the prospect of power cuts running through the winter.
The power shortages are the consequence of a combination of contradictory policies: moves to improve energy efficiency and cut consumption in support of carbon reduction goals, and fitful reform of the largely coal-fired power generation sector where long-standing subsidies and price controls cannot withstand the rise in global coal prices, leaving power plants short on fuel.
Provinces’ implementation of obligatory emission-reduction targets imposed on them by central government has been haphazard, varying from draconian to lax. In addition, the 3% reduction target for energy intensity for 2021 has also got ahead of the planning process.
The 14th five-year plan (2021-25) mandates targets for improving energy intensity (energy consumption per unit of GDP) and reducing CO2 emissions per unit of GDP. There is also a binding minimum target for the domestic energy supply from all sources of 4.6 billion tonnes of standard coal equivalent (versus 4.86 billion in 2019), but no caps on carbon emissions and coal consumption, and only an aspirational goal to increase the share of non-fossil-fuels in total energy consumption.
The 14th Five-Year Plan for Energy, likely to be published around or after the COP26 summit in Scotland in November, will provide provincial and municipal governments with a more detailed road map. However, that will cover the years through to 2025 and not show the full path to the 2060 net carbon neutrality target date. However, until they have that road map, Chinese and foreign firms operating in China will delay drawing up the emissions reduction strategies that are likely to be required.
The current energy intensity target has also run headlong into China’s infrastructure-investment pandemic stimulus and export- and industry-driven recovery. Factories have put filling orders now, with the consequent surge in demand for power, ahead of improving their energy efficiency.
Last year, primary energy consumption rose 2.1%, coal consumption 0.6% and carbon emissions 0.3%, whereas energy consumption and emissions declined in almost every other economy. The trends have accelerated into 2021.
Beijing is now having to arrange emergency coal supplies for fuel-short provinces and marshall the distribution grid for inter-provincial power-sharing.
The power situation illustrates the costs Beijing will have to shoulder politically and economically if President Xi Jinping’s decarbonisation goals are to be met, and more generally in structurally changing the economy for the next phase of economic development.
Achieving both will mean slower growth, which will have political as well as economic management dimensions. All but the wealthiest provinces are still industrialising, reliant on energy-intensive infrastructure and industries for growth and jobs, and remain fossil-fuel dependent. Xi has also set a goal of doubling the economy over the next quarter-century, implying 4% annual growth.
Yet even with modest growth rates reducing energy demand, technological advances in energy efficiency and the fledgling national carbon trading market taking wing, it will still require rigorous enforcement of central government policies to change the country’s energy mix to lessen its dependence on fossil fuels. As the efforts to impose energy intensity standards are now showing, provincial and local officials will readily foot drag or worse in implementing Beijing’s policies when it is in their interests to do so.
As with many aspects of rebalancing, the tight networking of local officials and local industries provides inherent resistance to policy direction from the centre. This is exacerbated by many of the major players in energy, including the oil companies, major power generators, the two grid companies and industrial consumers such as steel and cement manufacturers, are state-owned enterprises with size and political influence, especially at the local level.
China is far from alone in having to deal with the conflicting tensions between climate mitigation measures and jobs and economic growth. Beijing has prioritised the former of late, but continuing to do will require sufficient political will at high enough levels of the leadership. That will continue to exist until it does not because the political calculations have changed.
We noted at the beginning of this month that power shortages were starting to bite in Zhejiang, Guangdong, Jiangsu, Jiangxi and Hunan. State media are now adding Shanghai and Chongqing to the list
The China Electricity Council has repeated its estimate that it may be short of 30 million kilowatts of power come the peak summer season, with the council’s Xue Jing adding the color commentary earlier this week that that is the equivalent to the consumption of three Chongqings. However, given China generates 3,700 terrawatt hours of electricity, that is a relative drop in the bucket, to mix a metaphor, and explains why the impact on industry of the cuts has been mild to date. Rationing seems to be worst in Zhejiang, home of much heavy industry, where firms face being without power for a day every four to seven days. Elsewhere, air conditioning has been ordered to be turned down and street lights dimmed or extinguished.
Tightness between supply and demand is the reason for the cuts and rationing but it has been exacerbated by China’s dependence on coal for 70% of its power generation. While the price of coal has risen by a fifth over the past year, authorities have allowed power generators only a 2% increase in electricity prices as they battle inflation. The five biggest power companies, which generate half the country’s power, lost 10.6 billion yuan ($1.6 billion) in the first four months of this year. That dissuades them from running their plants flat out. The industry as a whole lost 18.3 billion yuan in the first quarter.
The National Development and Reform Commission now says that power companies in three power-short provinces, Jiangxi, Hunan and Guizhou, will be allowed a further modest price rise “to eliminate power shortages and boost local power companies’ flagging profits”. Henan and Hubei will reportedly get price hikes, too. Consumer prices will not be raised, however, so no market signals are being sent to dampen consumption.
A second exacerbating factor this year is the drought in central and southern China which has hit hydropower generation particularly in the south making the usual shortages ahead of the reservoir-replenishing summer rains worse than normal. A patchwork of regional power grids means it is nigh impossible to redistribute electricity from regions where there is surplus to those where there are shortages. Meanwhile exports of diesel have been banned so adequate supplies are available for emergency generators.
A sign of how fast the economy continues to grow: state media are reporting power shortages in several provinces. The China Electricity Council says it may be short of 30 million kilowatts of power come the peak summer season. Zhejiang, home of much heavy industry, is already facing its most severe shortages since 2004. Guangdong, Jiangsu, Jiangxi and Hunan are also suffering from shortages with some rationing already introduced.
This is mostly a structural supply demand imbalance though coal shortages are playing a part now, particularly the disruption of coking coal imports from Australia following flooding in Queensland. Nationwide, electricity consumption in the first quarter of the year was up 12.7% over the same period of 2010, exceeding 1 trillion kilowatts. Supply is struggling to keep up, with capacity expansion planned to increase by 9% this year. More grist for the mill of those wanting the expansion of the country’s nuclear power generation to be resumed.
Footnote: China Law Blog considers the implications for locating a foreign-owned small business.