China is heading into winter still blighted by power cuts and electricity rationing. That is forcing companies to cut back on operating hours and curtail shifts.
The impact on the Chinese economy has yet to feed through. But the "effect likely will be sharply negative," the ratings agency Standard & Poor's states in a report China's Power Outages - Get Used To It.
China's growth is already forecast by the World Bank to slow to 5.4% in 2022, from 8.5% in 2021, a 2022 showing that would put it exactly in the middle of the pack in Asia. It's a far cry from its previous world-leading rate.
More than 70% of Chinese coal-fired power plants are losing money, according to the China Energy Council trade association. They were already squeezed when the coal supply shortage forced spot prices for thermal coal up 94% compared with the COVID-crisis year in 2020.
Coal spot prices are now at an all-time high. The rate at the Qinhuangdao port as of Friday is C¥733 per ton, according to the stats tracker CEIC, up from an average of C¥448 per ton between 2013 and now, and an all-time low of C¥300 in February 2016. Qinhuangdao sits on the Yellow Sea, the largest shipping location serving Beijing.
The profitability of power plants is not going to improve when their average unit fuel cost is up 50% over the rate in June. Energy companies without renewable sources "are now making heavy losses on the power they provide," S&P notes, causing them to curtail their coal-fired output.
One of the problems is entirely self-inflicted. China banned imports of Australian coal, unofficially, in November 2020. That was part of its "gray zone" tariff war with the Aussies, which also barred shipments into China of Australian barley, copper, shellfish, sugar, timber and wine, as I explained back then. Aussie wine producers such as Treasury Wine Estates (TSRYF) bore the brunt of tariffs between 107.1% and 212.1%.
There are signs that the Aussie coal embargo has lifted. It has this month reportedly started to allow the estimated one million tons of Australian coal sitting in bonded warehouses along China's coast to be cleared by customs. But the mining companies have already redirected some of the supply to other countries clamoring for coal such as India.
Coal shortages are likely to last into March, when winter begins to break in the industrial northern parts of the country. The government is prioritizing the supply of residential power, which S&P says "should be secure," but will force commercial and industrial consumers of electricity to ration power throughout the winter.
The Beijing government has ordered state-owned energy companies to do "whatever it takes" to secure fuel supplies. It has mandated that coal mines produce more coal. But that will take time to happen.
Some provincial governments have been allowing power companies to increase their rates, which are tightly regulated. The economic planning National Development and Reform Commission set a strategy in 2019 of a "basic tariff plus floating rate" that allows some flexibility. Power producers are allowed to step up their prices by no more than 20% above the local benchmark tariff.
Simple math will tell you that a 20% price hike does not offset a 50% increase in production costs. However, companies are free to charge energy-intensive sectors higher prices, presumably originally to discourage their heavy use, but now a profit-saving loophole.
Independent power producers are fast trying to add to their renewable-energy capacity.
The largest Chinese clean-energy producers are China Energy Investment Corp.; China Huaneng Group with its U.S.-listed subsidiary Huaneng Power International (HNP) (HK:0902); China Huadian with its Hong Kong-listed subsidiary Huadian Power International (HPIFF) (HK:1071); and the State Power Investment Corp., which has several listed subsidiaries including China Power (HK:2380) and Shanghai Electric Power (SIELY) (HK:2727).
Smaller rival China Resources Power Holdings (CRPJF) (HK:0836), part of China's largest conglomerate, is also stepping up renewables production.
These companies are all ultimately state-owned, even if they have listed subsidiaries. That gives them strong borrowing and refinancing power to back their capital-intensive expansion into renewable energy. They will all be hewing to the party line laid down in China's 14th five-year plan, running from 2021-25.
Another problem disrupting supply, S&P notes, is that China's power grid is not yet flexible and sophisticated enough to handle the fluctuating input from renewable-energy sources. It does not have "smart" power distribution technology that adapts to an unstable source of generation. As a result, China's two grid companies, China Southern Power Grid Co. and the State Grid Corp. of China, are investing in power storage and smart-distribution facilities, to accommodate this.
China's energy problems are producing "wavering" with China's commitments to its climate goals. As part of this energy crunch, the country's energy efficiency - how much electricity use is rising compared with how much the economy is growing - has got 3.2% worse. It's notable that Chinese President Xi Jinping will not attend the COP26 energy summit about to start on Sunday in Glasgow.
With months to run on China's coal crisis, it's likely to be a long, hard slog through winter. In the long run, this energy crunch will surely provide new impetus for China's efforts to expand renewables production and shift away from coal, to clean energy sources that can produce power nearer the factories and homes that need it.