China's power woes herald green transition strains

HONG KONG, Sept 30 (Reuters Breakingviews) - China's power woes may deliver a helpful green jolt. Surging coal prices are largely to blame for electricity shortages. Boosting fossil fuel imports would help, but also jeopardise carbon-neutrality goals. It’s better to bear the pain now and accelerate structural changes. read more

Electricity rationing is becoming a seasonal occurrence. Prices set by Chinese regulators make the market inefficient and vulnerable to demand or supply shocks. This year both are happening at once: a dramatic summer rebound in manufacturing coincided with an equally dramatic coal shortfall, causing prices to soar ahead of the peak winter season. The benchmark Qinhuangdao 5,500 kcal/kg coal price jumped 66% year on year in July, per Fitch Ratings. read more

That’s making electricity generation expensive for local coal-fired plants, which accounted for nearly 60% of total supply last year. The problem is, they’re only allowed to adjust the fixed rate charged to grid operators by 10%. It isn’t enough: every 1% increase in the so-called on-grid tariff only offsets a 2% rise in coal costs, Citi analysts estimate. Many generators have simply shut down; the China Electricity Council reckons 70% of domestic coal-power plants were in the red in June.

More supply is the quick fix. A political spat with Australia, however, means China would have to compete for imports from Russia and elsewhere. Digging more coal at home might derail President Xi Jinping's push to cut energy consumption and intensity.

A painful but welcome solution would be to allow generators to pass on the higher costs to consumers. Industrial users, including state-owned steel mills and cement manufacturers, account for more than two-thirds of China’s power consumption and have historically enjoyed relatively low rates. Weaning them off cheap and dirty power is vital if Xi is serious about a carbon-neutral economy by 2060.

There are encouraging signs. In some provinces, price limits in wholesale electricity trading markets were relaxed slightly, the first time end-customers have absorbed higher costs, says David Fishman from consultancy Lantau Group. Officials are also considering increasing the fixed grid tariffs or adjustments for consumers, Bloomberg reported. That suggests more meaningful reform awaits, heralding further strains from the energy transition.

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CONTEXT NEWS

- The Chinese government is considering raising power prices to ease a supply shortage, Bloomberg reported on Sept. 29, citing unidentified sources. Officials have discussed increasing flat fees or rates linked to the price of coal for industrial users, and if necessary, for residential users as well, the report added.

- Widening power shortages, particularly in the northeast part of China, have halted production at many factories and forced local governments to ration power during peak hours. At least 15 Chinese companies have said in exchange filings that production had been disrupted by power curbs, while more than 30 Taiwan-listed firms with China operations had stopped work to comply with the power limits, according to a Reuters report on Sept. 27.