Electric Cuts Hit China's Businesses and Economy
Commercial Times, October 1, 2021
On the eve of Mid-Autumn Festival in September, the policy of “dual control” on energy consumption( i.e. energy consumption intensity, total energy consumption volume) by the Chinese government incurred storms of electricity curtailment and production suspension making production of industry in great chaotic pace while its impact was exacerbated by the recent surging price of coal. Despite Premier Li Keqiang on September 30 guaranteeing energy and electricity supply, the market worried that it had brought negative impact on China’s economic growth.
In September 2020, the mainland proffered a “dual carbon dioxide” goal demanding a sharp raise of the level of reduction on carbon dioxide emission by energy consumption, however, with the onslaught of the global coronavirus (COVID-19) pandemic, China, the first country that realized economy recovery, revived its status as the manufacturing center of the world. With the swarming-in of orders from all over the world, its factories accelerated production with extra operation hours leading to a surge in electricity consumption each month.
In pursuance to the criteria of dual control, the Chinese government listed twelve most serious provinces which failed to attain the goal including major coastal provinces as Guangdong, Jiangsu, and Zhejiang. Henceforth, before and after the Mid-autumn Festival, China began to impose electricity curtailment and production suspension, in some areas not only brusque breaker-pulling style of electricity curtailment was enforced, but some enterprises were also even forced to “open one day and close six days a week”. This storm has expanded from the “frontline” high energy consuming industries like petrochemical, cement, steel and textile industries to automobile, electronics, and solar energy industries. Taiwanese businessmen revealed that in the past curtailment would be notified in writing in advance, now only in extempore oral notice. Industry operators frankly spoke that facing this severest curtailment in history, the delivery dates of export orders were in great disorder and might have to postpone from 30 days to 60 days or even 90 days.
What most troublesome is the price surge of coal. Seventy percent of power generation plants in China are thermal power plants. This price surge increases cost of the power plants hence greatly reduces the willingness of power generation. Again, with the price surge of coal, power plants everywhere are in inventory shortage. Power plants in eight coastal provinces have coal inventory sufficient for ten days only. Once coals are exhausted, power supply network will collapse reinforcing the pressure to all parties concerned by this official “dual control” curtailment.
In order to deal with this power curtailment, at present Guangdong, Shanghai, Zhejiang, and Guangxi provinces have pinpointed industry customers to raise electricity price in peak hours hoping to induce industry to crisscross peak hours of power consumption. But to those provinces with power shortage as Guangdong and Zhejiang, this measure was too slow to meet a pressing demand. Taiwanese businessmen in Dongguan, Guangdong Province, expressed whether an enterprise by changing operation shifts and adjusting production line can attain its original production effect needs to be re-evaluated.
Though it was said that curtailment would end by October 1, the industry thought dual control was not a short-term policy. Besides some areas had exhausted the whole annual energy consumption basic index by the end of September, the chance of restoring normal power supply was slim, curtailment might become the norm in the future.
The market worries the power curtailment and production suspension will affect China’s fourth quarter GDP growth performance.
Goldman Sachs indicated that power curtailment made economy face tremendous down surge pressure, “the perspective of China’s fourth quarter is full of uncertainty.” Morgan Stanley pointed out that China’s curtailment imposed strong pressure to steel, aluminum, cement industries, and the fourth quarter economic growth rate was expected to drop one percent.
Viewing the severe situation, Vice Premier Han Zheng was said to have given orders to the major state-owned energy companies to safeguard winter power supply “at all costs” during the first day of long “October 1” vacation. Premier Li Keqiang also expressed on the eve of October 1 that China would maintain the stability of supply chains for industry chains and guarantee energy and power supply. How this power curtailment crisis which impacted global industry supply chain is to evolve has become focus of attention from all walks of life.