Climate change: China's power crisis may cast a shadow over its new climate commitments expected to be announced at COP26 in Glasgow

Asia's Tech News Daily

severe power supply crunch, United Nations Climate Change Conference (COP26), the power crisis in northeast China

China is still on track to meet its 2025 goal of peak coal consumption even after missing emissions targets in the first half of 2021 and policy missteps that resulted in a severe power supply crunch, according to analysts.

But the power crisis may invite some resistance from sceptical delegates at the upcoming United Nations Climate Change Conference (COP26) if, as many expect, Beijing commits to accelerating its environmental efforts at the event in Glasgow.

“If a result of these power shortages in 2021 is that the 2025 coal peak date is pushed back a year or two, that would be a serious problem, but we haven’t seen any indication that this is the plan,” said David Fishman, a manager at power sector consultancy The Lantau Group.

Chinese President Xi Jinping has committed China, the world’s largest producer and consumer of coal, to hitting peak coal consumption in four years’ time to support its 2060 carbon neutrality goal. He announced plans to stop building overseas coal power plants last month, and many observers expect China to make at least one more major environmental announcement during COP26.

But the recent power crisis that started in September and widened to more than half of China’s provinces including manufacturing hubs Zhejiang, Jiangsu, and Guangdong has cast a shadow over the country’s economic growth and decarbonisation path. Some provincial governments told factories to limit their power usage, curb output or even halt production until further notice, and some regions in northeast China even experienced residential power cuts.

The crisis might cast a shadow over China’s performance at COP26, raising uncomfortable questions if China does deepen its decarbonisation commitments at the event, according to Li Shuo, a global policy adviser for Greenpeace East Asia.

“If China wants to enhance its [commitments], there will definitely be someone bringing up the power crisis in northeast China and saying the country should prioritise coal supply,” said Li. “The power crisis happened at a time China is about to make a major climate decision and has definitely made the situation more complicated.”

The main cause of the power crisis – the country’s worst in decades – has been a shortage of coal that resulted from its skyrocketing price in the wake of coronavirus, and China’s regulated on-grid tariffs that have prompted power generators to reduce output in order to stem losses.

To alleviate the problem, the government has ordered power companies to secure energy supplies “at all costs”, called on coal miners to boost production and allowed a small increase in imports of Australian coal. Chinese Premier Li Keqiang also announced a series of measures to support coal production this month, including an acceleration in the construction of new mines and phased tax deferrals for coal-fired power plants.

As coal-fired power production is ramped up aggressively to meet demand, some analysts are concerned that the measures will mean China having to sacrifice its environmental progress to ensure energy security, at least in the short term.

“Like other markets in Asia and Europe, China must perform a balancing act between the immediate need to keep the lights on – via more coal – and showing its commitment to increasingly ambitious decarbonisation targets,” said Gavin Thompson, Asia-Pacific vice-chair of resource consultancy Wood Mackenzie in a newsletter earlier this month.

“But the short-term reality is that China and many others have little choice but to increase coal consumption to meet power demand.”

The large number of post-Covid economic stimulus measures passed in China last year based on the buildout of infrastructure projects that consume a lot of steel and cement, along with a strong residential property market, put a great deal of strain on the supply of carbon-intensive commodities and increase the temptation to go back to coal, according to Danny Huang, director and China commodities lead analyst at S&P Global Ratings.

“The legacy from Covid and the power shortage is that there will be expanded coal power and industrial capacity that will be there and will take time to take offline,” said Huang during a webinar earlier this month.

“So in terms of reaching those [energy and emission] targets, the progress will be stalled by the need to return to more coal usage. There is a likelihood that whenever there is an unexpected event, there is always a temptation to go back to coal power generation, as it has played out in this case.”

Wood Mackenzie expects supply of thermal coal to remain tight through the upcoming winter and even into 2022. Citi Research believes China’s energy supply crunch will persist into the winter, forcing the government to mandate a 12 per cent cut in industrial power use in the fourth quarter in order to secure basic winter coal burn.

Concerns about higher emissions have been raised further by local news reports that some factories are using less efficient and more emission-prone diesel generators to keep production going before the coal and power shortages are fixed.

Still, analysts think China will remain on track to meet its coal targets.

“I haven’t seen any official statements or convincing arguments that the current power shortages and the resultant measures to alleviate the shortages will result in the 2025 target being delayed or the objective being missed,” said Fishman.

He believes an accelerated reduction of coal use is likely to be among China’s new commitments to COP26.

The electricity crisis has, paradoxically, prompted some positive changes in China’s power sector, according to analysts. On October 12, major changes were announced to the pricing arrangements for coal-fired power, as well as the way in which commercial and industrial customers buy their power. Electricity prices will be allowed to rise by as much as 20 per cent against government benchmarks, compared with the current cap of 10 per cent.

The timing is undeniably related to the ongoing coal supply crunch and resultant power outages that have been making news in and out of China for the last few weeks, according to analysts.

“Besides being very embarrassing, the widespread breakdown of power security served to highlight just how vulnerable the Chinese power sector was in its half-liberalised state, a chimera of wholesale power markets with controlled outcomes, of fairly freely-traded coal but regulated on-grid pricing … it became very clear that the time to take the deeper plunge into market reform had arrived,” said Fishman.

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