What Are the Causes of the Energy Crisis in the Chinese 'Great World Factory'?

The Chinese power grid still generates two-thirds of its capacity from coal, with a receipt, so far, highly subsidized and cheap for an industry that absorbs 59% of the total supply. The rising cost of the bill makes its foreign customers tremble.

The Asian giant illustrates like few other latitudes the battle of the old economy to try to maintain the current energy status quo.

Because the journey towards renewables, chiseled by Xi Jinping in the fourteenth Chinese five-year plan (2021-25), designed to complete the leap towards global leadership through, among other strategic recipes, an energy transition that certifies net zero emissions of CO2 in 2060 in the most polluting economy on the planet, could run aground at the first of changes.

 

Big Dependence

The newspaper reported that the signs of the great dependence of the world's great factory on electricity as a source of energy, which plunged the second world economy into enormous pressure and inflation; reveal a deep cleavage.

On the other hand, the stimulating challenge to renewables has become more pressing for Beijing than the Chinese leader's presidential message, given its heavy dependence on imported gas and oil and its addiction to domestic coal production.

But, until energy neutrality is accommodated, China will be tempted to relaunch the coal production chain — and drive additional gas and oil prices — to supply the country's robust manufacturing sector; Which is already happening in the mines in the north of the country.

Under these circumstances, the first major energy crisis of the era of sustainability - bolstered by the new economy and the digital revolution - has entered the most dynamic market on the planet.

David Fickling, an energy columnist for Bloomberg, summed it up eloquently: The villain, inefficient and dirty coal, is back in China's production system to calm electricity price pressures.

Meanwhile, renewable energy needs the impulse to control the nation's energy and electricity mix that transmits most of the pollution to the atmosphere.

As a result, Shanxi's coal hub has already registered revenue increases for its companies, which have begun supplying turbines that should bring electricity to the colder northern regions of the country at a larger volume and at higher prices, in anticipation of a particularly harsh winter.

The newspaper pointed out that the first clash between the old and the new economy - that is, between the old industry and the technology of renewable energy sources that are still in their infancy, given their current low production share - has become a reality.

Added to this is the fact that the traditional way of working, i.e., the old economy, is superior.

The newspaper pointed out that after recording a kind of emerging global recovery of the economy, the degree of tension exercised by the energy crisis in China became a factor that affects the dynamics of the economic cycle to a large extent after the Corona crisis and determines its fate.

It quoted that there are basic indicators that reveal the growing danger of the energy crisis in China.

First, China is the market in which the manufacturing sector accounts for 59 percent of the country's electricity demand, compared to 25 percent of capacity used in the United States by US industry.

Second, the degree of electricity consumption by this powerful productive sector exceeds, for example, the total electricity demand of Chinese homes, offices and companies.

An additional factor, the low price of energy that has been crucial to China's splendid development, and Beijing's reliance on a tool of subsidies and cost controls for families, businesses, and industries.

In recent decades, coal has also become very expensive, the newspaper added.

After a period of deflation prior to 2016, its price became 40 percent higher the following year, and after it declined modestly during the epidemic (Corona) and rebounded by 57 percent between August 2020 and the same month the following year.

Ironically, China has blamed high energy-consuming sectors such as steel or refineries for high pollution; But at the same time, it allowed greater use of coal, also at exorbitant rates, to supply electricity demand.

 

Influence and Impact

Pùblico said China's transition to sustainability will not be easy. This task seems impossible without a clear classification that combines the interests and objectives of the state's environmental and energy policy.

In general, China has had to define a more aggressive strategy to promote renewable energy in transportation and industry.

"Demand for gas in the Chinese economy will grow by 41 percent in the next five years," said Jeff Moore, Asia director at Platts Analytics.

This coincides with the continuous growth in national production, as well as in the flows that arrive through the gas pipelines that China supplies to its industrial needs from abroad, which will increase by 26 percent over the next five years.

Hence the incentives to start the shift from a “constrained, inflationary, and polluting fossil industry” to “wind, solar, and hydrogen,” with fixed costs highly subsidized.

In this sense, Oceana Zhou of Standard & Poor's says that between 2021 and 2025 the Chinese government intends to "stimulate the local economy" through "technological innovation and environmental sustainability projects", in order to reduce China's dependence on raw materials in the coming years.

 

Currently, the latest data issued by the National Energy Agency talks about the contribution of solar and wind energy to the energy mix at 11 percent for the whole of 2021, compared to about 9.7 percent from the previous year.

For now, it remains to be seen whether China will act to control prices more rigorously in the face of rising prices and risks approaching Beijing.

The newspaper noted that the answer comes from Wan Jenson, director of the National Reform and Development Committee, an entity responsible for setting the principle of energy plans for the next five years.

"The range of volatility in energy prices will open a barrier between inefficient companies and those that will add value in the future," the official noted.

Collectively, these terms refer to the continuation of price fluctuations rather than setting fixed prices for energy.

The newspaper noted that if this step is avoided, inflationary pressures will continue for some time, warns analysts, who echo the most pessimistic reading, and see that the world is heading towards a gradual increase in prices, in this case, for Chinese manufacturing exports.

Thus, this will be reflected in the form of higher prices for the final product among consumers in foreign markets.

It should be noted that the International Monetary Fund, at its last autumn summit, indicated these expected results.

The organization's experts emphasized that the inflationary pressures of energy, its disruptions on the demand side, and the complexity of trade relations, has generated a state of situational uncertainty.

The newspaper reported that IEA analysts believe that a primary market balance will be necessary in laying the foundation for a green transition and the sustainability of the business cycle after Corona.

They acknowledge that an additional 300,000 barrels per day, and Russia's commitment to add more gas to the market, will succeed in restoring value chains during this quarter and the first quarter of 2022, to contain the prices of raw materials and thus stop the rise in the consumer price index and stimulate growth.

For this, the Chinese industry must return to ensuring price stability, the newspaper says.