The Current Massive Power Rationing Did not Come out of Nowhere

SHANGHAI, Sep 27 (SMM) - Coal-fired power is in short supply

1. The demand side: Since the social community resumes work and production, the domestic demand for electricity has grown rapidly, with a year-on-year increase of nearly 15%.

2. The supply side: China's thermal power generation accounts for more than 70% of the total power generation, while the coal prices have soared from about 563 yuan/mt (Qinhuangdao 5500 Kcal thermal coal) to 1079 yuan/mt. In-plant coal inventory at power plants is at historic lows.

In addition, some believe that the root cause of the current coal and electricity shortage is the "ban on Australian coal" from last December. However in 2020, China's power sector consumed over 2 billion mt of coal, and imported 42.35 million mt of Australian thermal coal (for power generation) in the same year, which takes up only a very small proportion of the total demand.

However, the ban of Australian coal has apparently fuelled a spike in coal prices. It also coincided with the recurring pandemic in Mongolia, which affected coal imports from the country.

3. On 1 January 2020, the coal-fired tariff mechanism, which has been in place for 15 years, will be decoupled. According to the National Development and Reform Commission's (NDRC) guidelines, the tariff for coal-fired power generation will be set based on the "base price + fluctuations", with an increase of no more than 10% and a decrease of no more than 15% in principle.

In other words, the market-based electricity price mechanism was not fully formed, so electricity prices would not and could not soar on surging coal prices. The power plants are generally losing money and their coal stocks are insufficient either, thus affecting the supply of electricity.

Dual control of energy consumption

The so-called "dual control of energy consumption" means controlling both the intensity of energy consumption (energy consumption per unit of GDP) and the total amount of energy being consumed.

In the context of "carbon peak" and "carbon neutrality", the introduction of energy intensity as a binding indicator is intended to force localities to change their economic development models and embark on a low-carbon development path.

However, in August, the NDRC issued the Report of the Completion of Dual Control Target for Energy Consumption by Region in the First Half of 2021", according to which the energy intensity in provinces and regions such as Guangdong, Jiangsu and Fujian has been rising rather than falling year-on-year.

Therefore, in order to reach the full-year target in Q4, many provinces and cities have intensified the power rationing.

Protecting export-oriented companies

The power rationing and production reduction did protect some of the export-oriented companies as well.

The easing global COVID-19 pandemic and the resumption of domestic production have led to a large influx of orders to China. However, these orders did not bring corresponding bargaining power, but rather intensified the competition among export processing enterprises. And there are still some companies blindly expanding their production capacity on the back of skyrocketing costs, soaring international ocean freight and unprofitable conditions. Should there be great changes in the pandemic situation or supply and demand pattern, it is likely to be devastating for these businesses.

The power rationing policy aims at cooling down these businesses and bringing them back to rationality.