November2021China’spowercrisis:Long-termgoalsmeetshort-termrealitiesOIESENERGYCOMMENTMichalMeidan,SeniorResearchFellow,OIESPhilipAndrews-Speed,SeniorResearchFellow,OIESThecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.2PoweroutagesinChinawerewidelyexpectedthisyearafterthecountryhadexperiencedsomerationinginDecember2020andthenagainoverthesummer.InearlySeptember,ahandfuloflocalitieswereseeingshortagesbutbyOctober,justintimeforthenationalholiday,over20Chineseprovinceswerecurbingorrationingpowersuppliesforendusers.Largeindustrialusershaveseentheirpowerdisconnectedforlongstretcheswhileothershavehadtolimittheiruse.InChina’sNorth-easternprovinces,thepowershortageshavealsoledtocutsinresidentialuse,arareoccurrenceforacountryaimingtoprioritisehouseholdenergysupply.Thereasonsfortheseoutagesarewidelycoveredbutalsohighlydebated:isithighcoalpricesorthe“dualcontrol”policies1—thecaponprovincialenergyconsumptionandtheenergyintensityreductiontargetsetbythecentralgovernment?Whilethereareanumberoffactorscontributingtothepoweroutages,themixedsignalsfromthecentralgovernment,combinedwithpricingdistortionsinChina’spowermarketareattheheartofthiscrisis.Astrongreboundinexport-orientedmanufacturingactivityledtohighindustrialdemandandthereforerisingelectricityconsumption.Butthegrowingemphasisonlimitingenergyuseandreducingenergyintensityhassentlocalofficialsmixedsignals.Provinces,coalimportersandgeneratorsmaybeusingthesepoweroutagestohighlighttheirdisarray.Whatismore,duetothedomesticpowerpricingmechanism,coalgeneratorsandimportershavehadfewincentivestostockupandimportcoalwheninternationalcostsarerising.So,whilesomeoftheoutagesareduetoafundamentalsupply-demandimbalance,theseverityofthepowershortagesreflectstheclashbetweentheunstoppableforceofthemarketandtheimmoveableobjectofthestateanditsplan.Thiscommentbrieflyreviewsthecausesofthepoweroutages,theirneartermmarketimpactonoilandgasaswellastheoutlookforpowerpricingreformandtheextenttowhichtheyarechangingthethinkinginChinaaboutthe2030-2060goals.TheworstofbothworldsChina’s“dualcontrol”policieshavebeenseenasakeycontributortothepowercrisis,butthecurbsaremorelikelyaculminationoffactorsincludingsoaringfuelpricesandcoalshortagesinthecontextofstrongmanufacturingactivity,heightenedbypricingpoliciesandmixedsignalsfromthecentralgovernment.China’s“dualcontrol”policydatesbackto2016whenitwasintroducedinthe13thFive-YearPlan.Policiestoreduceenergyintensityhavebeeninplaceformuchlongerandhavehistoricallybeenahigherpolicyprioritycomparedtoeffortstocontroltotalenergyconsumption.ThisfocusonenergyintensityhasbornefruitduetoacombinationofimprovementsinenergyefficiencyintheindustrialsectoralongsidetheexpansionoftheservicesectorintheChineseeconomy.ButthestrongeconomicrecoveryfollowingtheCOVID-19pandemic2hasupendedthistrend,bringingpowerdemandsoaring(seeFigure1).Inearly2021thegovernmentsetatargetforenergyintensitytodeclinebyaround3percentduringtheyear,agoalthatwasthenbrokendowntoprovincialtargetsandassignedtotherespectivegovernments.Butforthefirsthalfoftheyear,theNDRCfound12provinceslackingonbothcounts3(seeFigure2).ProvincesincludingGuangdong,ZhejiangandJiangsuproceededtorationpowersuppliesinordertomeetthesegoals.Butifeconomicandmanufacturingactivityisindeedstrong,curbingpowersupplieswillonlystallgrowthforawhile.Whentheswitchisflickedbackon,itwouldleadtoevenstrongerdemand.Whatismore,theNDRCstatedthatthe“dualcontrol”mechanismcanbeadjustedaccordingtolocalcircumstances.Thatsaid,theNDRC’sclarificationonthe“dualcontrol”1ZhangYukun,“What’sBehindChina’sRegionalPowerOutages”,Caixin,28September2021,https://www.caixinglobal.com/2021-09-28/whats-behind-chinas-regional-power-outages-101781259.html;DavidFishman,“ThethreecausesofChina’spoweroutages”,SupChina,28September2021,https://supchina.com/2021/09/28/the-three-causes-of-chinas-power-outages;LauriMyllyvirta,“TheRealReasonsBehindChina’sEnergyCrisis”,ForeignPolicy,7October2021,https://foreignpolicy.com/2021/10/07/china-energy-crisis-electricity-coal-pricing-renewables/2PhilipAndrews-Speed,SufangZhang,ChaoWang,“Does2020markacriticaljunctureinChina’slow-carbonenergytransition?”,OIESEnergyInsightno76,October2020,https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/10/Insight-76-Does-2020-mark-a-critical-juncture-in-Chinas-low-carbon-energy-transition.pdf3TheNDRClistcanbefoundherehttps://www.ndrc.gov.cn/xwdt/tzgg/202108/P020210817567136519542.pdf3Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.targets,issuedinmid-September4,seemstocontinuewiththemixedsignals:Itgivesprovincesmoreflexibilityinsettingtheirtargetsandallowingthemtoincluderenewablesintheirenergyconsumptiongoals,whilealsostressingtheneedtostrictlycontrol“dualhigh”projects(projectswithhighenergyconsumptionandemissions).Figure1:Electricitydemand,TWhandy/ychange(%)Source:ChinaElectricityCouncilSomeofthecommentaryinChinasuggests,however,thatlocalofficialswererationingsuppliesasameansofacceleratingtheirindustrialrestructuringtowardhigher-valueaddmanufacturing,squeezingoutenergy-intensiveactivities,alsoinresponsetothecountry’senvironmentaltargets.Clearly,thegovernment’sstrongclimateagendahasbeenacontributingfactor,exacerbatingtheimbalancebetweensupplyanddemand.LoweronsuppliesOnthesupplyside,ananti-corruptioncampaigninInnerMongolia5lastyearhasstrainedcoalsupplieswhileheightenedsafetyinspectionsatcoalminesinChina6andtighterenvironmentalcontrolshavemeantthatmineshavebeenreluctanttoproducebeyondnameplatecapacityastheywouldhavedoneinthepast.Evenapplicationsforexpansionofdomesticcoalproductionhavebeenslowtogetapprovedandrampup7.TheNDRC’sowncallstorampupsupplieshavealsohadlimitedimpact.Coalimports,meanwhile,havebeenconstrainedbyfloodsinIndonesia8,byChina’sbanonAustraliancoal,aswellasnewCovid-19outbreaksinMongolia9.RenewablesinChinatoowerelowerthanlast4“theNationalDevelopmentandReformCommissionissuedanoticeonimprovingtheenergyconsumptionand“dualcontrol”measures”(Chinese),11September2021,https://www.ndrc.gov.cn/xxgk/zcfb/tz/202109/t20210916_1296856.html?code=&state=1235“China’sInnerMongoliatoprobecorruptionof20yearsincoalindustry”,GlobalTimes,4March2020,https://www.globaltimes.cn/content/1181502.shtml6“Chinalaunchesyearlongcampaignofcoal-miningsafetychecks”,Reuters,17November2020,https://www.reuters.com/article/china-coal-idUSL4N2I319M;“PotentialsafetychecksatChinesecoalminesmayboostimportsfromRussia,Mongolia”,GlobalTimes,15August2021,https://www.globaltimes.cn/page/202108/1231517.shtml7“Beijingtakesmoremeasurestoraisecoalproduction”,Argus,2August2021,https://www.argusmedia.com/en/news/2240029-beijing-takes-more-measures-to-raise-coal-production8“Indonesianrainsshakeupthermalcoalmarket”,Argus,7September2021,https://www.argusmedia.com/en/news/2251543-indonesian-rains-shake-up-thermal-coal-market9“NewCOVID-19containmentmeasureshurtMongoliancoalsupplytoChina:sources”,S&PPlattsGlobal,19March2021,https://www.spglobal.com/platts/en/market-insights/latest-news/coal/031921-new-covid-19-containment-measures-hurt-4Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.year,withdroughtsinYunnanconstraininghydroelectricitysuppliestoGuangdongprovincewhilepoorwindconditionsinLiaoningprovinceinNortheastChinalimitedthesuppliesavailabletothegrid.Chinaisincreasinglyfacinghigher-than-expecteddemandduringnon-peakperiods,andevenstrongerdemandduringpeakperiods.Thatsaid,evenduringthecurrentpeakperiod,thermalplantsinmanyprovincesareoperatingatlowutilisationrates.Theaverageutilisationhoursforcoal-firedplantsinChinaovertheperiodJanuarytoSeptember2021wasjust3,450hours(52percent)10.Thoughmarginallyhigherthanoverthesameperiodsof2019and2020,itissignificantlybelowthe63%,or5,500hoursperyear,thatisseenaseconomicallyviableunderthefixedon-gridtariffs.11Figure2:NDRCscorecardforH12021Note:Redindicatesthataregion’sactualenergyconsumptionwasmorethan10percenthigherthanitstarget.Orangesignifiesalessthan10percentdifferencebetweenaregion’sactualandtargetvolume.Green,“third-levelpre-warning”–meansthetargetwasachieved.Source:NDRCmongolian-coal-supply-to-china-sources;“Isolatedandunpaid,MongoliancoaldriversqueueatChineseborder”,France24,21October2021,https://www.france24.com/en/live-news/20211021-isolated-and-unpaid-mongolian-coal-drivers-queue-at-chinese-border10“Analysisandforecastofthenationalpowersupplyanddemandsituationinthefirstthreequartersof2021”,ChinaElectricityCouncil,22October2021,https://cec.org.cn/detail/index.html?3-30215011“Chinarestartscoalplanconstructionaftertwo-yearfreeze”,ClimateChangeNews,7August2018,https://www.climatechangenews.com/2018/08/07/china-restarts-coal-plant-construction-two-year-freeze5Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.BySeptember2021,thermalcoalpriceshadreportedlydoubledfromayearago.InlateSeptember2021,anestimated220GWofcoal-firedpowercapacityintheregionoftheStateGridCorporationwasnotoperating;about20percentofthenation’stotalinstalledcoal-firedcapacity.Aroundhalfofthisidlecapacitywasundermaintenance,whiletherestwasunabletoobtaincoalsupplies.Buttherootcauseofthemaintenanceisthatpolicymakershaddemandedcoal-firedpowertariffsremainonparwithon-gridbenchmarks,whichwerecalculatedduringmuchlowercoalpriceperiods.Moreover,thetolerated10percentfluctuationabovebenchmarktariffswaseffectivelyscrappedafterthepandemicinordertohelptheeconomicrecoveryandlimitinflationarypressure.Coalgeneratorshavethereforebeenreluctanttooperatetheirplantsandhavealsoreducedtheiron-siteinventoriestoaweekorless.InsomeoftheNorth-easternprovinces,coalgeneratorsmaybesavingtheirlowstocksforwinterheating,preferringtorationsuppliestoindustrialusersnowbutavoidashortageinheatingfuelinthecoldermonths.Theshortagesarealsoexacerbatedbylimitedinter-regionalpowerconnectivityandlogisticalbottlenecks.Anypotentialsurpluscapacityinoneprovinceisunlikelytobeexportedtoanother,eitherbecauseofthe“dualcontrol”objectivesorpotentialfinanciallosses,orsimplybecausethenetworksarenotinplace.Tothiseffect,theNDRCalsocalledinlateSeptember12onrailwaycompaniesto“strengthentransportationinkeyareastoensurestablesupplies”.Finally,lowersupplieshavecoincidedwithstrongindustrialrecoveryfromthepandemic,alongsiderisingactivityinexport-orientedsectorssuchastextiles,computersandelectricmachineryrelatedtoreducedoutputinothermanufacturingcountries.Combinedwithheatwavesinsomeregions,China’spowerdemandhasbeenskyrocketing.YetthisdemandsurgeandlimitedsuppliesshouldnothavecomeasacompletesurprisetoChinesecoalimportersormorebroadly,tomacroeconomicandenergyplanners.Theirinactionmayinpartbeasignalthattheyneedclearermarchingordersfromthegovernment.Andmuchlikethefuelshortagesin2005—whentheoilcompanieswereincentivisedtoexportratherthansellintothedomesticmarketbecauseofpricedislocations—thepoweroutagesactedasacatalystfordeeperpricereform.Whatnow?Thegovernment’simmediateresponsehasbeentotacklesomeoftheunderlyingissueswithafocusonincreasingsupplieswhilealsoacceleratingthelong-stalledpowerpricereforms.Thecountry’sstate-ownedassetsregulatorrequiredthattherelevantcompaniesprioritizecoaloutputandsupplywhilethelargeststate-ownedutilitycompany,StateGrid,promiseditwouldstrengthenthedistributionofpoweracrosstheentirenetworkwhilemonitoringconsumption.Indeed,thewellreportedordertosecuresuppliesat“anycost13”wasfirstandforemostadomesticcalltoincreaseproductionandensuresupplies,evenata(greater)financialloss,alongsidehigherimportsofbothcoalandgas.On8October,PremierLiKeqiangatameetingoftheStateCouncil,issuedsixspecificorderstodealwiththepowershortagesincluding14:1)Ensuringsuppliesforwinterheating,includingcoalandgas,withprovisionstobemadeforgasfromtheSouthofthecountrytoreachtheNorthasneeded.2)Rampingupproductionatexistingcoalminesandacceleratingthecommissioningofapprovedcoalmines.TheMinistryofTransportisalsotaskedwithprioritisingcoaltransporttoensurewintersupplies.3)Supportingcoal-firedgeneratorsfinanciallybyofferingthemtaxdefermentsandsupportfromfinancialinstitutions.12“Noticeonguaranteeingrailwaytransportcapacityformedium-andlong-termsupplycontractsforpowerandheating”,29September2021,https://www.ndrc.gov.cn/xwdt/tzgg/202109/t20210929_1298126.html?code=&state=12313“Ensuringsafeandstableenergysuppliesforresidentialheatinginthewinterandstableoperationsofthesocietyandeconomy”,(Chinese),StateCouncil,14October2021,http://www.gov.cn/xinwen/2021-10/14/content_5642492.htm14“LiKeqiangpresidedoveranexecutivemeetingoftheStateCounciltomakearrangementsforthesupplyofelectricityandcoalthiswinterandensurethesmoothoperationsofthesocietyandeconomy(Chinese),StateCouncil,8October2021,http://www.gov.cn/premier/2021-10/08/content_5641406.htm6Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.4)Improvingthecoalandpowerpricingmechanismsthroughpowerpricereforms(seebelowformoredetails).5)Acceleratingtheconstructionofwindandsolarcapacityaswellasemergencybackupandpeakshavingpowersources;Improvingtheemergencyreservesofoil,naturalgasandcoal.6)Limitingthedevelopmentof“twohighs”projects(namely,projectsthatarehighinenergyconsumptionandhighinemissions);Improvethe“dualcontrol”mechanism;promoteenergysavingsandcarbonreductions.Themeasurescoverboththeshort-termneedtofillthesupplygapaswellasmedium-andlonger-termmeasurestoensurereliableenergysuppliesandamoremarket-basedapproach,witharecognitionthatthe“dualcontrol”measureswereinadequatelyimplemented.Thefollowingday,LiKeqiangalsochairedameetingoftheNationalEnergyCommission(NEC)15,ahighlevelbodythathasonlymetfourtimessinceitscreationin2010.Thefulldetailsofthemeetingarenotavailable,buttheofficialreadouthighlighted“energysecurity”andtheexpectationthatenergyneedswillcontinuetogrowasthecountrydevelops,suggestingafocusonsuppliesevenasthecountrypursuesdecarbonisation.Thishasbeentakenbysomecommentatorsasasignthatthegovernmentisrethinkingitsclimatetargetsandpledges16.Listressed,however,theneedtopromotethe“greenandlow-carbontransformationofenergy”whilealsowarningagainsta“onesizefitsallapproach”anda“campaignstylecarbonreduction”,whichthePolitburohadwarnedagainstalreadyattheendofJuly.Inshort,thegovernmenthasbeenstressingtheneedto“establishnewrulesbeforebreakingoldones”meaningthatthedevelopmentofrenewableenergyshouldbeexpandedandusedasabasisforphasingoutfossilfuels,butwarningagainstanoverlyrapidcurtailmentoffossilfuels.PowerpricereformFollowingtheStateCouncilmeeting,on12October2021,theNDRCannouncedmajorchangestothepowerpricingarrangementsforcoal-firedpower,aswellasthewayinwhichcommercialandindustrialpowercustomersbuypower.Thenotice17,effective15October2021,includesfourmajorchanges:1)Allcoal-firedgeneratorsarenowrequiredtosellpowerintothewholesalemarket.The‘ongrid’pricingforcoal-firedpowerwillbesetaccordingtothe‘base+float’coalpricemechanism.Renewableenergywilllikelycontinuetobelinkedtothebasepriceforcoal.2)Theon-gridpriceofcoal-firedpowerwillbeallowedtofluctuatemore:The‘float’componentmaynowriseorfallby20percentrelativetothebaseprice.Althoughtherewillbenoupwardcapforenergyintensiveindustries.Thispolicydoesnotapplytothespotmarket.3)Allcommercialandindustrialuserswillnowbuyelectricityinthewholesalemarkets:Theprevious‘catalogue’tariffforcommercialandindustrial(C&I)usersiscancelled.Theymustnowbuyelectricitythroughthemarket,eitherviadirectparticipationorthroughaggregators/retailers.Powerconsumersthathavenotidentifiedapowersupplierwillcontinuetopurchasepowerfromthegridcompanyduringthetransitionperiod,withpricesnowbasedonwholesalerates.Thegridcompanymustgivethepowerusersatleastonemonth’snoticebeforeswitchingfromthecatalogueratestothewholesalerates.Forusersalreadytradingintheopenmarket,iftheyturntothegridcompanyforlast-coursepowersupply,theywillhavetopay50percentmorethanotherpowercustomersforthesamepower.15TheNECwascreatedasasteeringcommitteethatallowsmultiplestakeholderstocoordinatedirectlyonenergypolicymatters,butinrealityseemstohavebeenconvenedatcriticaltimesforthecountry’senergydevelopmentinordertosteertheindustryintherightdirection.“LiKeqiangpresidedoverameetingoftheNationalEnergyCommission”,CCTV,11October2021,https://tv.cctv.com/2021/10/11/VIDEIh9Skz7SlBJv5wq8Mmi7211011.shtml16ChinaRethinksPathtoClimateGoalsDuetoEnergyCrisis,BloombergNews,12October2021,https://www.bloomberg.com/news/articles/2021-10-12/china-rethinks-its-path-to-climate-goals-due-to-energy-crisis17“TheNDRCnoticeonfurtherdeepeningthemarket-orientedreformofcoal-firedpowergenerationandon-gridtariffs”(Chinese),14October2021,https://www.ndrc.gov.cn/xxgk/zcfb/tz/202110/t20211012_1299461_ext.html?mc_cid=e378e0a2ae&mc_eid=1f5ebaac4b7Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.4)Residentialandagriculturalusersareexemptfromthispolicyandwillcontinuetousethelistedcataloguetariffs.Thenewpowerpricingmechanismishugelysignificantasitwillendtheguaranteedofftakeforcoal-firedpowerinChina—whichhasenabledandevenincentivisedtheapprovalofcoal-firedcapacity—whilealsosupportingtheuseofrenewablesasthesearelikelytobecomethecheapestpowersourceonthewholesalemarket.Andsincetherewillbegreaterpassthroughofcoststoendusers,industrialandcommercialuserswillseemorevolatilityinpriceswhich,overtime,shouldintroducegreaterefficienciesinpoweruse.Overtime,thisnewpricingmechanismshouldenablepowerconsumerstoinfluencethesupplyandpricingofpowerproductsbymakingeconomicchoices,andpowergeneratorswillsubsequentlyinvestinnewcapacitybasedonthedemandsofpowerconsumers18.Eventhoughthemeasureswereintroducedquicklyfollowingthesurgeinpoweroutages,theyhavelongbeenintheworksandcomeasacontinuationofpoliciesissuedin2015.ButtheseverityofthepowercrunchandthechallengesofnavigatingbetweenthemarketandtheStatehighlightedtheneedtomoveforward.Whilethisisapositivestepforward,muchwilldependonimplementation.Ofparticularimportancewillbethedegreetowhichlocalgovernmentsinterferewiththefunctioningofthewholesalemarketsinordertoprotectlocalindustriesfromrisingpowerprices.Anadditionalconsiderationwillbetheextenttowhichelectricitycanbereadilytransmittedacrossthecountry–anotherissuethathasfacedlocalprotectionism.Itwillalsobeimportanttoseehowoftenon-gridpricesarerevisedandhowtheemissions-tradingsystemwillfactorintothesecosts.Inthenearterm,higherpowerpricesandgreaterpassthroughtoenduserswillhelptheailingcoal-firedpowergenerators.Butdecisionmakershopethattherevisionofthepowerpricingmechanismwillnotraiseinflationarypressuregiventheincreaseinsuppliesalongsideimprovedefficienciesinconsumption.Nonetheless,theshort-termdriveformorecoal,gasandoil,suggeststhatsupplysecurityremainsatoppriorityeventhoughthelong-termtargetsremain.ThedashforgasThepoweroutagesandthecallstosecuresuppliesat“anycost”havereverberatedthroughcommoditymarkets.Andwithglobalgaspricesspiking,China’srushtoimportisakeycontributor.ButgasflowsintoChinahavebeenconsistentlyhighin2021,wellbeforethepowercrunch.Indeed,gascanofferonlymodestreliefforthepowercrunchgiventhatitaccountsfor6percentoftheinstalledpowercapacitynationwide,comparedwith66percentforcoal.Intermsofpowergeneration,itsshareisevenmorelimited,at4percent.EveninGuangdong,theprovincewiththelargestgas-firedpowerfleet,gasrepresentsonefifthofthecapacitymixwhilecoalaccountsforalmosthalf.Moreover,usingspotLNGtosupplygas-firedpowergenerationcouldwellresultingreaterfinanciallossesthancoal.Reportedly,roughlyathirdofGuangdong’sgaspowerfleetwasnotoperatingduetoshortagesofgasandtheirprohibitivecost.Thatsaid,thestrengthingasimportsintheyear-to-datewasduetoacombinationoffactorsincludingtherapideconomicrecoveryintheindustrialsector,strongpowerdemand,acoldwinter,followedbyahotsummer,aswellasafinalpushforthecoal-to-gasswitchingpolicyinNorth-easternChina.Restockinghasalsoalreadybegunbothatundergroundstoragefacilities,withSinopecstartingupanew10bcmundergroundstoragefacilityinNorthchina,andatregasificationterminals,includingatPetroChina’srecentlyexpandedRudongterminal.Thisyear,Chinahasaddedover7Mtpyofnewregasificationcapacityandanother5MtpysettocomeonlineinNovember.Intheyear-to-September,Chineseimpliedgasdemandreached285bcm(astaggering21percenty/yincrease,Figure3),exceeding30bcmamonth,suggestingthattheNationalEnergyAdministration’sforecastthatdemandin2021willtotalaround370bcmcouldbearealisticestimate.Ofthat,LNGimportsareontracktohittingandevenexceedingthe100bcmmark.Thestate-ownedmajorsarenowreportedlyconfidentthatthesupplyshortfallthiswinterwillbelimitedto2-4bcm,giventhattheyhavestockedupongasandareincreasingeffortstoraiseproduction18DavidFishman,“MeasurestoAccelerateandDeepenPowerSectorReformsAnnouncedinChina”,15October2021,ChinaWatchingBrief,https://www.lantaugroup.com/file/brief_china_power_sector_oct21.pdf8Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.throughoutthewinter.WhileChinamayneedadditionalgassuppliesduringtheWinterOlympicsasitlookstoensureblueskies,intheeventofextremelycoldweatherandshortages,thegovernmentwillcurbindustrialuseinordertoensureheatingdemand.ThestrongpullonLNGwillcontinuebutflowsfromthePowerofSiberiapipelinealongsidehigherimportsfromCentralAsiawilllimittheincrease,especiallysinceinSeptember,giventheoil-indexationandtimelag,pipedgas(attheborder)costonaverage$6/MMBtulessthanLNGimports.In2022,aseconomicactivityissettosoften,industrialdemandgrowthaswellasincrementalLNGrequirementsaresettoslow,evenasresidentialandcommercialuserscontinuetophaseoutcoalandreplaceitwithgas.Figure3:China’sgassupplies,bcmNote:Datafor2021isJan-SepSource:NBS,ChinaCustoms,OIESButthegovernment’scalltoarmshasbeenwellreceivedbythegasmajorswhowillusethisalsotolobbyformoreregasificationterminalsandseektoimprovetheirmarketshareattheexpenseoftheindependents.TheNDRC,forinstance,approvedconstructionofSinopec’s6MtpyLongkoufacilityinSeptember,althoughitisunclearifthisbringstheconstructiontimeframeforwardfromtheoriginal2024completiondate.ButbyannouncingitsintentionstoimportmoreLNG,SinopecandtheothermajorswillbeabletouseupimportslotsatPipeChina’sterminals,potentiallylimitingaccessforindependentbuyerswhicharealsomorereliantonspotpurchases.Moreover,byconcludingnewlong-termagreementswithUSsellers,theyarelookingtotickanumberofpoliticalboxes.Butwithgaspricesalsorising,theuseofLNGinroadfreightisnowreportedlylessappealing,withsalesofLNGtrucksfallingintheyear-to-Augustbyover50percenty/y19,despitetheintroductionoftoughertailpipeemissionsstandardsinChina.Meanwhile,industrialusersarealsolookingtosecuredieselgeneratorsinanefforttomaintaintheiractivitiesoverthecomingmonths.Buttheextentoftheexpecteduptickindieseluseremainsanopenquestion,asisrefiners’abilitytoraiserunsandmeetdemand.ThedieseldilemmaIsthemarketoverestimatingChina’sdashfordiesel?Freightusers,forinstance,canholdoffonbuyingnewLNGtrucksandoptfordieseltrucksintheshort-term,butthiscouldtaketimetofilterthroughtodieseldemand,especiallygiventherecentsurgeindieselcostsandreportedlimitsonsuppliesatretail19“SalesofnaturalgastrucksfellinAugustby83percent”(Chinese),FirstCommercialvehiclenetwork,25September,2021,https://page.om.qq.com/page/OicumxR46pYrET0DZXtVtcvg09Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.stations.Moreover,eventhoughthecurrentpowercrunchandgaspricehikemayslowtheuptakeofLNGinfreight,slowingthedisplacementofdiesel,itisunclearhowquickly(andifatall)truckdriverscanswitchfromLNGtruckingfleetsbacktodieseltrucks.Theshort-termincreaseinsalesofcommercialdieselvehiclesislikelytoprovideanuplifttodieseluse,accordingtotheChinaInternalCombustionEngineIndustryAssociation,salesofdieselenginesincreasedm/mbyover7percent,buttheywerestilllowery/ybyover30percent20.Moreover,truckdrivershavereportedlyslowedpurchasesofLNGtrucksbecauseofsoaringLNGpricesbutalsobecauseenvironmentalrestrictionshavebeenweighingonthetransportoflargebulkcommodities.Combinedwiththeslowdownintherealestatesector,thereisabroaderquestionforfreightaboutthelongertermtrajectory.Nonetheless,theoutlookforQ421stilllooksstrongduetodemandforbackupgenerationbutalsothewinterharvestandtheSinglesdayshoppingspreewhichtypicallyleadstoalogisticssurge.Demandfordieselgeneratorsisalsoontherise,withtheChinaInternalCombustionEngineIndustryAssociationpeggingthatJanuary-Septemberincreaseat24percenty/y21—butthecostsarealsoincreasingandtheleadtimefordieselgeneratorsisanywherebetweentwotothreeweeksinlightofthesurgeindemand22,suggestingthatthisspikeinsaleswillnottranslatetostrongerdieseldemandbeforelateOctober/earlyNovember.Thatsaid,forindustrialusers—whichwillseetheirpowersuppliescurtailedtoprioritiseindustrialusers—investinginbackupgenerationwillbekeytomaintainingoperations,despitetherisingcostsofthegeneratorsanddiesel.YetdieselsuppliesinChinaarealsotight.Theconsumptiontaxonblendstocks,introducedinJune202123,haslimitedtheavailabilityofoff-roaddieselfromindependentrefinersandblenders.Meanwhile,thecrackdownontheShandongindependents,alongsidepowerrationinginShandong,haveweighedonsupplies.Interestingly,though,themajorsdidnotrampuptheirrefineryrunsortheirdieseloutputtocapturemarketshareearlierthissummerwhentheconsumptiontaxcameintoeffect(seeFigure4).YetaccordingtoPetroChinaandSinopec’searningreports24,combinedrunsaveraged8.45mb/dinQ321,marginallylowerthanthe8.47mb/dreportedinQ221.Thisrapidtighteningofthedieselmarket,andperhapstheanticipationofevenstrongerdemandoverthecomingmonths,hassentpricesskyrocketing,promptingthegovernmenttoannouncethatitwillreleaseproductstocks25—althoughthetimingsandvolumeareunclear—andaskingrefinerstoraiseoutput.Sinopec,inresponse,hasstatedthatitwillincreaseitsgasoilsupplyby19percentinNovemberfromOctober,notingalsothatishasalreadyincreaseditsdieseloutputby20percentfromtheaveragelevelsseeninthefirstninemonthsoftheyear,andthatitwillrunitsrefineriesatfullcapacity,adjustingthedieselyieldto29percent.Whilethemajorsclearlyneedtopaylipservicetotheurgencyofthedemandsituation,theyhavethusfarbeenslowtoadapttothenewdemandspike.Thehighermarginsandgovernmentmandatewillcertainlyleadtoarealignmenttowardthedomesticmarket.Butitremainsunlikelythatthemajorswillraisethroughputsacrosstheboard.20“SummaryinternalcombustionengineindustrysalesinSeptember2021”(Chinese),15October2021,http://www.ciceia.org.cn/nnews.asp?vid=12002&lm=331021“SummaryinternalcombustionengineindustrysalesinSeptember2021”(Chinese),15October2021,http://www.ciceia.org.cn/nnews.asp?vid=12002&lm=331022“InthecontextofChina’spowercrunch,ordersofdieselgeneratorsarebooming”(Chinese),ChinaSecuritiesDaily,20October2021,https://finance.sina.com.cn/roll/2021-10-20/doc-iktzscyy0655954.shtml23Formoreontheconsumptiontax,seeOIESOilMonthly,issue6,https://www.oxfordenergy.org/publications/oies-oil-monthly-issue-6/24PetroChina:http://www.petrochina.com.cn/ptr/jdbg/202110/4b1e7f6159194e22ae2d04a113edff86/files/ff25648b5eb346249c6f51beb091be83.pdf,Sinopec-http://www.sinopec.com/listco/en/Resource/Pdf/2021102803.pdf25“TheStateBureauofGrainandMaterialReservesbeginsthatannualrotationofnationaloilproductstocks”(Chinese),31October2021,http://www.lswz.gov.cn/html/xinwen/2021-10/31/content_268028.shtml10Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.Figure4:Chinaproductoutput,y/ychange,mb/dSource:ChinaNBS,OIESHigherrunswouldallowthemtocapturestrongerdieselmarginsbutwouldpotentiallyleaveanexcessofgasolinesupplies.Whatismore,peaktravelseasonisnowoveraftertheOctobernationalholidayandwithnewboutsofCOVID-19infections,travelcouldremainconstrainedespeciallyaheadoftheWinterOlympics.Thatsaid,withtheLunarNewYearfallinginearlyFebruaryin2022andtheWinterOlympiccomingup,refinerswillwanttostockuponcrudeandoilproducts,buttheoutlookfordemandremainsaconcern.ThepoweroutagesandChina’sgrowthoutlookThepowercrunchalsoraisesquestionsaboutthemacroeconomicoutlookforChinaandmorebroadlyabouttheguidingpolicyprioritiesforChinainthecomingyear.Economicgrowthforecastshavebeencut,withOxfordEconomics,forinstance,nowestimatingthatQ421GDPgrowthwillslowto3.6percentfrom5percentandthat2022growthwillcomeinat5.4percenty/y,comparedtoanestimated5.8percentpreviously.Theimpactisbeingfeltacrossglobalsupplychainswithreducedmanufacturingactivityleadingtoshortagesoftextiles,toysandmachinepartsaheadofChristmas.Howthepowercrunchisresolved(ornot)willbeanimportantindicatorofprovincialpolicypriorities:Ifthepoweroutagesareduetooverzealousimplementationofthe“dualcontrol”policies,theycouldbereversedgivenalsothatthegovernmenthasindicatedthatprovinceshavesomeleewayinimplementation.This,inturn,wouldpointtotheimportancethegovernmentattachestoeconomicgrowth.Eventhen,however,securingsuppliesthroughdomesticoutputorimports(evenofAustraliancoal!)willtaketimeandmayrequirefurtherdomesticpriceadjustments(orsubsidies)suggestingthatpowerrationingwillcontinuethroughthewinter.Indeed,thegovernmenthashighlightedtheneedfor‘orderly’rationing26suggestingthatprovincesthatmayhavefailedtodisclosethetrueextentofdemand—forfearoffallingafoulofthe“dualcontrol”policies—willnowbeexpectedtoimprovetheirforecastingskillsandensurethatindustrialusersareforewarnedofpoweroutagesandthatresidentialusersaresupplied,especiallyduringthecoldwintermonths.Butifsomeofthepowercutsareanattempttosqueezeoutinefficientmanufacturingindustries,oraperceivedneedtoprioritiseenvironmentalgoals,itwouldsuggestthatChina’spoliticaleconomyischangingmorefundamentallythanpreviouslythought,implyingnotonlyslowergrowthratesbutfurtherpolicyturmoilintheyearstocome.Indeed,thechangeinChina’smacroeconomicoutlookseemsasmuchpolicy-drivenasitistheoutcomeofaperfectmarketstorm.AswiftsuccessionofregulatorycrackdownshastakenplaceinChinathis26“Ensuringsafeandstableenergysuppliesforresidentialheatinginthewinterandstableoperationsofthesocietyandeconomy”,(Chinese),StateCouncil,14October2021,http://www.gov.cn/xinwen/2021-10/14/content_5642492.htm11Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.year,suggestingthatitmightbewisetopayattentionsloganssuchas“CommonProsperity”.LikenedtoaRedNewDealorflaggedasanotherCulturalRevolution,theagendaremainsunclear.Thegovernmentseemstobepromising(onceagain)thatitwilldealwiththenumerousimbalancesintheeconomy,thatitwillreduceinequality—inpartthroughcontrollingandregulatingtheneweconomy—andmakelifebetterforordinarypeople.Manyofthemovesseemtohavegenuinepopularsupport.Butthesortofindustrialrestructuringthatcouldtakeplace—andisperhapsbeingpushedbylocalofficials—couldleadtounemployment,muchliketransferringthewealthfromtheneweconomicsector(manyofwhicharecurrentlyintheeyeoftheregulatorystormsuchaseducation,gamingandtechnology)ispoliticallychallenging.Whatimplementationwilllooklikeisunclearandsomeformofcoursecorrectioncouldcome,buttherearesignsthattheguidingprinciplesofmacroeconomicmanagementarechanging.Energysecurityandthe2030-2060carbontargetsThechangingoutlookforeconomicgrowthdovetailsalsowiththecarbonpeakingandneutralitycommitments.Tobesure,thepowercrunchandtheshort-termneedformorefossilfuelshascastdoubtsaboutChina’slong-termcommitmenttoitspledgestopeakcarbonemissionsbefore2030andreachcarbonneutralityby2060(the30-60targets).TheexpectedincreaseincoalproductioninChinahasraisedconsiderableattentioninthecontextofCOP26thathopedtosignalaclearendtocoal27withPresidentXiJinping’sfailuretoattendCOP26inGlasgowcastingfurtherdoubtsaboutthecountry’scommitment.AddedtothiswasChina’smovewithIndiatowaterdownthecommitmenttophaseoutcoal.Despitethese,Beijingcontinuestomoveforwardwithits30-60targetsandintherunuptoCOP26,Chineseauthoritiesissuedaslewofpolicydocuments.While,arguably,theseregulationsofferedfewspecificsonthewayforward,theyarestillsignificantastheyhighlightthegovernment’scontinuedeffortstoproduceanoverarchingandconsolidatedstrategy.OnSunday24October,BeijingissuedtheOpinionsoftheCentralCommitteeandStateCouncilontheComplete,Accurate,andComprehensiveImplementationoftheWorkonEffectivelyCarryingOutCarbonPeakingandCarbonNeutralityundertheNewDevelopmentTheory28orthe“1”ofits“1+N”documents.The“1”isthetop-leveldesigndocument,andtheNarenumerousimplementationplans,thefirstofwhich—theActionPlanforPeakingCarbonDioxideemissionsbefore203029—waspublishedon26October.Intermsoftargets,thepolicydocumentsreiterateexistingcommitmentsto2025,2030and2060including:-ReducingenergyintensityandCO2emissionsperunitGDPby13.5percentand18percentrespectivelyfrom2020levelsby2025.By2030,Chinawill“significantlyreduceenergyconsumptionperunitofGDP”andreduceCO2emissionsperunitGDPbymorethan65%from2005levels.-By2030,Chinawillsteadilydecreasecarbonemissionsfromtheirpeak-Raisingtheshareofnon-fossilfuelsinprimaryenergyconsumptiontoaround20percentby2025;25percentby2030–withtheinstalledcapacityofwindandsolarpowerplannedtoexceed1,200gigawatts.Theshareofnon-fossilfuelsinprimaryenergyconsumptionshouldreachover80percentby2060.-Increasingforestcoverageto24percent(from23percentattheendof2020)withtheaccumulatedsizeofforestsreaching18billionsquaremetersby2025.By2030,forestcoverageshouldrisetoroughly25percent,oracumulative19billionsquaremeters.27AlthoughChinahaspledgedtoendfinancingforoverseascoal28FulltextinChinesehere-http://www.gov.cn/zhengce/2021-10/24/content_5644613.htm?mc_cid=be873e023d&mc_eid=1f5ebaac4b–theEnglishversioncanbefoundherehttp://english.www.gov.cn/policies/latestreleases/202110/25/content_WS61760047c6d0df57f98e3c21.html29InChineseherehttp://www.gov.cn/zhengce/content/2021-10/26/content_5644984.htm?mc_cid=be873e023d&mc_eid=1f5ebaac4bandinEnglishherehttp://english.www.gov.cn/policies/latestreleases/202110/27/content_WS6178a47ec6d0df57f98e3dfb.html12Thecontentsofthispaperaretheauthors’soleresponsibility.TheydonotnecessarilyrepresenttheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsMembers.Beyondthesehighleveltargets,thedocumentshighlightthattheincreaseincoalconsumptionwillbelimitedduringthe14thFive-YearPlan(FYP)period(2021-2025)andphasedoutinthe15thFYP(2026-2030)whenoildemandwillalsopeak.Thedocumentspointtoanemphasisonenergyconservationanddemandsidemanagementalongsideacceleratedeffortstoincreasesuppliesofnon-fossilfuelsaswellasinnovationinareasincludingstorage,hydrogen,low-carbontransportaswellascarbon,captureutilisationandstorage.Bothdocumentsalsonotetheimportanceofcarbonsinksaswellasgreenfinance.Tobesure,alloftheabovewillberequiredinChina’senergytransitionandthesedocumentsofferlittleinsightintotheallocationoffundingorfurtherincentiveschemesthatwilllikelybedeterminedbyindustry-specificguidanceandlocalinitiatives.Additional“N”documentsarenowlikelytobeissuedtocoverindustriesincludingsteel,cement,petrochemicals,deepeningpowersectorreformaswellasthetransportandbuildingsectors.Butbeyondtheheadlinetargets,thedocumentsarealsonoteworthyintheiremphasisthat“endeavourstopeakcarbondioxideemissionsandachievecarbonneutralitymustbeincorporatedintotheoveralleconomicandsocialdevelopmentframework”pointingtotheneedforabroadoverhaulofChina’seconomicandindustrialmodelwhilealsorecognisingtheneartermchallenges,nothingthat“basedonChina’senergyresourceconditionsofrichincoalbutpoorinoilandgas,wemustinsistonconstructionbeforedestruction,stabilizetheenergystockandexpandtheenergyincrement.”Inaddition,thedocumentsreiteratetheleadershipoftheCCPinthisprocessaswellassomeoftheinstitutionalimperativesincludingbetteraccountingandverification,anongoingbalancebetweentheroleoftheStateandthemarket,theneedtoincorporatethe30-60targetsinlocalofficials’performancemetricsandadaptinggoalstolocalcircumstances.ThepoweroutagessincelateSeptemberhavenotchangedtheoveralltrend,buthavecrystallisedtheneedtopushforwardwiththesestructuraladjustmentswhilehighlightingtheneartermchallenges.Indeed,the“1”documentisdated22September,eventhoughitwasonlyofficiallyreleasedinlateOctober.Assuch,therewasno“re-think30”ofthe30-60pledgesastheyareanintegralpartofChina’swidereconomic,energyandindustrialupgrading.Thismeansthattheywillremainatoppriorityforcentralandlocalleadersbutthatthesetargetswillalsohavetocontendwithotherpriorities,suchaseconomicgrowthandsocialstability,amongothers.Overtime,thehopeisthatthesegoalswillbemutuallyreinforcingbuttherewillbeinstanceswhentheyareatoddsandlocal/centralleaderswillneedtoadjust.ThemixedsignalsfromtheChinesegovernmentthisyearhavenothelpedmattersandpolicytensionswillcontinuetoplagueChina’senergypolicymakingoverthecourseofthe14thFYP31.ButtheoverarchingdocumentsreleasedinlateOctoberwillremainimportantreferencepointsforChina’slong-termtrajectory,eventhoughtheyleaveroomforinterpretation.Lookingaheadto2030,onecanimaginetwoscenarios:Inonescenario,deliberatepolicyactions,combinedwithunintendedconsequencessuchasthepoweroutages,causetheGDPgrowthratetofall.Iftheconstructionofnon-fossilfuelpowergeneratingcapacitycontinues,carbonemissionswillpeakwellbefore2030.Inanalternativescenario,theeconomycontinuesgrowingasbeforewithmanylocalofficialslookingtobuildoutlocalcapacityandinfrastructureaheadofthecarbonpeak,therebydelayingthetimewhencoalconsumptionpeaks.Despiteprogressonnewnon-fossilcapacityadditions,carbonemissionspeakcloserto2030.Therealityislikelytoliebetweenthesetwoextremesandbetheresultofacombinationofpolicyandluckinterruptedbycrises.Equally,theoutlookforachievingcarbonneutralityby2060hasnotbeenalteredbyrecentevents.Butactionstakenoverthenextfivetotenyearswillbecriticalforsettingthepacetowardthisobjective.30“ChinaRethinksPathtoClimateGoalsDuetoEnergyCrisis”,BloombergNews,12October2021,https://www.bnnbloomberg.ca/china-rethinks-path-to-climate-goals-due-to-energy-crisis-1.166498331“PolicyTensionsFacingChinaasitDevelopsitsFive-YearPlanforEnergy”,PhilipAndrews-Speed,OxfordEnergyComment,KeyissuesforChina’s14thFiveYearPlan,March2021,https://www.oxfordenergy.org/wpcms/wp-content/uploads/2021/03/Key-issues-for-Chinas-14th-Five-Year-Plan.pdf
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