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The View | China’s energy crunch and the high economic costs of going green
- China’s coal supply has been constrained by carbon emission controls and tensions with Australia
- Beijing may have to consider relaxing its control over electricity tariffs and reviewing its green policy
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The widely spreading energy crisis in China is likely to extend to winter, and it has already affected many people’s daily lives and hobbled the manufacturing sector. Obviously, this is a puzzling situation: why is there an energy crunch amid an economic slowdown?
In fact, the energy crisis might have been brewing for a while, and August’s power consumption data offers some clues. According to figures from the National Energy Administration, China’s electricity consumption in August grew about 3.6 per cent, which is a significant deceleration from 12.8 per cent the previous month.
At first glance, this looks like a case of what analysts would usually attribute to demand factors. In other words, the slowdown in power consumption growth reinforces prevailing opinions that the Chinese economy is facing strong headwinds, particularly given the Covid-19 outbreaks linked to the Delta variant in August.
However, a supply bottleneck has also been emerging: China is facing a significant shortage of coal, which has caused a spike in prices. In China, coal-based producers account for more than 70 per cent of the country’s electricity generation.
Market prices can illustrate the supply and demand dynamics of coal. The prices of thermal coal used for power generation, for instance, have more than doubled this year. As electricity tariffs are administratively controlled by the government, power plants are suffering massive losses due to skyrocketing coal prices.
In fact, since 2018, as part of an effort to reduce business costs, electricity prices for manufacturing have been lowered by at least 25 per cent. From this perspective, the power plants have even fewer incentives to supply electricity to industrial firms.
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