The Fuse

China’s Energy Crisis Comes as World Urges Faster Climate Action

by Nick Cunningham | October 14, 2021

The global energy crunch is pushing up energy prices everywhere, threatening to act as a drag on the economic recovery.

China in particular is facing a series of headwinds from energy supply shortages and high prices, and there are few short-term answers. The IEA and many other climate watchers are calling for an acceleration of the transition.

The pandemic recovery

The global supply chain problems and energy crunch is mostly the result of a stark mismatch between supply and demand that stems from the recovery from the pandemic. Essentially, the large supply shutdowns in 2020 have not fully come back even as the recovery began in earnest earlier this year. Shortages have pushed up prices for a long list of commodities, with energy spikes the most pronounced.

The unfolding energy crisis in China is particularly notable. Power shortages have forced factories to cut back on operations, forced some municipal water stations to temporary stop pumping water, and resulted in blackouts to homes and businesses. In turn, the outages across China’s manufacturing heartland could contribute to global supply chain problems, pushing up prices for all sorts of consumer and industrial goods traded around the world.

Analysts attribute much of the cause for China’s power crisis to the fact that the country has a complicated set of price controls that have contributed to the supply shortages. For instance, electricity prices that power generators earn are regulated, while coal prices are set by the market. As a result, power plants sell low and buy high when coal prices spike. The arrangement creates a disincentive to produce power when it is in fact needed.

The government has also tried to tamp down coal prices that ostensibly were market-based, but capping prices that coal mining companies earn on selling coal led to less coal supply. Beijing then changed course, allowing for higher coal prices to be passed on to generators, and ordered mines to increase production.

Coal prices have skyrocketed alongside the global run up in natural gas prices. Last month, the Chinese government ordered some industrial users in at least ten provinces to ration power use. It also has gone out and sought to secure as much cargo as possible from suppliers around the world. China imported 32.9 million tonnes of coal in September, a surge of 76 percent from the same month a year earlier. Natural gas imports were up 23 percent.

By mid-October, China decided to let power prices rise by as much as 20 percent to keep power plants online, which will also have the effect of forcing demand cutbacks due to the expense of buying costly electricity.

Other factors have contributed to the problem. Last year, China effectively stopped buying coal from Australia over an unrelated political dispute over Canberra’s interest in investigating the origin of the Covid-19 pandemic.

More recently, short-term problems are also factoring in. China suffered horrific floods earlier this month, shuttering coal mines and exacerbating the supply shortage.

Energy transition

The fossil fuel industry is quick to pin the blame for rising energy prices on climate policy or renewable energy, a disingenuous and opportunistic attempt to derail climate action.

For now, it is unclear how successful the attempt to water down climate policy in the U.S. Congress will be. In Europe, where natural gas prices are up six-fold at the Dutch gas hub TTF, there is disagreement on the way forward. Some have called for the creation of a European-wide strategic gas reserve.

But on October 13, the European Commission announced a new “toolbox” to tackle the crisis, including a suite of short-term financial aid for individual and industrial users. Notably, the toolbox did not call for a halt to the energy transition or watering down of climate policy, but it instead argued that the transition needs to go faster.

“The clean energy transition is the best insurance against price shocks in the future, and needs to be accelerated,” the document said. It called for more aggressive renewable energy deployment, as well as battery storage. With renewable energy as the cheapest option for new power generation in much of the world already, it makes little sense to funnel money into less competitive fossil fuel projects.

But high prices are rattling global leaders and clean energy investment is still too low. “There is a looming risk of more turbulence for global energy markets,” Fatih Birol, the IEA Executive Director, said in a press release promoting the agency’s new World Energy Outlook. “We are not investing enough to meet future energy needs, and the uncertainties are setting the stage for a volatile period ahead. The way to address this mismatch is clear – a major boost in clean energy investment, across all technologies and all markets. But this needs to happen quickly.”

However, the spike in energy prices does present problems for the energy transition. High prices and all-out efforts to squeeze more electricity out of coal, gas and even oil-fired power plants to tamp down the current crisis presents tension as the COP26 climate conference gets underway in roughly two weeks.

China Premier Li Keqiang warned on October 11 that energy security was a prerequisite for China’s energy transition, comments that seemed to suggest the country could slow down its emissions reductions.

That comes as many climate negotiators and watchers are urging China to step up its ambition. “Can the world afford to have China, as already the No. 1 emitter, continuing to grow in those emissions over the next 10 years?” John Kerry, the international climate envoy for the Biden administration, said in a recent New York Times interview. “No.”

The fear is that the COP26 summit will be a big letdown as governments grow skittish at phasing out fossil fuels.

“The world’s hugely encouraging clean energy momentum is running up against the stubborn incumbency of fossil fuels in our energy systems,” the IEA’s Fatih Birol said. “Governments need to resolve this at COP26 by giving a clear and unmistakable signal that they are committed to rapidly scaling up the clean and resilient technologies of the future. The social and economic benefits of accelerating clean energy transitions are huge, and the costs of inaction are immense.”