Silicon metal and aluminum industries hit by China power shortages

From pv magazine International

The solar manufacturing supply chain is among the industries being affected by a combination of soaring power demand, coal shortages, and carbon emission reduction measures which have seen widespread electricity rationing in China.

In Yunnan province, in southwest China, producers of the silicon metal which feeds polysilicon have been operating at 10% of the output they achieved in August and will continue to do so for the rest of the year as provincial authorities try to control electricity demand with a measure that is also affecting the phosphorus industry.

Fellow solar supply chain members from the aluminum industry in Guangxi province, in the south, have been forced to operate just two days per week, alongside peers in the concrete, steel, lime, and ceramics segments, and manufacturers in neighboring Guangdong have access to normal power supplies only on Fridays and Saturdays with electricity rationed to a 15% grid security load for the rest of the time.

With reports of drastic power shortages emerging from China in recent days, the country has actually been experiencing problems since late June but rationing is not unusual during the peak summer hours.

What has changed this time is that the outages have continued and prompted rationing measures across 19 of the nation’s provinces for the rest of the year, and it is not just manufacturers who are being powered down. In China’s northernmost province of Heilongjiang, which is starting to experience cold temperatures, a family was reportedly almost killed after an unannounced blackout halted a fan in their village home which was responsible for dispersing carbon monoxide fumes from their heating system.

The problems have been caused by a combination of rising post-Covid electricity demand at a time when the politically-motivated ban on imports of Australian coal has tightened supply; and the manner in which Beijing controls power prices, with the situation further exacerbated by carbon emissions reduction policy.

Demand

Electricity demand from industry was 13.5 percentage points higher in the first eight months of the year than in the same period of 2020, at 3,585 TWh, reflecting a 13.8% year-on-year rise in total consumption, to 5.47 PWh, according to data from state energy industry trade body the China Electricity Council. Figures produced by the China General Administration of Customs tell the same story of a rebound driven by the global recovery from the pandemic, with China recording import and export trade worth RMB2.48 trillion ($385 billion) in January-to-August, up 23.7% on the same period of last year and 22.8% higher than in the first eight months of 2019.

With Beijing having enforced an unofficial ban on imports of Australian coal for the last year or so – as the result of an ongoing diplomatic spat with Canberra – that rising demand for the fuel which provided around 73% of Chinese electricity in the first half of the year, has further raised prices for the fossil fuel.

The problem for Chinese coal-fired power generators is that Beijing maintains strict controls on the price of electricity so input costs cannot be passed on to the consumer. The mismatch between a liberalized coal market and centrally-controlled end-user prices is illustrated by the current situation in Guangdong, where a coal price of RMB1,560 per ton ($242) has pushed the cost of coal-fired electricity up to RMB0.472 per kilowatt-hour ($0.073). With coal power companies facing an electricity price ceiling of around RMB0.463/kWh ($0.071), generators are losing around RMB0.12 for every kilowatt-hour they generate. In that situation, rationing electricity supplies is an obvious remedy.

The crisis has been worsened by the introduction of China’s ‘dual control’ energy policy, which aims to help meet president Xi Jinping’s climate change pledge of hitting peak carbon emissions this decade and a net zero economy by 2060. ‘Dual control’ refers to attempts to wind down greenhouse gas emissions at both a national level and in more local areas, such as provinces and cities.

Red status

With the finer details of the carbon reduction policy yet to be ironed out, government departments and provincial and city authorities have started to set their own emission-reduction targets and, in mid-August, state planning body the China National Development and Reform Commission (NDRC) published a table of the energy control situation across the nation. With nine provinces marked red for their energy consumption, and a further 10 highlighted as yellow, officials received another motivation to introduce power rationing.

In terms of what happens next, the current approach of rolling blackouts seems unlikely to be a sustainable solution, given the damage it could inflict on industry and the resentment it would cause in parts of the huge nation already preparing for winter.

The binary choice apparently facing China’s policymakers is whether to ramp up coal supplies to force prices down, by using decommissioned domestic supplies and halting the ban on Australian imports, or to raise electricity prices sufficiently to prompt generators to get the lights back on – and the production lines humming. While the drawbacks of raising household electricity bills will be obvious, the former approach could seriously endanger the nation’s climate change commitments as the world prepares for the COP26 meeting in Glasgow next month. Sources close to the NDRC have suggested the electricity price may be set to rise soon.

GDP

What is clear, is the effect the energy crisis is having on the Chinese economy, and on the solar supply chain. Last week, leading up to Friday’s national day holiday, the coal price in northern China rose to around RMB2,000 per ton ($310), three times higher than the level seen at the beginning of the year.

Investment bank China International Capital Corporation has blamed the dual control emission reduction policy for the electricity shortages and predicted a 0.1-0.15 percentage point impact on economic growth in the last quarter and the current window. Morgan Stanley has put that figure at 1% in the current quarter, if the current industrial output restrictions continue, and Japan’s Nomura Securities has revised down its annual forecast on Chinese growth from 8.2% to 7.7%, with expected GDP gains in the third and fourth quarters reined in from 5.1% to 4.7%, and 4.4% to 3%, respectively.

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