Does China Have Enough Energy For The Coming Winter?

Between Zero COVID Restrictions And Severe Drought, Energy Insecurity Looms

Last week I noted how the Chinese province of Sichuan is facing an energy crisis. The summer’s severe drought has left the province with inadequate capacity for hydroelectric power generation, giving rise to the likelihood of blackouts and other problems due to energy shortfalls.

China Is Facing Its Own Energy Crisis

Now there are signs the energy problems are more extensive and perhaps even more dire than first appeared. In addition to the challenges of reservoirs already near the minimum level at which power can be generated, China’s coal production is suffering because of…you guessed it….Zero COVID policies.

In Datong, Shanxi province, a key rail route hauling coal eastwards saw volumes shrink as much as 30% because of crew shortages, the China Coal Transportation and Distribution Association reported. Some parts of Datong were locked down October 11, and dozens of rail workers on the line to Qinhuangdao were among more than 100 new virus cases reported on October 17.

Nationwide, coal is still China’s dominant energy source. Shortfalls in coal production mean shortfalls in energy production—or an increase in coal imports to make up the difference. Either scenario jeopardizes China’s energy security and makes the stability and reliability of the Chinese power grid less certain and more problematic.

In China, Coal Is King

To understand the ramifications of Zero COVID disrupting coal production, one must grasp the significance of coal in China’s power grid—over 60% of China’s generated electricity comes from coal, and China is adding new coal power plants and new coal power generation capacity.

In 2018, China had 3,476 coal-fired power plants, which produced 2,045 TWh of electricity, or about 62% of China’s total electricity production that year. China’s coal power plant fleet is one of the largest in the world, and is also one of the most rapidly growing. Between 2000 and 2010, China added the equivalent of the entire United Kingdom’s coal-fired power capacity to its power grid. In the decade since, it has added more than twice that. China now has more coal-fired power capacity than the rest of the world combined. Approximately two-thirds of China’s coal power plants are located in just three provinces: Shandong, Henan, and Inner Mongolia.

While China’s latest five-year plan (FYP) for its energy industry calls for expanded use of nuclear power and renewable energy, it also calls for an expansion of total power generation capacity to 3,000Gw. Moreover, the capacity targets for nuclear and and renewables are not that far off from current capacity.

To decarbonize the electricity mix, the FYP sets the capacity target for the two zero-carbon fuel sources, hydro and nuclear respectively at 380GW and 70GW by 2025, which would be 12% and 2% of the 3,000 GW capacity target respectively In other words, hydro would account for a smaller share of total fuel mix and nuclear remains the same as it is today. It seems like the country is well on its way, as China exceeded its 2025 goal for hydropower already, with 390GW of installed capacity providing 15% of the country’s power supply in 2021 .

Nuclear is at 75% of the 70GW target. While only 2GW of nuclear capacity became operational last year, the country has been ambitiously developing nuclear power projects with 14GW of confirmed capacity under construction and additional 47GW announced

Coal is China’s energy present, but it is also China’s foreseeable energy future. Over the next few years, even as they expand the use of renewables, China is going to be burning increasing amounts of coal to generate electricity.

Drought Has Limited Hydroelectric Capacity

Energy production is already a crisis in Sichuan, owing to the heavy reliance in that province on hydroelectric power as well as coal. The extreme drought of the summer has limited reservoir capacities, compelling the province to resort to power rationing policies during the record-setting hot summer.

Manufacturing hubs along the Yangtze River are restricting power consumption in multiple industries to accommodate demand, while the government has called for more coal-fired power as reservoirs used by hydropower suppliers run low in the drought conditions.

However, coal output disruptions, due in no small part to Zero COVID lockdowns and restrictions, have impeded Sichuan’s efforts to ramp up coal power generation, as shortages of the fossil fuel stand in the way of the policy response.

A lack of rainfall and water in reservoirs and a shortage of coal and gas, as well as difficulties in retaining power generated in Sichuan and purchasing electricity from other provinces, are set to restrict supply, according to China Water, a newspaper supervised by the Ministry of Water Resources.

No water in the reservoirs and no coal production due to Zero COVID means no energy for Sichuan.

Renewables Are As Unreliable In China As They Are Elsewhere

While China has been expanding its use of renewable energy sources, particularly wind power, in order to reduce its dependence on coal, it is encountering the same unreliability of renewables as a stable power source that has been experienced elsewhere.

However, renewables like wind and solar rely on the weather and cannot be stored at scale with existing technology. This results in a significant disconnect between installed capacity and actual power generation that renewables provide. For example, in 2021, wind accounted for 14% of China’s installed capacity but only generated 7% of the electricity. The intermittency of growing renewable capacity also means that there is an increase in for balancing by a stable and dispatchable baseload such as coal or natural gas.

This is not atypical of renewables, as even in the United States renewable power generation has generally resulted in greater expense and less electricity¹.

The most prevalent and perhaps most popular climate policies in the U.S. are Renewable Portfolio Standards (RPS) that mandate that renewable sources, such as wind and solar, produce a specified share of electricity, yet little is known about their efficiency. Using a comprehensive data set and a difference-in-differences
style research design, we find that electricity prices are 11% higher seven years after RPS passage and carbon emissions are 10-25% lower.

Accordingly, China’s increases in renewable power generation capacity are paradoxically requiring additional power generation capacity from coal. The reason for this is simple: The inherent variability (i.e., unreliability) of renewables requires that complementary capacity from a stable energy source be established to handle energy demand when renewables output is lacking².

These findings lead to a number of conclusions. Firstly, there are a number of integration options that help mitigating the value drop of VRE: transmission investments, relaxed constraints on thermal generators, and a change in wind turbine design could be important measures. Especially increasing CHP flexibility seems to be highly effective. Increasing wind turbine rotor diameters and hub heights reduce output variability and could help to stabilize wind's market value. Secondly, variable renewables need mid and peak load generators as complementary technologies.

China’s expanded investment in renewables means coal is more important now than ever before. That in turn means that Zero COVID shutting down coal production carries a far higher economic cost than would have otherwise been the case.

Zero COVID Means Zero Coal Mining

With coal central to China’s capacity to generate electricity, anything that disrupts coal supplies will disrupt the power grid—and Beijing’s strict Zero COVID policies are proving to be quite disruptive to the coal supply.

With fall temperatures already starting to increase energy demand, COVID flare ups in China’s coal-producing regions are adding price pressure to coal markets.

Spot prices for coal in Qinhuangdao have risen due to both falling temperatures as well as tighter supplies because of the Covid flare-ups, Morgan Stanley analysts including Sara Chan wrote in a note Tuesday. The price climbed 2.2% to 1 558 yuan a ton on October 17, she wrote.

Zero COVID lockdowns are not at all conducive to an healthy coal supply chain for power generation.

The situation has already become sufficiently serious that some provincial officials are warning local coal producers against boosting prices “too high”.

Shaanxi, China’s third-biggest coal producing region, warned local miners of harsh punishments should they raise prices too high or purposely curb production in the hope of making higher profits later, according to an official statement cited by local industry publication Yulin Coal Web.

Additionally, while China has doubled its coal reserves at most power generation plants from this time last year, Beijing has taken the added step of discontinuing the resale of liquified natural gas (LNG), despite current low natural gas demand. Instead, LNG imports are being stockpiled as an additional cushion for winter energy demand, to augment an ironically unreliable coal supply thanks to Zero COVID disruptions.

China has asked state-owned LNG importers to stop reselling cargoes to buyers in Europe and Asia in order to ensure sufficient domestic supplies for the upcoming winter demand peak, Bloomberg News reported on Monday.

La Niña Scrambling Demand Projections

Complicating China’s energy outlook for the winter is uncertainty over the influence the La Niña cooling effect of Pacific Ocean temperatures will have on winter temperatures.

Sichuan’s estimate, though, was made under the worst-case scenario, according to Yuan Jiahai, a professor at the School of Economics and Management at North China Electric Power University in Beijing, and the anticipated conditions may not occur due to the lessons learned in summer.

“The key is how cold the coming winter will be, which is hard to tell because of La Nina,” Yuan said.

Most parts of China tend to experience a cold winter under La Nina, a phenomenon of sea surface temperature anomalies in the central and eastern Pacific.

If the coming winter is harsher and colder than anticipated—a significant possibility given the lingering La Niña effect, which is forecast to extend into next year—China very likely does not have adequate reserves of coal or natural gas to satisfy demand, especially with hydroelectric capacity largely compromised by drought and low reservoir levels. The power rationing and rolling blackouts of the summer could very easily be repeated during the winter.

That this could happen illustrates yet again the contradictory and wholly unrealistic nature of Beijing’s Zero COVID policies. While China’s energy policy quite reasonably calls for increased coal production ahead of the winter months to ensure adequate capacity to meet demand, capacity which is already challenged due to the constrained state of China’s hydroelectric infrastructure from severe drought, Zero COVID cuts against those same policies. Zero COVID policy contradicts and counteracts energy policy, making preparations for a potentially significantly cold winter uneven and haphazard.

If China is faced with an extremely cold winter, and is proven to have inadequate coal reserves to address energy demand, then winter blackouts can be added to the growing list of economic costs imposed by China’s Zero COVID policies.

1. Greenstone, M., and I. Nath. Do Renewable Portfolio Standards Deliver Cost-Effective Carbon Abatement? 12 Nov. 2021, https://epic.uchicago.edu/research/publications/do-renewable-portfolio-standards-deliver.

2. Hirth, L. “The Market Value of Variable Renewables: The Effect of Solar Wind Power Variability on Their Relative Price.” Energy Policy , vol. 38, July, 2013, pp. 218–36. Retrieved from https://www.neon-energie.de/Hirth-2013-Market-Value-Renewables-Solar-Wind-Power-Variability-Price.pdf