It was only about a month ago in September that certain provinces and cities in China experienced power rationing, and the effects have rippled across the Internet.  A variety of locations, threads and sites are discussing the issue, and, like most things, the problem has generated its fair share of rumors and falsehoods.

The chief concerned generated from the power situation is a major disruption in the supply chain of products coming from China.  There are additional rumors and armchair economic specialists who are speculating there will be production issues because of limited electrical power.  This is only adding additional levels of anxiety and concern – both of which are unnecessary.

However, the combination of the pandemic and this disruption is certainly causing some degree of concern and completely understandable that many would feel this way.  One thing is true – becoming overly anxious and concerned will do little to nothing in helping resolve the issues, and if anything, merely exacerbate the current state of things.

It is important to look at the situation in a very calm and rational way.  Those of you who are resellers and small business owners shoudl continue reading.  It is our goal here at Sourcing Nova to make sense of the entire situation.  It starts with rational thought.

By rational thought, this means separating the rumors from the facts.  Once we have the facts, the solution becomes relatively simple to resolve.

Consider: China has always been successful at finding solutions to problems and does not shirk back from a problem.  This is why the majority of large scale incidents lead to positive reforms within the country that end up better for all involved.

What does this mean?  Simple.

There is no shortage of electricity across China.

China has one of, if not the most, technically sound and stable power grid systems in the world.

Again, know is that there is no shortage of electricity in China.

In terms of power grid stability and technical strength, China undoubtedly has the best power grid system in the world.

Let’s look at this past summer as an example of what we mean.  There was a grid load of 11 of the many provinces in the country that saw record highs.  The loads for Guangdong, Zhejiang, and Jiangsu broke 100 million kilowatts per day in July 2021.  This was greater than the loads of France or Germany – countries – not provinces.  The only power issue over the summer was Zhengzhou, when a substantial rain storm caused massive outages on July 20.  However, once the rain passed, power was quickly restored to the residents.

The power supply population is over 1.3 billion with a coverage area reaching 88 percent.  For urban areas, this means the power supply network can reach reliabilty of 99.97 percent.  For the rural areas, the reliabilty drops to 99.84 percent.

There are media outlets in the West making claims of regular power outages across China.  This is not the case and verges on blatant lies.  The power grid, as we said previously, is exceptionally strong and supplies over one billion people 24/7/365.

Those who have visited, lived in or have family/friends in China will certainly attest to a solid power grid with very few outages less and except equipment upgrades.

Sourcing Nova is based in Guangzhou, and in an average year, there is less than 10 hours of power outages.  The phenomenon happening now are 21 provinces and autonomous regions suffering loss of power because of an unforseen imbalance of supply and demand along with a collection of factors.

The power industry runs on something called the ‘energy impossible triangle.’  This means it is unpractical verging on impossible to meet the three demands of an energy grid:

  • Environmentally friendly and safe, clean and low carbon emissions — Generation
  • Stable, safe and reliable – Supply
  • Inexpensive and economical – Consumer usage

 

Think of this triangle as the same thing as the old adage of “Good, fast and cheap – choose two.”

  • Good and fast – not cheap
  • Good and cheap – not fast
  • Fast and cheap – not good

 

Combining all three is an impossible utopia.

Of all the developed nations in the world, China is likely to be the first to break this ‘impossible triangle’ with its national power supply grid and system.  What follows are the steps being taken within China, its research teams and government.

 

Generation

Technology will drive environmental friendly power generation.  China as the most efficient and cleanest thermal power plant, and in 2013, bested a Danish power plant for lowest coal consumption for generation.  More importantly – the plant continues to operate in that fashion.

Drawbacks from further technology advances are because of cost and other external factors.  The technologies are not appropriate for all power plants, but China’s technical understanding of power generation is leading the developed world – hands down.

 

Suppy

There is a solution for stability – nationwide dispatch.

The first half of 2021, North China sent 3.5 billion kWh to Central China (UHV) and 45.7 billion kWh to East China.  This was a year-on-year increase of 13.5 and 30.2 percent respectively.  Northeast China, using  inefficient wind power, sent 35.7 billion kWh to North China, down 13 percent year-to-year.

Central China, in the face of serious rain, sent 23.9 billion kWk to East China and 16.6 kWh to South China, a year-on-year decrease of 10.3 and 10.2 percent.  Northwest China sent 131.9 billion kWh to North and Central China, a year-on-year increase of 17.4 percent.  Southwest China sent 50.6 billion kWh to East China, a year-on-year decrease of 16.4 percent.

cross regional power transmission across china

cross regional power transmission across chinaThe power and gas transmissions from the west to the east, water diversions from south to north meant many Chinese were able to enjoy steaming bowls of soups, the A/C running, movies and games simultaneously – even in the face of the national scheduling issue.  It is this exchange that allows us to maintain the stable power grid so many enjoy.

 

Pricing

There must be a degree of stability and affordability for the consumer – be it personal or a business.

In the West, there are consequences for the mismatch between supply and demand.  The costs are always pushed down onto the backs and wallets of the end consumer, who see incredible price increases in their electrical power.

China uses a ‘base price + fluctuation’ model with a rise of no more than 10 percent and fall of no more than 15 percent in principle.  However since October 8, the range has increased to 20 percent across the board.

This does not mean pricing cannot be used to adjust supply but only to limit the surge and fall of pricing.  Setting aside time and space for controls and adjustment in pricing, this will lead to a better degree of stability for energy costs for the average person.

Herein lies the golden mean – a high stable power supply + power price stability – based on a unified command and dispatch – across an entire country.

It is a chess game of sorts because there are production and electrical shortcomings.  The pieces must remain on the board and cannot be moved without purpose and by the rules of the game.  Making certain this chess game and delicate balance is met will certainly test the energy grid’s decision making department’s forecaset of economic growth and energy consumption in 2022.

Sourcing Nova brings up these three points of the current state of electricity in the country not because of a better experience, but the generations of engineering has created the best and most stable power supply system in the world.  Will there be problems?  Certainly.  However, there is not a major panic within the country as some would have you believe.

This is all well and good.  Two questions remain: what are the phased issues; what cause the shortage?

Before we can provide you a complete understanding of those questions, you must understand the composition of China’s power grid.

As of now, October 2021, the power generation capacity is sufficient.  There is not a sudden increase in demand that will cause undue strain on the power grid.

Should there be a derth of power in a location within the country, the grid model above clearly shows that there is generation capacity and expandability for additional power should the need arise.

Back up to July 2021.  The national installed capacity of power generation was 2.202 billion kW.  This breaks down into the following:

  • Thermal – 1.246 billion kW, 56.6 percent
  • Hydropower – 370 million kW, 16.8 percent
  • Wind – 282 million kW, 12.8 percent
  • Solar – 254 million kW, 11.5 percent
  • Nuclear – 49.89 million kW, 2.3 percent

 

the composition of China’s power grid

Furthermore, thermal power can be broken down into two categories:

  • Coal – 1.079 billion kW, 49 percent of installed capacity
  • Gas – 99.72 million kW, 4.5 percent of installed capacity

There is a difference between installed capacity and power generation.  Hydro, wind and solar energy are dependent on the sky and weather, thus limiting the overall production.  Installed capacity cannot represent actual generation.

For the consumer, using coal to generate power provided 61 percent of the power generation and 49 percent of the capacity in 2020.  Wind and photovoltaics was roughly nine percent of power generation and 24 percent of the installed capacity.

2021 has had some abnormal weather.  This has yielded a much more exacerbated mismatch between installed capacity and power generation.

For the first eight months of 2021, the national installed capacity of power generation was 2.28 billion kW, with a 4.9 percent increase in hydropower capacity.

Hydropower, while efficient, has its limitations in China.  The main one is the majority of the hydropower generated comes from the southwestern portion of the country, where record high temperatures and scant rain fall cut into the hydroelectric capabilities.  This meant generation from power plants fell by one percent year-on-year.  The difference was, of course, made up with thermal power.

Wind power was above the national average in three of the northeastern provinces, specifically: Heilongjiang, Jilin and Liaoning.  There is a toatl installed capacity of 35 million kW and during the summer peak an output of 34,000 kW.  After September 21, the wind power generation capacity dropped below 10 percent of the power capacity.  The difference came from thermal power.

It is evident that any gaps and/or shortfalls with new energy methods defaulted back to thermal power and coal in particular.  Henan, Shaanxi, and Shanxi, the major coal-producing provinces, took on considerable rain fall this past summer, July specifically, and coal production was stalled.  Additionally, transportation of coal was temporarily set back.

the abnormal precipitation in Henan

The above graph shows the abnormal precipitation in Henan.

The weather patterns for this year have rippled across the globe.  Countries in Europe, dependent on wind and hydro, have significant gaps in power generation.  This has in turn led to natural gas shortages and skyrocketing prices.

natural gas prices are skyrocketing globally
Image Resource: https://www.cnbc.com/

The power shortage is, like we said, a global issue, and China is affected just as all other countries.

There is going to be a period of time with a mismatch of supply and demand as more countries transition to new energy structures.  Power shortages may not be the same across the globe for developed nations.  There will be a lack of power supply regardless.

Look to Europe and their economies as an example.  Most do not use natural gas, and electricity costs have more than doubled since the beginning of 2021 from a year previous.  In July alone, the following countries saw significant increases in electrical costs:

  • Italy – 166 percent
  • Spain – 167 percent
  • Germany – 170 percent
  • France – 134 percent

It should be noted that France had an electricity oversupply until this past year, and the country is facing a shortage like the remainder of Europe.  In the U.S., costs rose to $0.139 per kWh, and in China, prices are 0.52($0.08) to 0.62($0.10) yuan (U.S. dollar) per kWh.

 

Powerside generation changes

Powerside generation, there are three reasons for power shortages:

  • Low water led to a year-on-year decline in hydropower
  • Low wind led to a drop in wind power
  • High coal prices drove insufficient thermal power generation

There has been a serious upswing in China for environmental protection.  The once powerful coal-producing provinces have cut production or stopped operations completely.  Australia has rising coal prices.  Indonesia has had to reduce production because of exceptional rainfall rates.  South Africa’s violence cut coal exports and hurt an already tight supply.  Add to the mix increase in fees for sea freight because of the pandemic, and it becomes clear why coal prices have risen.

China and the government have not sat back and been idle.  The  National Development and Reform Commission has pushed for localities to increase coal mining, production and imports for domestic shortfalls.  As soon as coal production capacity returns to normal, any issues with power shortages will be rapidly resolved.

 

Supply side changes

 China Power is not organized for the market.  There is understanding that public utilities being market-oriented has disadvantages.  If power rates were 100 percent under the control of the market, power production plants could increase prices on a whim.  This would mean only those who could afford the prices could pay, and the rest would be left, literally, in the dark.  The Chinese government ensures that all citizens can afford their utilities.  This means “planned electricity and marketed coal” put undue pressure on enterprises.  The price fluctuation has tax cuts and fee reductions in place to help companies keep costs down and prices affordable for citizens.

Power works like this: Power plants sell electricity to the State Grid.  The State Grid in turn gives priority to protecting citizens according to regional development.  This translates to electrical costs for urban citizens of anywhere from 0.52($0.08) to 0.62($0.10) yuan per kWh.

Under normal years, the system has been highly effective.  However, coal prices and stable electricity prices have cost thermal plants a net loss of 0.1 yuan ($0.02) for every kWh of generated electricity.  The result is under-operated power plants.

The Director of the Price Department of the National Development and Reform Commission set out to make changes.  Reform will expand flucutations in market transaction electricity prices.  This means thermal plants, coal, will have prices not to exceed the current float of 20 percent, principle not exceeding 20 percent, not exceeding to 20 percent in principle and not exceeding 20 percent for market transaction prices for enterprices that use large amounts of energy for daily operations.

This means coal plants will be able to cover costs with price flucutation.  When market electricity prices rise, prices will go up for enterprises, in particular the upstream production enterprises.  This will also have an effect on the industriall producer price index, PPI.  The measures are conducive to inproving power supply and demand.

The improvements mean better guarantees for meeting power requirements for enterprises, provide stable production for the same, better market supply and price stability.  Granted, the short-term effects of the reform will yeild higher market transaction electricity prices.  However, the purpose of the reform is not higher prices but marketization of electricity for the country.

The reform is an important step for the market reform.  This means a market-based electrical price mechanism that works on the “can go down but up” method.  The restrictions and curtailments on power in some of China started a market-oriented reform on coal power generation on-grid tariffs.   The National Development and Reform Commission, on October 12, corrected the relationship between coal power and safe, stable electricity supply.  The reform also is meant to stablize electricity prices for the majority of citizens and farmers alike.  This means no increase in electrical costs.

Prices for other elements, such as those in the public welfare system, will remain stable as well.  Residents, schools, social welfare, community service centers, and the like that use residential electricity will keep the current price levels.  There will be no impact on the CPI, Consumer Price Index.

The National Energy Administration on October 8 made a news announcement noting that the measures on increased coal production have already produced results.  Where possible, production, supply and resumption in the coal mines are underway if conditions are favorable.  This also means relevant businesses and enterprises are speeding up as well.  Procurement plans, local governments sending service guarantees for procurement funds, transportation capacity, customs clearance and the like are strengthening the coordination of inter-administrative railway transportation as well as creating green channels for road transportation of coal.

Local governments have daily dispatch mechanisms for thermal coal purchese and take hold of inventory of thermal coal.  Additionally, there are plans to expand the scale of imported coal and push coal-deficient provinces to communicate with rail for transportation capacity.  The goal is the maximum amount of imported coal resources.

 

Demand side changes

We have already looked at power generation and supply.  Now here is the demand side.

First – the pandemic.

China is the only large-scale manufacturing base with a standard operating rate.  However, some issues are to be expected because of the abnormal rates of orders coming in from the rest of the globe.  A direct consequence – increased energy demand.  There is a conflict between economic growth and energy consumption, but there is a solution as well.

Industrial upgrading.

Relevant governmental departments create ratings on these manufacturers.  The rating has four grades: ABCD and are determined by output value per mu (667 sq. m. or 7,180 sq. ft.).  AB grade has a longer time, CD is smaller.  The higher the level, the more days you have to use electricity.  We have some high-end product manufacturers reporting back to us that the power shortage has had little to no impact on their production capabilities.

However, those manufacturers with high energy use and low output will certainly feel the pinch.

Winter is not far away.  Residents will need heating with coal and electric used for heating purposes.

The power shortage will be around for some time, and the Christmas season rush may be affected as well.  Certainly those companies with cheaply made products will have their supply chains affected and all but interrupted.

 

Final thoughts

The power shortage in China is due to an imbalance of supply and demand based on concentrated factors.  None of the problems are structural and are all controllable.  Government aid and intervention will facilitate the end of the issue in short order.

There will be some pain for the low-end manufacturing, and as China increases its environmental protection policies, these manufacturers could well be pushed out of business completely.

If you are serious about starting a new business and importing products from China, start with excellent product research on products that meet the three criteria listed:

  • High quality
  • Better technological content
  • Large profit margin

If you choose an industry with governmental support, you can be assured of a better and more stable supply chain.  The Chinese government favors industry with high technological content and brand value.  Those companies that invest heavily into R&D also receive favorable policies.