Analysis: How power shortages might ‘accelerate’ China’s climate action

§ What are the leadership’s instructions?

Last Friday, the State Council – China’s highest organ of state administration – issued six specific orders to deal with the power shortages in a meeting chaired by Premier Li Keqiang, according to state media and the government’s website.

The meeting was followed by another high-level meeting chaired by Li with the National Energy Committee on Saturday, which this article will discuss below.

By Friday, at least 20 out of the country’s 30-plus provincial-level regions had experienced blackouts and electricity rationing over the space of a month or so, according to Jiemian News, a Shanghai-based outlet. This round of power cuts occurred not long after the last round in summer (read Carbon Brief’s China Briefing from 3 June for more) and has affected an estimated 44% of China’s industrial activity. Reuters reports that the “energy crisis” is expected to “last through to the end of the year”. 

In the three provinces in north-eastern China – namely Liaoning, Jilin and Heilongjiang – the electricity shortages have caused disruption to people’s livelihood, with residents reportedly seeing their household electricity cut off suddenly without notice for days. The three provinces, described by the media as “China’s rust belt”, have a combined population of nearly 100 million and are the traditional backbone of the country’s heavy industry.

Analyses from Chinese media outlets – including Caijing, Caixin, the Paper and Jiemian – have attributed the outages to a mix of factors, such as power-generation shortfalls and a rush from local governments to hit their energy-control targets. One Beijing-based expert tells Carbon Brief that the “fundamental cause” is a lack of coal supply.

The State Council gave the instructions during an executive meeting, state broadcaster CCTV reports. The official channel says that the meeting “made further arrangements for the supplies of electricity and coal for this winter and next spring to ensure the basic life of the people and the smooth operation of the economy”, among other topics. 

Six instructions from China’s State Council (edited translation of original text)

1. To give priority to people’s livelihood, guarantee people’s daily life and the energy for heating in winter and, in particular, ensure the coal and energy demand for winter in the north-eastern regions be fulfilled. (一要坚持民生优先，保障群众生活和冬季取暖用能，特别要确保东北地区冬季用煤用电。)
2. To promote those coal mines with the potential to release their production capacity and accelerate the commissioning and full-capacity production of those open-pit coal mines that have been approved and largely completed – under the precondition that the production is safe. The transport departments must prioritise that transport for coal is guaranteed. (二要在保障安全生产前提下，推动有潜力的煤矿释放产能，加快已核准且基本建成的露天煤矿投产达产。交通运输部门要优先保障煤炭运输。)
3. To support the increase of electric power supply from coal power enterprises. (三要支持煤电企业增加电力供应。)
4. To reform and improve the market-based mechanism for the prices of coal power. (四要改革完善煤电价格市场化形成机制。)
5. To push forward the construction of large-scale wind-power and photovoltaic bases and prepare the coal, gas and oil reserves. (五要推进大型风电、光伏基地建设，做好煤、气、油储备。)
6. To resolutely contain the blind development of dual-high projects. (六要坚决遏制两高项目盲目发展。)

Yuan Jiahai, a professor at the School of Economics and Management of North China Electric Power University in Beijing, tells Carbon Brief that this round of power rationing was driven by a “mismatch between the growth of energy supply capacity and the growth of energy demand, which led to a hard gap in coal supply and a large-scale power supply shortage”. 

Prof Yuan, a seasoned Chinese energy policy expert, says that in the 13th Five-Year Plan period from 2016 to 2020, China underwent a “structural reform” on the supply side of the coal industry to “dissolve excessive coal production capacity”. (According to Xinhua, by the end of 2020, the reform had retired about 5,500 coal mines identified as using “backward” production methods, which represent one gigatonne of coal production capacity.) In comparison, on the demand side, China’s post-Covid economic rebound and soaring export orders drummed up the country’s energy consumption. 

Prof Yuan says that “the fundamental cause of the large-scale power shortages in China currently…is the insufficient supply of coal”.

Coal supply scarcity led to surging coal prices. Expensive coal, in turn, forced coal-power companies – which have to sell their electricity at largely state-determined prices – to cut back their production to avoid financial losses, causing the electricity shortfalls amid growing demand, according to Prof Yuan. 

Speaking of the State Council meeting, Prof Yuan explains to Carbon Brief how the leadership aims to tackle the problem with the six instructions. He says that the first instruction is the government’s “fundamental goal” while facing a “hard gap” in coal supply. 

The second, third and sixth – namely to boost coal supply, contain energy-intensive industries and increase power supply – are “direct protective measures”. The fourth instruction addresses the long-term financial losses of coal-power generators. The fifth is a “long-term mechanism” to accelerate renewable energy development and the capability to provide strategic energy reserves.

Dr Yang Muyi, senior electricity policy analyst of Asia at Ember, an independent climate and energy thinktank, tells Carbon Brief that the central government’s instructions are “very targeted”. He says: 

“These six instructions can be divided into two parts. One part solves the short-term problem of power shortages by increasing the production of coal. The other part seeks to expedite the deployment of clean replacements for coal, including wind and solar power, with a view to progressing energy decarbonisation in a timely and orderly manner over the long run.”

Dr Yang points out that the “energy crisis” has exposed some areas for improvements in China’s governance system for the energy transition. In particular, he says that the current system mainly relies on setting mandatory targets. Although the method is widely considered effective in mobilising large amounts of resources for “cleaning up” the energy sector, it sometimes lacks the flexibility required to deal with the changing complexity involved in energy decarbonisation. Moreover, there is a gap between the rate at which China has been managing its use of coal and developing “green replacement energy forms”, which contributed to electricity shortages, Dr Yang says. 

Hong Kong-based David Fishman, manager of the Lantau Group, an energy-focused strategy and economic consulting group, tells Carbon Brief that the second, fourth and sixth instructions from the State Council are “important”.

Fishman explains that the second and fourth orders speak directly to the problem of coal scarcity. At the same time, he says the sixth order “acknowledges that the ‘dual-control’ measures were implemented without finesse or sophistication and demands that such overzealous behaviour be curbed”. 

As the widespread power curtailments unfolded, the National Development and Reform Commission (NDRC), the state macroeconomics planner, last month issued new instructions to “improve” the “dual-control” policy. The move aimed to prevent electricity rationing and production suspension as a result of curbing emissions. (Read China Briefing from 30 September for more.)

Fishman explains further: 

“From a governance perspective, number six is the most significant. It is an admission that the ‘dual-control’ policies were mismanaged, that there was ‘blind development’ (盲目发展) of these goals, and this must be changed. 

“From a power systems transition perspective, number four is the most significant. This is the first time China has passed fuel costs directly onto end-users, which will inspire them to change their consumption habits.”

§ Electricity prices reform ‘deepens’

Although the power crunch has highlighted a host of issues, it might also accelerate the country’s climate actions by potentially fast-tracking the electricity market reform and renewable development, according to the China experts Carbon Brief has interviewed.

Prof Yuan says that the electricity shortages have underscored that reform is needed to fully introduce a free market economy into China’s electricity market. He believes the most important instruction is number four, which revises the prices of coal-fired power. 

The instruction orders the country to “promote all coal-fired electricity generation to enter the electricity market”. In addition, it allows coal-fired power prices to fluctuate by up to 20% from baseline levels – compared to the 10% upward limit and 15% downward limit previously – provided that residential, agricultural and charity-purpose electricity prices are stable. Prof Yuan says that such a measure would increase companies’ “willingness” to generate electricity and guarantee electricity generation. 

In China, electricity prices had always been strictly controlled by the state until December 2002 when the State Council published a plan to reform the electric power system. The plan – for the first time – introduced a partially market-oriented pricing mechanism in an effort to build an “open”, “orderly” and “healthy” government-supervised electricity market system that could see “fair competition”. 

About two years ago, the State Council took further action to push China’s electricity market reform. In September 2019, a State Council executive meeting said that China would establish a market-based electricity price mechanism to lower power costs for enterprises. The meeting said that China would abolish the coal-electricity price link and establish a market-based system composed of benchmark and fluctuating prices from 1 January 2020. 

The fluctuating limits set by this meeting in 2019 – capped at a 10% increase and a 15% decrease – were the ones that have just been revised. 

And, according to Prof Yuan, the baseline prices referred to by the State Council last Friday are the on-grid tariffs – the price agreed upon between an electricity-generating enterprise and an electricity purchaser for the electric power uploaded to a grid – at the end of 2019. 

Apart from the new 20% price fluctuation cap, the State Council also ordered that the electricity prices for “dual-high” industries would be determined by the market and not be restricted by the upper limit. Prof Yuan comments:

“The majority of the participants in the trading of the electricity market are energy-intensive enterprises from industries, such as iron and steel, cement and electrolytic aluminium. To remove its 20% price increase limit is to use the industrial policy attributes of electricity prices to contain ‘dual-high’ industries further.”

On Tuesday, the NDRC released a notice to flesh out the State Council’s instructions four days earlier. 

The official document, dated 11 October, largely matches the State Council’s instructions. But it carries a few extra orders. For example, it instructs that the on-grid tariffs of all coal-fired electricity generation should be “loosened in an orderly manner”. It also commands all industrial and commercial users to enter the market-based pricing mechanism and says the catalogue electricity price – the end-user price for regulated users determined by the government – should be abolished. 

Wan Jingsong, director of the NDRC’s pricing department, described this reform as “yet another important step made by the electricity marketisation reform”. At a press conference on Tuesday, Wan said that the “core” of the reform is that it intends to establish a market-based mechanism that would allow the prices “to increase as well as fall”. 

The notice overrides any conflicting instructions and will take effect from 15 October, according to the NDRC.

§ ‘Energy security’ is the ‘pre-condition’

One day after the State Council executive meeting on 8 October, Li chaired another meeting with the National Energy Committee (NEC), CCTV reports. 

Before Saturday, the commission had only held four meetings since its foundation in 2010, 2014, 2016 and 2019. According to an article on China Dialogue from 2019, each of the NEC’s first four meetings took place at a “critical time” of the country’s energy development planning and left “marked impacts” on the energy industry for the following few years.

CCTV says that Li, the commission’s director, convened the latest NEC meeting to discuss and assess several government plans, including the 14th Five-Year Plan on developing a “modern energy system” and the energy sector roadmap for emissions peaking.

The official channel names a list of senior officials who participated in the meeting. It says that Han Zheng, China’s vice-premier and the NEC’s vice director, attended the meeting. Han directs China’s climate change affairs and is the leader of China’s climate “leaders group”, which was established by the central government in late May.

China’s other three vice-premiers, Sun Chunlan, Hu Chunhua and Liu He, took part in the meeting, too. Noteworthy participants also included State Council members Wang Yong and Xiao Jie, foreign minister Wang Yi, plus NDRC’s director He Lifeng. 

It is unclear whether the timing of the meeting is linked to the power shortages, but it put forward relevant directives, particularly the order to bolster “energy security”. 

According to CCTV, Li instructed that the country should “assess its own situation to make overall plans to stabilise growth and adjust structure, deepen market-oriented reforms in the energy sector, promote the green and low-carbon transformation of energy, improve safety assurance capabilities and provide a solid support for modernisation”.

Additionally, Li urged that the country stick to a “single game” and avoid “a false start” in its climate endeavour. He called on certain regions to rectify their “one-size-fits-all approach (一刀切)” and “campaign-style carbon reduction” – two phenomena the central government had repeatedly criticised. He demanded officials make sure that people in northern China can “have a warm and safe winter”.

Dr Yang from Ember thinks that Li mainly highlighted the urgency of eradicating the “one-size-fits-all” and “campaign-style” emissions reduction measures. He notes that China’s Politburo had pointed out the issues in a meeting in July (see Carbon Brief’s explainer on this), but the recent power shortages further exposed their drawbacks. Dr Yang adds: 

“The instructions from the premier stress the significance of energy security. Sufficient and reliable energy supply is essential for socio-economic development, and a strong development is ‘the foundation and key to resolving all issues’. [His instructions] elevate energy security to the national security level, implying that the decarbonisation of the energy sector must be based upon the assurance of secure energy supply.”

Li also gave out specific methods to solve the problems, namely to fast-track the development of renewable energy and energy consumption efficiency, according to Dr Yang. He adds that those measures echo one of the instructions given by the Politburo in July: “establish [new rules] before breaking [old ones] (先立后破)”. He explains: 

“[Premier Li’s instructions] aim to [use the development of the renewable sectors] to force fossil fuels to phase out in an orderly manner, based on the growth of green energy and energy-saving. [Such a move] can prevent energy supply issues driven by the blind curtailment of fossil energy production.”

Li’s directives on Saturday have attracted much attention from global media outlets, with some saying that those instructions may imply that China is having a “rethink” of its pathway towards carbon neutrality.

Reporting on the meeting, the Guardian says that “China plans to build more coal-fired power plants and has hinted that it will rethink its timetable to slash emissions, in a significant blow to the UK’s ambitions for securing a global agreement on phasing out coal at the COP26 climate summit in Glasgow”.

Bloomberg also says that “China’s widening power crisis…is prompting policymakers to rethink the pace of the nation’s energy transition”. MailOnline has a similar story titled: “China plans to build new coal-fired plants after blackouts last week in a move set to cause alarm ahead of the COP26 summit in Glasgow”.

However, Carbon Brief has read through Li’s full instructions at the NEC meeting – as reported by state news agency Xinhua – and did not identify the order of planning to build “new” domestic coal-fired plants on top of the ones that are already in the pipeline. (According to the latest Global Energy Monitor figures, there is 97GW of coal-fired power capacity under construction and another 163GW in earlier stages of development in China.) 

In a relevant paragraph in Xinhua’s report, Li directed the country to “optimise the overall arrangement of the coal production capacity” and “build advanced coal-fired power [plants] and phase out backward coal-fired power [plants] in an orderly manner based on the reasonable developmental needs”, Xinhua says. A separate statement on the government’s website is a copy of the Xinhua story.

Dr Shi Xunpeng, principal research fellow at the Australia-China Relations Institute, University of Technology Sydney, tells Carbon Brief that he does not think China is having a “rethink” of its climate strategy. Instead, he notes that it is a good thing that the Chinese government is “adjusting its pace” for its energy transition and climate actions. 

Dr Shi is also president of the International Society for Energy Transition Studies, a non-profit organisation based in Australia focussing on low-carbon energy transition. He explains: 

“Energy transition is a complex systematic project. Its process will be full of uncertainty and it will be hard [for a country] to stick to a predetermined goal and roadmap without any changes. On the contrary, [a country] must make timely adjustments based on the changing situation.” 

Dr Shi says that Li’s address is “not surprising”. According to him, the speech likely indicates that – from a policymaking perspective – China’s leadership have realised that their policies had been “distorted” during the implementation. 

In a column for Caijing, a Chinese financial outlet, in late September, Dr Shi had already made similar propositions. He underlined that “it is important for the authorities to make necessary, top-down adjustments for policy goals and implementation measures to avoid campaign-style carbon reduction behaviour that is not consistent with the country’s developmental phase”. 

Fishman from the Lantau Group believes that this round of power rationing could actually be “positive” to the country in the long run. He says:

“Beyond the short-term policy measures, this episode of power shortages will change the way Chinese power sector stakeholders view coal as a fuel source, which would have positive outcomes for the long-term decarbonisation goal”.

Prof Yuan from North China Electric Power University agrees that the main purpose of the NEC meeting is to ensure that the previous order of “rectify[ing] campaign-style carbon reduction” will be understood and carried out. He says that the meeting was “held against the backdrop of large-scale power rationing and production curtailment nationwide”, so the focus “naturally fell onto energy security”. Prof Yuan quotes what he thinks is the most significant directive from Li:

“China is still a developing country. In the current stage, industrialisation and urbanisation are deepening and, inevitably, energy demand will continue to grow. [Therefore, we] must treat the assurance of security as the precondition of developing a modern energy system and increase our self-sufficiency.”

§ Implications of more coal supply

The State Council executive meeting last Friday – the first out of the two meetings chaired by Li – instructed the country to boost its coal production. On the same day, Reuters reported that the local energy regulator of Inner Mongolia – China’s second-largest coal-producing region in 2020 after Shanxi province – required 72 coal mines to “accelerate releasing production capacity”. (Inner Mongolia had already ordered dozens of closed coal mines to reopen in summer. Read China Briefing from 26 August for more.)

Also, on Friday, the National Energy Administration (NEA), the state energy regulator, told China Power News Network, the NEA’s official publication, that China’s measures to boost production and supply had seen “substantial results”. The authority said that in line with orders from the central government, 120m tonnes of coal production capacity had been “gradually released” since August. 

The series of reports emerged as China’s use of coal has gathered much attention in the lead up to COP26. Many international diplomatic figures – including John Kerry, US president Biden’s climate envoy, COP26 president-designate Alok Sharma and UK prime minister Boris Johnson – have called on Beijing to step up its phaseout of coal, especially on the domestic front.

Explaining what increased coal output means for China’s climate goals, Fishman says: 

“[China’s] coal-fired power plants have been running at reduced loads because of the expensive coal. Mining more coal alleviates the scarcity issue and brings carbon emissions from burning coal back to the level they were before the power shortages.”

Fishman says, from his standpoint, “it’s safe to say that China will make very strong efforts to meet its domestic and international pledges”. He continues:

“Based on the events of the recent weeks and months, I think there’s a strengthened case for coal playing an even smaller role than previously planned. The annual renewables growth targets were already incredibly ambitious; they might have to get even more ambitious.”

Prof Yuan tells Carbon Brief that expanding coal production “appropriately” to ensure stable energy supply adheres to President Xi’s recent instructions on the coal sector. Specifically, it reflects Xi’s directive for the coal sector to safeguard the “bottom line” that is the country’s “energy supply security”. 

Dr Yang says that the instruction is “a necessary measure” to stabilise the coal market “in the short term” to ease the “electricity supply crisis”. He says that it is also “a must” for ensuring economic growth and social stability. 

Dr Yang also stresses that the government has not “loosened its grip on its energy decarbonisation” because the instructions “underscore the further acceleration of the development of green energy”.

The increase in coal production may seem to “go against the dual-carbon goals in the short term”, but it is in line with China’s goals in the long run, according to Dr Shi. He says:

“Energy transition needs to put people first. The transition will only be sustainable under the precondition that it could ensure the supply of affordable energy. Therefore, increasing coal supply seems like a step back, but, in fact, the act itself is experience gained [by China] in its pathway of seeking sustainable energy transition.”