TLDR: For a period of time in 2021, there were electric shortages throughout China. Especially in the North Eastern Provinces. China use coal extensively for both heating and power generation. Because of an unfortunate overlapping of policy changes (carbon neutral + market reform) and other factors, in order to keeping humans alive, factories were allowed limited work times and civilian uses were rationed. At its worst, there were on average 3~8 hours of downtime intermittently throughout the winter months. (Mostly Nov~Dec)*
Electricity is important. China is important. And I am going to make the naive assumption that happenings regarding China's Electrical grid system is at least somewhat important.
In addition, by looking at how a portion of the grid "failed", it would also shine on the effects of how some macro/foreign policy changes can have immediate and consequential effect on the life of the people.
I promise that by the end of this article[1]:
- You will have a slight better understanding of Chinese geography.
- What are some reasons behind the recent-ish (~2021) electrical shortage in China, especially what happened in the Three North-Eastern provinces. (historically referred to as Manchuria)
Yer a Power Plant Boss, Harry
Here what your life looks like if you ran a power plant in 2021:
- You get instruction from your "boss" telling you how much energy you should produce in any given period.
- Your profit margins are locked to roughly 0.03～0.2 RMB per kilowatt-hour at the best of times. Because you don't get to set prices - your margin is predetermined by your customer.
- You are not getting as much subsidies as before, because the cool kids running solar and wind are getting them. And because they are cool, the government is letting them into this new "market" economy thingie.
- You only have one customer, and that is the Grid (电网). Back in the old days, the plants and the Grid were basically the same company and had monopoly over all power in China; the good old days are gone, at least for you.
- You have long term contracts with your coal suppliers.
- Oh, did I tell you your boss and your customer is the same person?
So, what do you have to do when you are asked to produce power at a loss while running low on coal with limited supplies? You have a couple obvious choices:
- Just stop making electricity.
- Buy more coals and make negative monies (usually from the nearest coal depot, usually shipped by train and then "last-miled" in by truck often)
Depending on your specific location, proximity to train and docks availability, you could be limited to just buying them from inland. And if you are a SoE (State owned Enterprise) power plant, you are sufficiently detached from the money making matrix to not have second thoughts about this. However, if you are a private power plant, you may just take the reputation hit with your state superior and say "fuck it" and stop producing power. (At a slight cost to your social and physical health, as well as making your only purchaser unhappy because they look bad in-front of Chairman Xi.)
So, when you woke up on that fatefully day in Mid October, you realized the coal price for benchmark 5500kcal/kg coal have since doubled from its price from a few days ago. You knew you were the frog being boiled alive in the water of ever rising coal price - you just didn't know this day would come this quickly.
But why was coal a problem when China is its largest producer and top-3 importer? And why is there a shortage of electricity?
Coals Don't Grow On Trees
China gets coal in these following ways:
- Import it from overseas: Usually from Indonesia and Australia*. (More on the latter later)
- Move it from Inner Mongolia to where you want it: Usually to central distribution depots situated near Beijing and then either shipped to where you want them by rail, or in the case of the Southern provinces, shipped by ships.
- Inner Mongolia: [Resource rich, Poorer Periphery, Northern, Interior, Politically Non-influential]
- Beijing Area: [Resource poor, Richer Center, Northern, Coastal-ish, Politically dominant]
- Southern Ports near Shanghai: [Resource poor, Very Rich Center, Southern, Coastal, Politically important].
Sadly, as the saying goes, "[Trade] War is merely the continuation of policy by other means ". In this case, the war is waged against Australia, and the sad casualty of this war is the warmth and comfort of some citizens of China. I will not go into detail here, but it appears that the spat between China and Australia in 2020 is COVID related, and China was not all too happy about Australian Government making insinuations/veiled claims that COVID was potentially a Chinese bio weapon. It seems like the animosity goes back to 2017 because of alleged claims that China is influencing Australia internal politics.
Having rid of themselves of their largest coal import partner, China doubles down on Indonesian coal. Alas, Indonesia was not a perfect substitute, because the Indonesian coal are usually of a lower energy density than Australian coal (often quoted at 4200 vs 6000 kcal/kg). And Chinese coal powerplants rely on the 5500~4500 kcal/kg range of coals for power generation.
So far, the coal price have went up, quality has gone down somewhat. Surely things can't get anyworse.
The Sky is High, and the Chairman is Far Away - Literally
North-Eastern China is that awkward part of China sticking out in the top right. North of North Korea, and closer to Vladivostok than to Beijing for the most part, it is very awkward to ship to and it is very big (about Turkey sized). And is rather poor in terms of warm water ports.
Thou not too much out of the way when compared to the likes of Xinjiang and Tibet, North Eastern China is traditionally not considered a part of Chinese heartland. And is more of strategic importance than a vital part of the Chinese manufacturing ecosystem. So, it is often quite expensive to ship stuff to North-Eastern China from Beijing area relative to more central locations. Below, we have an excerpt from the National Development and Reform Commission from a while ago that illustrates how differential pricing changes have really made shipping stuff expensive to the peripheries.
"In Ten years, price goes up in at least Nine of them: [it is] railroad freight price adjustment program again. Reporters recently from the Development and Reform Commission and the Ministry of Railways jointly issued the “Ministry of Railways on the adjustment of railroad freight tariffs notice” was informed that the national railroad freight prices from February 20 onwards, the average tariff level per tonne kilometer to increase by 1.5 cents, an increase of 13%. It is reported that the adjustment is mainly for the general line; the Daqin, Fengshada, Jing-Yuan and other four lines of coal transportation line remain unchanged."
- China Energy News Monday, February 25, 2013Oh, those coal train lines were exempted from the price increase? None of those goes to North-Eastern China. And without the infrastructure to take advantage of waterway shipping, life kinda sucks.
And being the boss of a power plant that runs on a minimal margin, this might just be the kinda of straw that would broke your back and bring darkness to Manchuria.
This is Not Everything, But I Don't Know to to End This, So God Bless You and God Bless America
What have we learned?
- High Transportation Cost: North-Eastern China is out of the way, and is poor in navigable waterway.
- Life in the low margin business just sucks: Especially when you have next to no negotiating power against your customer and boss.
- Policy Risk is high in the Chinese Energy Business: There is very little room to say "no" in this line essential business ("What you want to freeze people to death?"), and they can be easily crippled by a sudden shift in domestic or foreign policy.