China faces energy risks – price controls come at a price

Despite drastic measures to boost coal production, China could face further power shortages this summer. This is because most of the new supply is of lower quality and burns faster in power plants.

China, the world’s largest coal consumer, gets 60% of its electricity from coal.

Last year, a drop in domestic coal production triggered a weeks-long energy crisis that has since affected output in the world’s second-largest economy. Beijing has ordered an increase in coal production to record levels and capped the price of coal to ensure power producers are affordable.

But traders said the price peak urged miners to prioritize coal supply over quality.

There is not much incentive for miners to produce high-quality coal. The gross margin is very low due to the high price. Their top priority is to produce enough coal to meet the targets set by the government.

Steam coal with a calorific value of more than 5,500 kcal/kg is referred to as high-heat coal.

Power plants also prefer low-quality products, which are cheaper and help reduce power generation losses, according to Yu Zhai, senior adviser at Wood Mackenzie.

While China is the world’s largest coal importer and the second-largest importer of liquefied natural gas (LNG), it mainly uses domestic fuels to meet its energy needs and controls local energy and fuel prices as well as domestic coal production to ensure that sufficient energy is available at an affordable price.

Following last year’s energy crisis, domestic coal producers have boosted output to record levels, state planners said. As a result, Chinese utilities’ coal inventories rose 50 million tons year on year to 159 million tons in May.

However, there was no direct data on the amount of low-temperature coal in storage.

As industrial activity picks up following the recent COVID-19 lockdown, traders say a higher proportion of lower-quality coal means there may not be enough coal available to meet significantly higher energy demand.

The China Electricity Council predicted in April that many regions, including southern and eastern China, will experience power shortages during the summer rush hour.

In the northern provinces along the Yangtze River, energy consumption has already increased due to the warmer climate. Regions such as Henan, China’s third most populous province, will be severely tested to meet electricity demand.

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