Prolonged drought in China's Yunnan province likely to worsen hydropower shortage

China's Yunnan province, the country's second largest hydropower producer after Sichuan, has been facing a prolonged drought that could worsen in coming weeks, forcing it to ration power supply to domestic industries and neighboring provinces, according to market participants, government announcements and state media reports.

Yunnan exports hydropower to coastal provinces like Guangdong and Guangxi, and a drop in supply ahead of summer could force these provinces to seek more alternative fuels like coal, oil and LNG. A similar hydropower crunch in Sichuan in August-September 2022 led to large-scale power rationing within the province and reduced electricity exports.

China's manufacturing hub, Guangdong province, has the country's highest GDP and electricity consumption, which totaled 787.03 TWh of power in 2022, local government data showed Feb. 7. This also means it has to rely on hydropower imports from Yunnan despite having one of the largest installed capacity in the country.

Yunnan had 81.12 GW of installed hydropower capacity as of the end of 2022, the second largest after Sichuan province's 97.49 GW, according to industry data.

Yunnan generated 374.79 TWh of electricity in 2022 from major power plants, of which 81% or 303.88 TWh was hydropower, which rose 11.6% year on year. Thermal and solar power generation were 45.91 TWh and 3.75 TWh in 2022, up 1.1% and 3.1% year on year, respectively, while wind power generation was 21.25 TWh, down 8.4% year on year, provincial government data showed.

According to a forecast analysis report released by the Kunming Power Trading Center on Feb. 16, Yunnan plans to export 145.2 TWh of electricity to southern coastal provinces in 2023, with another 4 TWh that can be exported or kept for local use. Yunnan exported 181.69 TWh of electricity in 2022, accounting for more than 40% of its total power supply, according to local government data.

Yunnan has plans to put another 28.21 GW of renewable power generation capacity into operations in 2023, but this could be impacted by insufficient policy incentives and exacerbate tight power supply, Kunming Power Trading Center said.

In the first half of 2022, Yunnan delivered a total of 55.99 TWh of electricity to Guangdong, accounting for 15.7% of Guangdong's power consumption of 355.61 TWh during the same period, according to data from state-owned Xinhua News Agency and Guangdong provincial statistics. Full-year data is not yet available.

"If power supply from Yunnan reduces this year, Guangdong will have to ramp up its own power generation to ensure local supply," a market source in capital Guangzhou said, adding that gas-fired power could be a short-term option.

Guangdong province has one of the highest concentrations of gas-fired power generation capacity in China at around 28.38 GW at the end of 2020, according to local government data. This accounts for around 29% of the country's total gas-fired capacity of around 98.02 GW, based on data from CNPC Economics and Technology Research Institute in 2021. Guangdong imported 177.2 TWh of electricity in 2022, accounting for 22.5% of total consumption of 787.03 TWh in the year, according to data from S&P Global Commodity Insights.

Worsening drought

Average precipitation in Yunnan in January was 96% lower than the previous year, and the lowest in five years, Yunnan Hydrology and Water Resources Bureau's said on Feb. 8. It said the number of regions in the province with moderate or above average drought may increase and the drought will worsen through February.

Prior to this, Yunnan Provincial Department of Water Resources held talks on mitigation of natural disasters on Feb. 3, in which it said that the possibility of a drought and floods in Yunnan this year is expected to be greater than in previous years, the department said in a Feb. 6 notice.

There has been no significant precipitation in most parts of Yunnan since the beginning of 2023, and the drought has been developing rapidly, with total precipitation in the province this year expected to be lower than previous years' average, it said.

There are about five months of rainy season in Yunnan from June to October, five months of dry season from December to April, and two months of shoulder period in May and November, which means the province is already halfway through the dry season.

Power rationing

Yunnan exports electricity to neighboring provinces under contracts. "These power transactions are fixed via long-term intergovernmental agreements, which should be given priority," Caroline Zhu, senior low carbon electricity analyst with S&P Global said, adding that power from Yunnan is less expensive than other local sources.

Yunnan has already imposed power rationing to primary aluminum smelters, which account for around 42% of the manufacturing industry's electricity consumption in the province, over Feb. 18-19, due to shortages, forcing them to cut capacity, S&P Global reported.

The utilization rate of hydropower units in Yunnan was already under 50% in the dry season, and a prolonged drought could result in power rationing to other sectors.