China's coal-fired and gas-fired power plants struggled to boost electricity production despite record summer demand through July as regulated tariffs prevented them from passing on surging coal and gas prices to consumers.
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This means that despite the risk of blackouts and scorching temperatures in July, power companies were unable to fully ramp up electricity generation, and LNG, gas and coal imports had limited room to grow.
Many gas-fired plants in China are considered ideal for peak shaving, or meeting surges in peak power demand. Despite that they operated at lower capacity than coal-fired power plants, which account for more than 60% of China's total power supply. Coal-fired plants did not run at full capacity either, according to several domestic utilities.
One power producer which runs about a dozen plants in southern China, said operating rates at its coal units were around 70% and at its gas units were around 50%-60%.
Deep losses have constrained the operating rates of many of China's gas-fired power plants as their break-even price is around $7-$8/MMBtu, but the spot LNG price has surged to above $14/MMBtu, sources said.
"Gas-fired power generation in China is likely not impacted much by the recent high temperatures. In June, there was a similar situation in southern parts of China, and the Guangdong province even introduced a policy change to allow higher generation from gas-fired power plants," André Lambine Senior Analyst, Global Power Analytics at S&P Global Platts, said.
"However, we estimate output from Chinese gas-fired power plants actually shrank from 36 GW in May to 33 GW in June; even though overall power generation increased by 82 GW month on month," he said, adding that there was limited upside to gas plan utilization during recent heat waves.
A source with a Chinese national oil company said downstream gas demand in China had eased in the past two weeks, and with typhoon In-Fa expected to hit Guangdong region over the weekend, temperatures would fall further.
"Two weeks ago we saw China's power load going up but now it has come down; gas inventories in south China have even gone up due to the recent typhoons," the person said.
Coal capacity constraints
"Many factors have been discouraging power plants' operating rates, which include generation losses and feedstock shortage," a source in the coal industry said.
"The break-even coal price for many coal-fired power plants is around Yuan 600-650/mt, but the coal price has far exceeded this level currently, which means that the more power they generate, the more losses they will incur," the source said, adding that firms were cautious of stocking coal inventory at such high prices as they depend on bank loans to purchase feedstock amid poor finances.
The S&P Global Platts Northeast Asia Thermal (NEAT) Coal Index hit an all-time record high of $125/mt on July 22 due to tight supply, strong demand and high international coal prices.
Although the government has tried to lower coal prices by releasing reserves and encouraging imports in the past two months, the thermal coal index on the Zhengzhou Commodity Exchange rose to around Yuan 900/mt this week, near its record high of around Yuan 950/mt in May, up more than 70% from last year.
"I think there is stronger demand for cooling at the moment in China given the higher temperatures," Matthew Boyle, Manager, Global Coal and Asia Power Analytics, said. He said however, coal transportation was impacted by the flooding in central China, delaying the recovery in production.
"This could be supportive for higher thermal coal imports for August, but given the high coal prices, Platts Analytics believes domestic Chinese power utilities are already facing downside risk on generating margins. This might not see a large rise in seaborne import demand in August," Boyle added.
Record high demand
China's power generation hit a record high of 27.2 TWh on July 14, an increase of 4.5% from the previous record, with peak-load capacity also hitting a record high of 1,192 GW the same day, state-owned Xinhua News Agency reported on July 19, citing top policy planner National Development and Reform Commission.
The power load at three regional power grids -- East China, Central China and South China, and twelve provincial power grids including Hebei South, Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Hunan, Jiangxi, Guangdong, Shaanxi, and Ningxia all hit record highs, Xinhua said.
It said peak-load capacity in the provinces of Guangdong, Jiangsu, and Zhejiang hit 13.4 GW, 12.1 GW and 10 GW, respectively, and peak-load in Zhejiang province rose by 8.1% year on year.
A heat wave has been sweeping across the country from early July, and China's Meteorological Administration issued high temperature warnings for over 18 provinces since early July.
More than 22 cities in the country, including Beijing, Guangzhou, Shenzhen, Chongqing, Xi'an, have issued schedules for alternating power outages by region and location over July 12-30, according to local media, which reduces the strain on power grids and prevents large-scale blackouts.