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ANALYSIS: China's energy intensity caps poorly timed amid ongoing fuel shortages

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ANALYSIS: China's energy intensity caps poorly timed amid ongoing fuel shortages

Highlights

Energy intensity curbs exacerbate coal shortages, high fuel prices

Decarbonization policies better suited for long-term energy goals

Energy intensity targets likely to get tighter in next five-year plan

China's latest measures to cap energy consumption have been widely blamed for causing the current power crisis, but the curbs more likely ignited a tinderbox of issues accumulating for months around soaring fuel prices and coal shortages, highlighting the difficulties in implementing energy policy in the context of a huge economy with numerous moving parts.

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The country's top economic planner National Development and Reform Commission announced Sept. 16 updated measures under its existing dual control policy that seeks to curb both energy consumption and energy intensity. This followed an earlier dual control scorecard issued in August that named provinces that had exceeded policy targets.

Energy intensity is the amount of energy consumed for each unit of GDP growth, and is a measure of the energy efficiency of an economy. It has declined over the decades as human energy use has improved due to better technologies. For instance, a unit of GDP growth 50 years ago would have needed much more energy consumption than today.

China's power sector had been facing a mix of surging coal prices, limited domestic coal stocks, industrial power demand rises after a post-COVID-19 economic recovery, and structural issues in the power grid and coal supply chain for months.

NDRC's energy curbs were issued in anticipation of more severe fuel shortages and disruptions after the lessons of the previous winter, and to try and resolve the imbalance by clamping down on energy intensive demand while efforts to shore up supply continue.

However, the timing of the curbs and their misinterpretation by the provinces underscore the need to better coordinate energy policies with market movements and deregulate coal and power prices to truly reflect increasing energy costs. The dual control plan is also better suited to improve China's long-term energy efficiency rather than short-term goals that are more likely to shock the system, experts said.

The plan not only aimed to tighten the dual control of energy use, but also allow for more flexible target setting and better alignment with China's climate goals, such as creating incentives to encourage renewable energy development, and developing a market regime for trading energy use quotas among provinces.

NDRC itself said in September that its updated measures were aimed at "better resource allocation and utilization in 2025, achieve significant energy intensity reduction and energy structure optimization in 2030, and establish a mature regime for resource allocation and energy saving in 2035."

Click here for our full coverage on China's power crisis

Dual control

The dual control policy has been in place for many years but only got the spotlight in the current crisis.

China proposed quantitative targets for both total energy consumption and energy intensity for the 13th five-year plan period 2016-20, which limited annual energy consumption to 5 billion mt of standard coal equivalent in 2020, and reduced energy intensity by 15% in 2020 from the 2015 level.

In 2020, the consumption cap was met, but China's energy intensity only reduced by 13.2% in the 2016-20 period, falling behind the target.

In March, NDRC released the outline of its 14th five-year plan, which proposed to further reduce China's energy intensity by 13.5% by the end of 2025. The cap for total energy consumption has not been specified yet, and is expected in the detailed five-year plan for the energy sector to be launched soon.

On Aug. 17, NDRC issued a notice that gave "red alerts" to 10 provinces that failed to meet either the energy consumption or intensity target. The provinces -- Guangdong, Jiangsu, Yunnan, Fujian, Shaanxi, Guangxi, Ningxia, Qinghai, Xinjiang and Hubei -- were required to take corrective actions, which resulted in them cutting power supplies, especially to energy-intensive industries.

NDRC issued Sept. 16 measures titled "The improvement plan of China's dual control system on energy consumption and energy intensity" that added to the pressure.

Under the September update, the approval and supervision of projects with an annual energy consumption above 50,000 mt of standard coal equivalent was tightened, and financial support to unqualified energy-intensive projects was halted.

The September plan also required authorities to tighten supervision and financing of "two high" projects -- involving both high energy consumption and high emissions -- that usually refer to coal-fired power projects and heavy industries like petrochemicals, chemicals, steel, non-ferrous metals and building materials that collectively account for more than 70% of China's CO2 emissions.

Two highs and bad timing

The provinces that received NDRC's red and yellow alerts in August account for about 70% of China's industry value added, according to a recent study by investment company China International Capital Corp., or CICC.

CICC said Guangdong and Jiangsu, which exceeded both energy targets, collectively account for more than 20% of the country's industrial capacity, and the tightened measures heavily impacted their chemicals, steel, non-ferrous metal and building material sectors.

The 13.5% energy intensity target under the 14th five-year plan implies China needs to support close to 5% annual GDP growth with an about 2% annual energy consumption growth, which is quite challenging, according to a report by securities company Tianfeng.

It said many provinces had already faced difficulties in 2020 when the 13th five-year plan's energy targets had to be met in the middle of a pandemic. In 2021, China's industrial production and export volumes both grew as the economy recovered and the tightened controls put many projects at risk.

The September policy acted as a trigger when severe power supply and fuel shortages had already accumulated for months.

Data from CICC showed China's current coal stocks in coastal regions can only support power supplies for about 10 days. This comes amid investors backing out from coal projects and record high coal prices. China's coal exports increased sharply in August by 168.5% year over year, according to customs data, exacerbating fuel shortages, as domestic coal suppliers were relying on exports to generate profits.

To achieve a smooth energy transition, China needs to ensure better coordination of its decarbonization policies with energy and commodity market movements. In particular, the market forces need to be better understood and managed in its energy transition plans.