China’s electricity crisis: a new global pandemic pushing energy prices to unprecedented highs

What initially appeared to be some good news eventually led to the emergence of a major energy crisis in China, a crisis which spread to the rest of the world with an explosive increase in energy prices, especially natural gas prices.

Indeed, China’s strong post-Covid economic recovery has led to a surge in demand for electricity… at a time when the country has been making serious efforts to limit the use of coal in order to meet its climate change targets.

However, coal still provides around 60% of the country’s electricity! Between coal mine closures, an unofficial embargo on coal imports from Australia, and provinces having to meet greenhouse gas emission reduction targets, all in a context of electricity prices capped by the central government, it didn´t take long for the result to show: several major Chinese cities are experiencing severe power cuts.

Chinese gas companies then embarked on a hunt for LNG cargoes, with the resulting consequences for Europe: with the markets anticipating massive shortages for the winter, gas prices reached an all-time high of 159 euros/MWh in early October, before falling back below 100 euros/MWh.

Can we expect a quick return to “normality”, especially with the upcoming commissioning of the Nord Stream 2 pipeline?

Nothing is more uncertain…

China is prepared to pay big for its gas supply, as large, wealthy southern industrial provinces, such as Guangdong, and mining regions in the northwest implemented electricity rationing measures that have caused widespread public concern and threatened to plunge the economy into chaos, the press reported.

But this time, residential areas are also affected by power cuts, something that has not happened for nearly a decade.

China is the world’s largest consumer of energy and the largest emitter of greenhouse gases and has stated its ambition to reduce its emissions from 2030 onwards, and then to reduce its net emissions to zero by 2060, a promise made by Chinese President Xi Jinping at the United Nations.

The current electricity shortage experienced in China is the result of a policy which the country has been pursuing for several years to become less dependent on coal. About five years ago, Beijing began planning the gradual closure of mines concentrated in the northwest of the country. At the time, China’s mining industry was producing too much coal and therefore had a very negative environmental impact. It also had a very bad reputation because of numerous fatal accidents.

However, by the end of September, China’s six major national energy suppliers had barely enough coal in reserve to cover for the country’s needs for a fortnight. The situation is even worse in India, with less than eight days’ supply.

The tensions in the Chinese, Asian and European energy markets have a common origin, linked to the economic recovery. Factories have started to operate at full capacity again, leading to a surge in electricity demand that cannot be met by the energy supply.

As winter approaches, the demand for gas has led to a rush for LNG. Qatar has warned that it faces huge demand from all its customers, and cannot meet everyone’s needs, with LNG tankers queuing up outside the country… A bidding war is being set up between Europe and China, with the latter willing to pay high premiums over the European benchmark.

And this is happening at a time when gas stocks in Europe are at their lowest seasonal level for more than a decade, due in particular to the cold winter of 2020-21, even if the storage reform in France has enabled satisfactory levels to be maintained here.

Some other factors are at work in Europe, with supplies from Russia – Europe’s balancing producer – currently limited. As a result, gas prices have increased fivefold between September 2020 and September 2021.

Nevertheless, the start-up of the Nord Stream 2 pipeline, which was recently completed, could eventually ease the shortage in Europe. However, it will take several more months for the pipeline to become commercially operational. Uniper, for example, has stated that the new pipeline will not help ease the strain on Europe’s gas supply this winter…

The two Nord Stream pipelines will allow for a direct supply of Russian gas across the Baltic Sea to Germany – without using the mainland route via Ukraine… Work on the Nord Stream 2 pipeline was halted due to US opposition and sanctions but was resumed and completed in September 2021. The pipeline will provide access to new Russian gas reserves in the Arctic.

In the meantime, European governments are planning national support schemes for their citizens, including subsidies, price caps, etc., to soften any impact as the Covid-19 crisis emerges. But given the size of the price differential to be absorbed, and the still strong opposition to what is perceived as a fossil fuel like any other, it is doubtful that these approaches will be able to quickly curb the rise in gas prices.

It is not surprising that nuclear power is back in favour with politicians, as a way of reconciling the reduction of greenhouse gas emissions with access to abundant electricity. The only problem is the time it takes to build new power plants, with a timeframe of 10 to 15 years!

In the short term, as far as gas is concerned, only V. Putin’s Russia could relieve the pressure. However, Nord Stream 2, especially with the twists and turns of its certification on the German and European sides, will not provide a solution before the end of the winter. Everything will depend on the flow of Russian gas through Belarus and Ukraine… indeed, Qatar is producing at maximum capacity, and LNG exports from the United States have rebounded strongly after the Covid-19 crisis and are close to maximum capacity there, too. Gazprom says it is meeting “all its obligations”, but is ready to open the tap a little wider from 8 November to allow gas stocks in Europe to be replenished as winter sets in, as those in Russia are now full… It didn´t take long for the market to react: TTF price fell back below €70/MWh on 29 October for the first time since 27 September, to €68.53/MWh. But most analysts are still forecasting prices to remain high until the spring, and very volatile, as the market reaction to the suspension of the Nord Stream 2 certification showed. Indeed, due to the pause in investment caused by the Covid-19 crisis, gas supply is not expected to increase significantly in 2022-2023.

Philippe Lamboley

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Each month, one of our experts publishes an article describing his view on a specific topic of the constant changes taking place in the energy market, with special focus on the French market.

Profesional Experience

Céline, a young and dynamic person, had a first experience in the tourism sector as a community manager at Loups du Gévaudan, in Lozère. She joined HES team in November 2021 to diversify her knowledge: learning about the energy sector, specialising in marketing strategies in order to improve the company’s customer relations and, at the same time, developing her skills in coordination and project management.

Education

Céline graduated in Spanish and English Language, Literature and Civilisation at La Sorbonne IV (2018). She also holds a master’s degree II in cultural projects and establishments management, with a special focus on international tourism. She also studied abroad at the University of London (England) and Universidad de Morón (Argentina).

Céline Haya Sauvage

Marketing Responsible

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“Decarbonization of the Energy and Transport sectors is arguably today’s main economic driver for the industry.”

Profesional Experience

His career started in civil engineering as a Project Manager in France, Martinique and Australia. Afterwards, he became the General Manager of a subsidiary in Venezuela. In 1992, he established Dalkia in Germany (district heating, cogeneration, and partnerships) and represented Véolia in Thailand. In 2000, he opened the commercial office of Endesa in France to take advantage of the liberalized retail market. From 2006, as a development Manager at Endesa France, he led Endesa’s plan for Combined Cycle generation in France and developed the wind and PV portfolio of Snet at the same time. Philippe Boulanger worked for 3 years at E.ON’s headquarters coordinating the company´s activities in France. He was strongly involved in the French hydro concession renewal project. As a Senior Vice President – Project Director at Solvay Energy Services from April 2012 to February 2014 he was in charge of the H2/Power to gas and European direct market access deployment projects. Philippe has been an HES expert since 2014.

Education

Philippe Boulanger holds engineering degrees both from the Ecole Polytechnique and the Ecole Nationale des Ponts & Chaussées (France) and has a combined experience of more than 25 years in energy and infrastructure. In addition to English, Mr. Boulanger is fluent in French, German & Spanish.

Philippe Boulanger

Electricity Expert

HES-Philippe-Boulanger

“The world is changing. New investors pay particular attention to the energy sector while historical actors adapt their position to the market.”

Profesional Experience

Antonio started his career in the electricity sector in 1991 working as a member of staff for the General Manager of Sevillana de Electricidad (Spain). In 1997, he was in charge of the commercial regulation at Endesa Distribution. In 2000, he joined Endesa’s European M&A department. He was appointed CEO of Endesa Power Trading Ltd in 2003. He became Head of Energy Management for SNET, France, in 2004 and was appointed CEO of this company in 2008. In 2009, he held the position of Head of Corporate Development for E.ON France. In 2011, he founded Haya Energy Solutions (HES), a consulting firm which assists companies in optimizing their value chain: from strategy definition to day-to-day operations, based on a strong experience and understanding of the energy industry. From 2015 to 2018, Antonio was Chairman and CEO of 2 French CCGTs (2x410MW), owned by KKR. At the end of 2018, he joined Asterion Industrial Partners, a dedicated infrastructure investment fund, as an Operating Partner.

Education

Antonio graduated from the Escuela Técnica Superior de Ingenieros of Seville (Spain) and holds an MBA degree from Deusto University (Spain).

Antonio Haya

CEO