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Tao Wang: The macro impact of power shortage and dual control of energy
October 12, 2021 07:05
Text/Sina Finance Opinion Leader Columnist Wang Tao
Given that recent policies have begun to require the release of coal supply and domestic demand may slow in the future, the impact of power and coal shortages on industrial production may be more moderate.
Why is China short of electricity recently?
The combination of economic recovery and high temperature weather has led to rapid growth in electricity demand. my country's industry, service industry and residential sectors account for 67%, 16% and 15% of total electricity consumption respectively. Although floods and epidemic prevention measures in some areas dragged down growth from July to August, overall economic growth rebounded sharply in the first eight months of this year. From January to August, exports increased by 33.7% year-on-year, and real estate investment increased by 11% year-on-year, which in turn promoted a steady growth of 11.3% in industrial production and a 13.1% increase in electricity consumption in the industrial sector. The production of high energy-consuming industries such as steel, aluminum, cement, glass and ethylene increased by 5.3%, 8.3%, 8.3%, 11% and 25% respectively year-on-year. In addition, the service industry rebounded from low levels, and electricity consumption increased by 21.9% year-on-year. Residential electricity consumption increased by 7.5% year-on-year, especially the sharp increase in July-August, partly because the temperature this summer was higher than in previous years. On the whole, the electricity demand from January to August increased by 13.8% year-on-year (16.2% in the first half), which is likely to be significantly stronger than the actual GDP growth rate (the first half of the year increased by 12.7% year-on-year, and a significant slowdown is expected in the third quarter).
The shortage of coal has increased the pressure on power supply. In the case of strong electricity demand, hydropower generation (accounting for 16% of the overall power generation) from January to August fell by 1% year-on-year (down 4.7% year-on-year in August), which added additional pressure on thermal power supply (from January to August) The year-on-year increase was 12.6%, accounting for 69% of the overall power generation). Although photovoltaic and wind power generation are growing, they are small in size and unstable in supply. More importantly, the large-scale capacity reduction and strict capacity restrictions since 2016 have exacerbated the current coal shortage. From January to August, domestic coal production increased by 4.4% year-on-year, while coal imports fell by 10.3% year-on-year (7%-8% of coal supply), which exacerbated the coal supply and demand gap, especially the pressure on thermal power generation. In addition, strict production safety and environmental protection inspections also limit the release of coal production capacity.
The supply-demand gap has led to a significant reduction in coal inventories in power plants and significantly pushed up coal prices. In view of the strong demand for electricity and the weak coal supply, the average available days of coal inventories in power plants has dropped sharply to 14 days, far below the historical average of 22 days (data from thermal power plants in 8 major coastal provinces shows that their coal inventories are lower). This has led to more unstable power generation in thermal power plants than before, and more power plants need to undergo equipment maintenance. If coal supply does not improve in the future, UBS Securities estimates that by the end of 2021, the static coal supply and demand gap may be as high as 70-80 million tons (equivalent to 2% of total annual coal demand). In view of the large imbalance between coal supply and demand, the market price of thermal coal has risen sharply in the past few months, from 950 yuan/ton in June to 1,000-1100 yuan/ton in July-August, and further climbed to 1,300 yuan/ton in September (9 The last week of the month has exceeded 1600 yuan/ton).
Rising coal prices in the market, but low and inelastic on-grid electricity prices have exacerbated the shortage of power supply. China has increased the proportion of coal-fired power plants covered by long-term agreements, but the monthly price trend of long-term agreements basically follows the market price and is only slightly lower than the latter. More importantly, although my country has implemented the benchmark coal-fired power generation price mechanism of “base price + fluctuating up and down” from 2020 (previously, the floating range was no more than 10% and no more than 15%; the State Council decided on October 8 The fluctuation range of the market transaction electricity price has been expanded to 20%), but the increase of the on-grid electricity price is relatively limited under the condition that the base price remains unchanged. Rising coal prices, superimposed on-grid electricity prices are low and inelastic, resulting in large losses for thermal power plants. The break-even point coal price of thermal power plants is about 600-800 yuan/ton, which is far lower than the September average long-term coal price of 1,000-1200 yuan/ton and the market coal price of 1,300 yuan/ton. Therefore, in addition to meeting the basic needs of economic activities, thermal power plants have no incentive to increase coal stocks or increase power supply, which further aggravates the shortage of power supply.
What is "dual control" of energy and what is the significance?
Energy "dual control" is a binding index requirement to control the total energy consumption and energy consumption intensity. The 14th Five-Year Plan proposes to improve the dual control system of total energy consumption and intensity, and the cumulative energy consumption intensity per unit of GDP will be reduced by 13.5% between 2021-2025. In fact, there have been similar goals since the 11th Five-Year Plan. It is planned to reduce energy consumption intensity by 20% in 2005-2010, 16% in 2011-2015, and 15% in 2015-2020. Among them, the government plans to reduce energy consumption intensity by 3% in 2021. This indicator is decomposed and distributed to the local government. It is one of the important binding indicators for the performance appraisal of local government leaders. This means that if real GDP growth this year is 8.2% (UBS Securities benchmark forecast, facing significant downside risks), the growth rate of energy consumption should be less than 5%. In addition, the 14th Five-Year Plan has set a goal of reducing carbon intensity by 18%, but the government has not set a single-year target for reducing carbon intensity in 2021.
In the first half of the year, the progress of dual control was slow. Recently, some areas have stopped production and restricted production. Based on the "Barometer of Completion of Energy Consumption Dual Control Targets in Various Regions in the First Half of 2021" issued by the National Development and Reform Commission on August 12, the energy intensity of 9 provinces and autonomous regions has risen instead of decreasing (including Guangdong, Jiangsu, Fujian, Guangxi, Yunnan and the fourth half of 2021). 10 provinces and autonomous regions, including Zhejiang, Henan, Liaoning, and Sichuan. In fact, in the first half of the year, real GDP grew by 12.7% year-on-year, while electricity consumption grew strongly by 16.2% (the growth rate of electricity consumption in recent years was slightly higher than the growth rate of energy consumption), which means that the overall progress in achieving this year's dual control goals is relatively slow. slow. If it is assumed that the energy consumption intensity reduction target of 3% can be fulfilled in 2021, and the base figure is higher in the second half of the year, and other energy consumption is assumed to maintain the previous trend, this means that electricity consumption in the second half of the year may fall by 2% year-on-year. Given that the dual control target is a binding indicator requirement faced by local governments, and economic growth has been relatively strong since the beginning of this year, according to media reports, some local governments (especially the first-level and second-level early-warning provinces where the progress of the dual-control is not up to the standard in the evaluation of the Development and Reform Commission) Temporary restrictions have been imposed on local industrial production activities from the end of August to September, especially the high-energy-consuming upstream industries such as steel, nonferrous metals, minerals, building materials, chemicals, and papermaking.
The power shortage is mainly caused by the coal supply and demand gap and the low feed-in tariff, which is not directly related to the dual control policy. As mentioned above, the power shortage in some areas is mainly due to the obvious gap in coal supply and demand, and the soaring coal price and low on-grid power prices inhibiting the power generation of thermal power plants. In order to avoid large-scale grid accidents or equipment damage, some cities have imposed temporary restrictions on power supply. On the other hand, the main purpose of the dual control policy is to control the total amount of energy consumption and reduce the intensity of energy consumption. Some local governments are facing pressure to implement the dual control goals and directly temporarily shut down the production of some high-energy-consuming industries, mainly upstream industries.
But the two are indeed related. Of course, it is reported that some local governments have used electricity curtailment to force companies to stop production. In addition, if the coal shortage lasts longer and coal production capacity is not released, some local governments may need to temporarily shut down some industrial production to ensure residential electricity and winter heating. On the other hand, if the dual-control policy constraints continue for a longer period of time and further restrain industrial production, coupled with the possible slowdown in real estate activity, this may reduce future electrical power and narrow the gap between energy supply and demand.
How will the power shortage and dual control policy affect the economy?
What is the impact of the dual control policy on growth? Under the pressure of dual control policies and power shortages, in September, more than a dozen provinces temporarily restricted industrial production, and this may continue in part to the fourth quarter, restraining national industrial production and GDP growth, especially economic activity in September . In fact, the manufacturing PMI of the Bureau of Statistics fell to 49.6 in September, which was the first time in 19 months that it was below the line of prosperity. Taking into account the slow progress in reducing energy intensity, just to achieve the goal of reducing energy intensity throughout the year, electricity consumption in the second half of the year needs to increase from 16.2% year-on-year in the first half of the year to a year-on-year decline of 2%, and it may increase year-on-year in the third quarter. %, and the fourth quarter fell 9% year-on-year. It is worth noting that electricity consumption in the fourth quarter may naturally slow down due to weaker demand growth, and on top of this, dual control policy constraints may cause an additional 6-7 percentage point slowdown in electricity consumption growth, of which high consumption The decline in electricity consumption in the energy industry is expected to exceed that in the service industry and residents. According to the input-output table to calculate the direct and indirect impact of the power sector on the upstream and downstream, we estimate that an additional 6-7 percentage point slowdown in electricity consumption growth will eventually drag down the GDP growth rate in the fourth quarter by about 0.5 percentage point.
From the perspective of the total impact of each province on the bottom layer, compared to the 10 provinces and other provinces that have not reached the progress in the reduction of energy intensity in the first half of the year, we assume that the 9 provinces and regions that have increased energy intensity will implement more stringent production. Restrictive measures and last longer. On the whole, the dual control policy constraints may drag down the slowdown of industrial production in September by 2-3 percentage points, and slow down the GDP growth rate in the third quarter by 0.2-0.3 percentage points. The constraints of the dual control policy will partially extend into the fourth quarter and restrict related production activities. However, considering that the real estate activity and export growth rate may weaken in the fourth quarter, its energy demand will also slow down accordingly. Therefore, the impact of the dual control policy may be even greater. mild. Under this circumstance, the dual control policy constraints may drag down the slowdown of industrial production by more than 1 percentage point in the fourth quarter, and the slowdown of GDP growth by more than 0.3 percentage points.
From the perspective of coal and electricity shortages, the government is likely to solve residential electricity consumption during the heating season first. Therefore, if the electricity shortage continues in the future, it may still restrict industrial and commercial electricity consumption. If coal production capacity is not released and imports are not increased in the future, UBS Securities estimates that by the end of 2021, the static coal supply and demand gap may reach 70 million to 80 million tons, and industrial power consumption in the fourth quarter may need to be reduced by 10%-15%, especially for some high consumption. Energy upstream industry. Given that recent policies have begun to require the release of coal supply and domestic demand may slow down in the future, the final impact of power and coal shortages may be lower than the above static analysis, so the impact on industrial production may be more moderate.
How might the policy respond?
Take multiple measures to alleviate the power shortage problem. With the arrival of the peak of power consumption in the winter heating season, the central and local governments have begun to actively respond to the problem of power shortage. The State Council and the National Development and Reform Commission announced a series of measures to stabilize power generation and consumption, including:
Under the premise of ensuring safety, increase production and supply, and support qualified high-quality coal mines to release "advanced" production capacity; recently, Inner Mongolia and other provinces have made it clear to accelerate the release of nuclear increase in coal production capacity. It may take some time for this to take effect, because coal companies may still be worried about the continued pressure of safety and environmental reviews. In addition, high coal prices in the market may also cause coal companies to be unwilling to increase production quickly and significantly. In addition, the government also requires an increase in the supply of natural gas.
Increase coal imports moderately. Coal imports from July to August have rebounded on a low base, and it is likely to continue to accelerate in the next few months, but it is not clear whether China will resume coal imports from Australia. Since the beginning of 2021, Indonesia has provided 62% of China's coal imports, while Russia accounted for 19%.
Fully protect people's livelihood energy. This means that if the power shortage continues, local governments may still temporarily restrict some industrial and commercial power (especially high-energy-consuming industries) to ensure electricity for people's livelihood (the latter accounts for 15% of all electricity).
Reasonably channeling energy costs means that more cities may raise the on-grid electricity price based on the current benchmark price mechanism for coal-fired power generation of “base price + fluctuating up and down” (previously, the increase was no more than 10%, and the drop was no more than 15%). However, the government may keep the benchmark electricity price unchanged, and adjust electricity prices mainly by increasing the rate of increase. It is worth noting that on October 8, the State Council has decided to expand the fluctuation range of market transaction electricity prices to 20%, which is expected to partially alleviate the loss of thermal power companies.
The dual control policy requirements have not been significantly loosened at present, but may be slightly fine-tuned. So far, the dual control policy requirements have not shown obvious signs of loosening, and the government has not indicated that it plans to significantly reduce the dual control target (3% reduction in energy consumption intensity). However, as the downward pressure on future growth intensifies, and given that local governments have "movement-style" carbon reduction and production restrictions, we believe that the government may fine-tune policies, including temporarily relaxing the implementation of the dual control policy, and avoiding energy and electricity. There is a substantial shortage, and local governments are required to issue targeted policies to correct the "one size fits all" stop and limit production measures. If the downward pressure on growth exceeds expectations, it is not ruled out that the government may loosen the dual control targets on the margins (for example, the decline in annual energy consumption intensity will be slightly less than 3%). Recently, the State Council has proposed that renewable energy consumption should not be included in the total energy consumption within a certain period of time, which will also help ease the short-term pressure of dual control policy constraints. Taking into account the continuing impact of the dual control policy, we expect that the prices of upstream products may remain relatively high in the second half of the year until demand slows more significantly at the end of 2021, or a new round of dual control evaluation cycle starts in early 2022. In addition, pollution prevention and environmental protection policies before and during the Winter Olympics are also factors that require close attention.
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