Despite Ramping Up Coal Production, China May Still Face a Power Crunch This Summer

China may face further power shortages this summer despite increasing domestic coal output, as most of the new supply is of lower quality than before and burns more quickly in power stations. China relies on coal for 60% of its electricity production, and is the largest consumer of coal in the world. Last year, low domestic output led to a weeks long power crunch that disrupted manufacturing.

Since then, the government has ordered to boost output to record levels and put a price cap on coal to make it more affordable for power generators.

However, the price cap is encouraging producers to value quantity over quality, leaving power generators needing growing volumes of coal as they look to raise output.

For miners, extracting high quality coal does not make much sense as margins are low due to price caps. Therefore, they prioritize producing large volumes to fulfill government targets.

Thermal coal with values above 5,500 kilocalories per kilogram is typically considered high heating value coal.

Meanwhile, power plants also favor low quality products as they are cheaper and help them reduce loss from electricity generation.

China is the world’s biggest coal and LNG importer, but relies on domestic fuels for power generation. The government controls local power and fuel prices and domestic coal production to ensure that affordable power is available.

In response to last year’s power crunch, coal miners boosted output to record levels, increasing inventories at China’s utilities by 50 million tonnes from the year before.

But most of the output is of medium and low heating-value coal that power plants need to burn more of to generate the same amount of electricity as from higher heating-value coal.

Some utilities raised coal use by as much as 15% but power generation levels stayed almost the same.

Industrial activity has been picking up after recent pandemic lockdowns. Higher proportion of lower quality coal means there may not be enough coal supply on hand to meet substantially higher power needs.

China Electric Council projects that several regions would experience tight power supply in peak hours in summer.

The problem of low volume of higher quality coal has been exacerbated by a change in China’s coal imports since Beijing placed an unofficial ban on imports from high-grade coal producer Australia in late 2020, and increased purchases from low-grade coal suppliers in Indonesia and Mongolia.

While Indonesia produces some high heating-value coal, it’s more expensive and mainly sold to Europe.

Increased coal imports by European buyers looking to replace Russian coal and gas supplies have also reduced high-grade coal supplies and pushed international coal prices well above domestic Chinese prices.

Beijing has also encouraged hydro and renewable power generators to produce as much as they can so that the burn rate of coal supplies can slow down.

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