Heatwave in China: energy crisis and global consequences
This article was originally published in Italian in Panorama on 5th Sep 2022.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at:https://www.panorama.it/economia/ondata-caldo-cina-crisi-energetica-e-conseguenze-a-livello-globale
In addition to the multiple lockdowns instituted by China in 2022 due to the zero tolerance policy of Covid-19, which have strained global supply chains and further hampered the country's economic growth, the Middle Kingdom must now face its worst heatwave in 60 years, which in August caused peaks of over 40 degrees in several provinces.
This drastic situation, which has affected almost the entire northern hemisphere of the globe including Italy, has led to the sudden closure of factories and to a drought that has generated suspensions in the supply of water and hydroelectric energy, as well as restrictions on the use of electricity in the whole region. These extreme weather conditions are slowing the transition from traditional to eco-sustainable energies of the second largest economy in the world, increasing uncertainty in this period of transition.
In this article we will analyze the ripple effect that these measures could cause overseas and the repercussions on China's economic performance in the second half of 2022, before addressing the heart of the matter, namely how to solve these energy shortages.
The heat wave at present
Like other countries, China is experiencing extreme heat waves with little or no rainfall this summer. On August 20th, the China Meteorological Administration (CMA) issued another red alert for heat waves in southern China, the ninth in a row for the 31st consecutive heat day in the last period.
Water levels in the nation’s longest river, the Yangtze, are at a record low, halting shipping over vast sections of the key waterway, with certain shipping routes closed in the middle and lower reaches of the Yangtze, from central Hunan province to Anhui in the southeast.
Energy Crunch in Practice
In the south-west of China, one of the most affected regions in the country, local authorities have ordered factories without warning to suspend their operations following a particularly hot period that would have led to a "surge" in electricity consumption.
Chongqing, a directly controlled administrative municipality of 31 million in the southwest of China, has a high number of factories that make automobiles and computers, their shutdown is envisioned to have a significant impact on supplies domestically and internationally. Electronic component manufacturers like Foxconn and auto manufacturers like Tesla have recently outlined they are having difficulty maintaining production amid the power crunch, needing to make adjustments in their operations due to the power rationing.
To make matters worse, rapidly spreading fires hit the city, apparently caused by spontaneous combustion triggered mainly by extremely high temperatures. More than 1,500 residents were transferred to safe areas, and the intervention of 5,000 firefighters, police, local officers, volunteers and seven fire helicopters were required.
Record temperatures, droughts, COVID-19 outbreaks and fires were therefore the main problems that Chongqing and China had to face during one month.
While Sichuan, a province in southwest China (with a landmass equivalent to the size of Spain), is a key manufacturing hub for the semiconductor and solar panel industries, with the power rationing hitting factories belonging to some of the world's biggest electronics companies, including Apple and Intel.
Since Sichuan is rich in mineral resources such as lithium and polysilicon, indispensable in the photovoltaic and electronics industry, many international companies in the semiconductor sector have plants in this province, and it is therefore likely that the closure of these factories will cause reductions in supply of these raw materials, prompting an increase in their already high prices globally.
Energy saving policies for households and businesses have also been promoted in other important Chinese provinces located in the east of the country, including Jiangsu, Anhui and Zhejiang. In the province of Jiangsu, many European companies have been left without energy, creating enormous problems for the production lines.
In fact, the meteorological authorities of this province have warned drivers of the risk of possible punctures in car tires due to the increase in road surface temperatures with 68 degrees centigrade recorded in some sections.
Energy Mix
The record heat wave has already exacerbated an ongoing drought, cutting water levels at hydropower reservoirs, with major regional and global manufacturing powerhouses relying on hydropower in the aforementioned regions for roughly 80 percent of their energy needs, and with consumers using more energy than usual to stay cool during the heat wave, energy supplies have thus been running dangerously low.
The power outages, however, were not planned well in advance and therefore caused insurmountable problems for companies, which fell into an atmosphere of uncertainty. In fact, there have been several cases of companies forced to suspend production at certain times of the day, receiving the relative notification only on the morning of the same day.
This phenomenon could also have been caused by a lack of coordination between the various electricity suppliers. Taking as an example, the State Grid Corporation of China (SGCC), a Chinese state-owned electricity services company, is divided into multiple branches scattered throughout the various regions of China (for example, the Sichuan branch is separate from the Jiangsu branch) , a lack of coordination between two branches could lead to overcapacity in one region and power outages in another.
If disruptions become more regular, manufacturers may channel future investment for factories towards cooler and the more coal-reliant regions of the country, despite higher operating costs and the central government’s long-term goal of reducing coal-dependence (pivotal for achieving carbon neutrality) and stimulating western provincial economies. In fact, according to data from the European Chamber of Commerce in China (hereinafter referred to as the "European Chamber"), 45% of European companies operating in China, have outlined that as the current energy mix contains only a small proportion of renewables, which is acting as one of the main challenges for the country in achieving its carbon neutrality goals.
China, Europe & Decarbonization
China’s ambitious climate pledge of peaking emissions before 2030 and achieving carbon neutrality by 2060 (the so-called '30 60 'decarbonization goal) was always going to require the country to fundamentally restructure its energy economy, reshape whole industries and accelerate the development of nascent technologies and value chains. The increasingly extreme weather conditions that China faced (and still faces now) had also played an important role in this drive, as outlined by the European Chamber of Commerce in China in their report entitled Carbon Neutrality: The Role of European Business in China's Race to 2060.
With 69 per cent of European companies reporting that a lack of access to renewables could derail their corporate decarbonisation targets, increasing the share of renewables in China’s energy mix is a key aspect of this strategy and will require comprehensive power planning and grid regulation, alongside the development of a sustainable interprovincial exchange in order to avoid or at the very least mitigate any future energy shortages which may arise from extreme weather conditions.
However, China’s success will be highly dependent on its ability to leverage as much expertise as possible, including providing European companies with increased market access and a level playing field on which to operate, so that they can make greater contributions. A clear mutual benefit in this regard is that China is fertile for both receiving and developing European technologies. In many respects, the pace of the research and development (R&D) environment in China allows companies to commercialise new products faster than they are generally able to in Europe, as the innovation environment is largely less risk averse.
Conclusions
There is a risk that sudden power outages in China, if not quickly eliminated, could create delays in the delivery of orders by European companies operating in the territory. This situation of instability may compromise the current status of this nation's main productive pole at a global level. China’s power shortages will likely force some European companies operating there to delay orders, with the electricity shortage rippling across factories and industries, testing the nation’s status as the world’s capital for reliable manufacturing.
An example of a company that has decided to move part of its production out of China is Apple which, after several months of continuous interruptions in its supply chain, announced last June the transfer of the iPad production to Vietnam, to protect itself from future energy shortages and delays in supply.
This move by the US tech giant (the largest by market capitalization) will influence the decisions of other foreign-owned companies that have considered reducing their dependence on China for the production or procurement of key materials.
Over the past two years, China's strict zero-Covid policy has prevented overseas investors from sending their own senior executives and technicians to the country, and recent power outages have only further dented this country's reputation and questioned the country's reputation. And its reliability.
While China has made significant gains in energy efficiency in recent years, European companies have implemented effective decarbonisation technologies in their home markets and are ready to support China directly by strengthening industrial cooperation between the European Union ( EU) and the People's Republic of China (PRC).
As a practical example, two thirds of European companies in China have set, or are in the process of setting, specific decarbonisation targets for their operations in the territory, while requiring environmental impact assessment reports from their suppliers, to facilitate the decarbonisation of supply chains in the country, contributing fully to the achievement of zero emissions.
The EU and the PRC must therefore remain open to dialogue and commit themselves to multilateralism, maintaining bilateral communication and cooperation channels in trade and investment, in order to create a more predictable business environment and a more sustainable future.
