The cost of electricity is rising for consumers around the world. China isn’t facing the kind of dire energy crunch faced by many consumers in Europe, but recurring power outages since last year are a reminder that it has electricity problems of its own. 

The weaknesses in China’s electricity grid predate the global energy shortage stemming from Russia’s invasion of Ukraine. With climate change and pressure growing on China to clean up its energy act, things may get worse. 

This week, The Wire looks at China’s electricity grid: how it works, who foots the bill, and how its structure leads to power crunches and expensive prices despite the relative abundance of energy in China. 

GEOGRAPHY AND CLIMATE

The problem with China’s electricity grid isn’t one of production, but distribution. Where China’s electricity is generated and where it is most needed are not the same, thanks to a combination of geographic factors and shortcomings in planning.

The transition to green energy has exacerbated this disparity. Renewables including hydroelectricity, wind and solar, are most abundant in China’s inland northern, northeastern and northwestern regions, while demand for electricity is strongest in China’s highly industrialized, and more densely populated coastal provinces towards the east.

State Grid, China’s state-owned electric utility company, has tried to make it easier to transmit electricity across the country by spending billions on ultrahigh voltage power transmission lines, with more than $22 billion of investments planned for the second half of 2022 alone.

But even when such lines have been built, they are underutilized, in part due to a lack of demand. Rather than rely on energy rich inland regions, many coastal provinces prefer to go it alone. 

One reason for this is self-interest: building more power plants locally is a boon for provincial GDP figures. But there is also lingering wariness among power-importing provinces about the dependability of others: when exporting provinces run short of supply, they tend to prioritize keeping the lights on at home.

The anachronistic way that electricity is bought and sold in China also limits inter-provincial trade. Most of the country’s wholesale market is made up of monthly or even annual bilateral contracts, locking in a set amount of electricity supply at a fixed price. This inflexibility hurts both buyers and sellers at times of instability, such as during a heat wave. 

Long-term contracts are also ill-suited to the green energy transition. Wind, solar and hydroelectric power are all more volatile power sources than fossil fuels, making them incompatible with long-term contracts. As a result, UHV power lines originating from renewables-rich regions have often been underutilized even as those provinces accumulate a surplus of electricity, resulting in a high degree of waste. 

PRICE CONTROLS

Beijing has sought to address reliability and waste issues by encouraging the development of a so-called ‘spot’ market, allowing for greater short-term movements in electricity prices in order to meet demand. The National Energy Administration has been piloting such efforts since 2018,  accelerating them following the power shortages of 2021. 

The spot market’s development has been undermined by the fact that market reforms haven’t gone far enough. During periods of high demand, provincial energy bureaus may be freer now to buy electricity at spot prices from neighbors; but price controls still limit how much end users, like households and businesses, pay for their electricity. That means distributors are constrained in how much they can pass on higher electricity costs, leading to provincial energy bureaus running up potentially huge losses.

Beijing sought to alleviate the price control problem last year, by allowing coal power tariffs to rise by up to 20 percent above the government-set price level for commercial users, as opposed to 10 percent in the past. For industries deemed particularly energy intensive, the cap has been removed altogether. But agricultural end users and households are still protected by the 10 percent price cap.

The case of Zhejiang province shows how this system falls short. To avoid a supply crunch amid a heatwave in July, Zhejiang’s energy bureau bought power from other provinces at a high spot price. But most of the imported electricity went to households and the agricultural sector, for whom tariffs were capped. That meant the energy bureau incurred more than $1 billion in losses. An attempt by the provincial government to recoup losses by raising a tax on power generators provoked a widespread backlash, including a rebuke from the central government. 

INCREMENTAL SOLUTIONS

Amid growing concerns about energy reliability, coal power has seen a resurgence in China — running contrary to Beijing’s commitments to coal’s role in the country’s energy mix. Industrial centers such as Guangdong and Zhejiang are busy building more coal generators. In October alone, Chinese authorities approved or broke ground on 17 new coal power plants.

Part of the reason for coal’s resurgence is a belief that the fossil fuel, while polluting, is more reliable than existing renewables. Outputs from wind and solar vary based on weather conditions, while droughts across China have curtailed hydropower in historically energy rich provinces such as Sichuan.

But as climate change renders weather conditions around the world ever more unpredictable, even reliable supplies of coal aren’t guaranteed. Part of the reason for last year’s power crunch was that torrential rain and floods in Shanxi and Shaanxi forced dozens of coal mines offline.

A middle ground may be for coastal provinces to build more renewable energy locally. A shortage of space has made it hard for industrialized provinces to construct solar and wind farms at scale, but other developments such as the falling cost of offshore wind make this an increasingly competitive option. 

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