How China’s energy crisis happened, in six steps

Business & Technology

Rising demand for Chinese goods, climbing prices for coal, and a government campaign to reduce power consumption have collided — and caused an energy crisis in China. Here’s how it happened, and what might come next.

power lines china
Illustration by Derek Zheng

Factories and utilities across China are temporarily shutting down, affecting everything from consumer tech to textiles and even traffic lights as provinces heed Beijing’s campaign to reduce energy consumption.

A three-day outage in the three northeastern provinces of Liaoning, Jilin, and Heilongjiang meant cell phones without any signal, stores lit only by candles, and gas leaks that left dozens injured. Local authorities in Shenyang, Liaoning, warned of “the collapse of the entire grid” if power wasn’t rationed.

But the problems go far beyond the northeast: According to David Fishman, China energy policy researcher and manager at the Lantau Group consultancy, as many as 20 provinces in China have been told to ration power.

How did we get here?

In these six steps.

  1. We begin with an economy that depends on coal for 56% of its energy. Beijing, which has pledged to peak carbon emissions by 2030 and reach neutrality by 2060, is working to reduce its dependence on coal through a “dual control” system. That means lowering energy consumption and energy intensity — in other words, increasing efficiency. To that end, it has created new regulations that have slowed down mining activity. Mining safety standards have also gotten tighter after a series of mining accidents.
  2. Over the summer, as world economies began emerging from the pandemic, demand for Chinese goods rebounded. But domestic coal production couldn’t keep up with energy needs: in the first eight months of 2021, coal-fire generators were producing 14% more power than the same period last year, while coal production rose only 6%. Renewables also lagged due to late rain and unreliable wind.
  3. When Chinese utilities looked for coal abroad, they found sky-high prices, with Europe also desperate for resources. It doesn’t help that imports of more-efficient Australian coal are banned due to ongoing diplomatic and trade disputes.
  4. Power companies, which aren’t allowed to use surge pricing, are declining to buy expensive coal if it means selling the resulting energy at a deep loss.
  5. All this before winter has set in. Northern provinces are holding back coal reserves to prepare for colder months, constraining supply even further.
  6. To top it all off, after climate targets were missed by 20 of China’s 31 provinces and regions — representing 70% of the country’s GDP — the country’s pollution-heavy manufacturing hubs were ordered to curb emissions. Heavy users have been asked to halt production during peak hours, and some have been told to shut down entirely until further notice.

What are the consequences?

Facing energy cutbacks and shutdowns, key suppliers for Apple and Tesla are buying generators and stockpiling inventory to keep supply chains intact. Intel, Nvidia, and Qualcomm’s partners are also getting squeezed, worsening the great chip shortage.

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Analysts at Morgan Stanley estimate that 7% of the country’s aluminum production capacity has been suspended, along with 29% of cement production, potentially followed by paper and glass. In addition, the country’s largest steelmaking hub, which is just over 100 miles from Beijing, has capped its output to ensure blue skies for the Winter Olympics next February in the capital city. Commodity prices have tumbled in recent days.

In addition to the industrial slowdown causing shortages around the holiday shopping season, rising energy costs are likely to spread across the globe and accelerate inflation. As for China, economists are forecasting that the crisis will weigh on this year’s GDP growth: Analysts at Goldman Sachs and Nomura Holdings cut their full-year projections from 8.2% to around 7.7%.