Electrical power shortages loom again, and 2008 was meant to be the first year for a while in which China was to have enough power generation capacity to satisfy demand. But the problem is not a shortage of power generation capacity, rather a shortage of coal.
It is easy for foreign observers of China’s energy scene to spend an undue amount of time commenting on those aspects of China’s energy sector and policy which have international consequences; for example oil imports, energy diplomacy, carbon emissions and overseas investments by national oil companies. But we tend to forget that China’s top energy policy priority is to ‘keep the lights on’. That is to say that China’s economic growth and the increasing affluence of its population require ever increasing amounts of energy to be delivered to energy users of all types, industrial, commercial and residential. Coal continues to provide some 65-70% of China’s primary energy needs and thus it is coal which has to be the starting point for any analysis of security of energy supply in China.
China has been self-sufficient in coal supply on account of its vast reserves of coal which lie mainly in the north of the country, but which can also be found in smaller quantities in most provinces. As China’s demand for energy has risen, the domestic supply has kept pace. Output from China’s mines rose from 600 million tonnes in 1980 to 1,360 million tonnes in 1996, before flattening in the late 1990s in response to the Asian crisis and consequent static demand. Over the same period, the government invested substantial amounts of money in increasing the capacity of the rail system to bring coal from the north where it was mined to the south and east where it was consumed.
In the mid-1990s some 45% of production came from the small-scale township and village coal mines, 40% from large state-owned mines, and the balance from mines owned by local governments. The year 1998 saw a major restructuring of the coal industry. All the large mines owned by the central government were passed to the provincial governments. At the same time a campaign was launched to rationalise the township and village coal mines and to close many of these mines, on account of their poor safety and environmental records and their ability to undercut the larger mines in the market. By 1990s the price for coal was largely set by the market, and illegal small-scale mines could avoid many costs and taxes, and so sell at a lower prices than the larger mines.
As economic growth picked up from 2002 onwards, demand for coal soared and production rose to meet this demand. Each year the output of coal increased by about 200-300 million tonnes to reach 2,520 million tonnes in 2007, almost double that in the year 2000. This increased production came from the largest mines now owned by major integrated companies as well as from the township and village mines, which by then had been privatised and were re-opening to meet the demand. An excess of supply over demand allowed China to become a major exporter of coal over the period 2000-2005, with net exports reaching 90 million tonnes per year, against an average of 30 million tonnes per year in the 1990s.
As demand for coal has risen, so has investment in new mines in the north of China: Inner Mongolia, Shanxi, Shaanxi and Ningxia. Most of these mines will have an annual production capacity of more than 50 million tonnes, and a few will exceed 100 million tonnes. In 2007, China's coal production capacity was 2,700 million tonnes and it is expected to reach 3,200 million tonnes in 2008 and 3,400 million tonnes in 2009. At the same time the government has embarked on yet another campaign to close or upgrade the small-scale coal mines.
The current weakness in the nation’s coal supply lies not so much in the mine capacity but in the capacity to transport the coal to where it is needed. This has been the weak point in the supply chain for coal for more than twenty years About 50% of coal is carried by rail and this coal accounts for nearly 50% of rail capacity. Investment in new rail capacity needs to grow at the same rate as the demand for coal, or even faster if the government wishes to diversify the use of the rail network to other goods. Net coal production capacity set to grow 9% in 2008, but transport capacity will expand by just 3%. As a result demand in the south and east cannot be met from domestic supply, and these energy deficient regions resort to importing coal.
China has imported coal to the southern coastal provinces for many years, but during the 1990s the level of these imports remained at about 2 million tonnes per year. Fluctuations in the level of net exports of coal were caused by changes in the level of total coal exports. This changed in the year 2002 when the imports rose to 11 million tonnes. Since then imports of coal have increased steadily to reach 50 million tonnes. This contrasts with total exports in 2007 of just 53 million tonnes, meaning that China’s net exports of coal in that year amounted to just 2 million tonnes. Indeed the country was a net importer of coal in some months of 2007.
The first three months of 2008 coal saw mine output up by 7.8%, but coal consumption in major power stations rose 18% and power stations account for some 50% of coal demand. As a result, domestic and international coal prices continue to rise. Domestic prices have reached US$100/tonne, and so Chinese coal companies have reported profits for the first quarter of the year which are up 30-50% on the same period last year. In January 2008, the exports of coal rose as these companies sought profits on international markets, until the government clamped down to boost domestic supplies. Despite another rise in April the total coal exports for first four months of 2008 are 8% down on last year.
The shortages of coal supplies in the regions where it is needed are starting to build to crisis point. In May 2008, it was reported that 34 power plants with capacity of nearly 7 GW had suspended operations because of a lack of coal. In early June a total of 62 plants with an aggregate capacity of 62 GW were reported to have less than three days supply of coal, and stock piles in a number of provinces were below the 7-day emergency threshold. China’s power plants need an estimated 1,400 million tonnes of coal supply this year, but could see shortfall of 250-300 million tonnes.
Meanwhile the government is calling on all coal mines to raise production, even the small-scale mines, provided they have met the safety standards and have received permission to operate. Provincial governments in coal-producing areas are starting to constrain coal prices and those in consuming areas are acting to prevent any coal from leaving the province. The large power companies have been exhorted to ensure reliable supply, regardless of cost. Meanwhile the government continues with the construction of 21 new railway lines.
The outlook for 2009 may be favourable, but it seems that China is in for a long hot summer this year.
Philip Andrews-Speed is Director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, UK