Updates on the most concerning topic for member companies all over the country
The current round of power restrictions in China is now already lasting about a month. Here the German Chamber is sharing its perspective on the situation as of today.
In a Nutshell
- Companies’ situation: Improvement in some places, many areas still affected or even worsened during the last days.
- Pain points: Mainly onsite safety and additional costs due to uncertain production schedules; production plans and long-term planning severely impacted.
- Countermeasures: If anything, negotiating power supply with government, night shift production or investment in generators, renewable and energy-efficient processes have been done or are considered.
- Supply chains: There are all kind of parts in the upstream and downstream supply chains which are or soon to be interrupted.
- Future Development: Increased efforts by the government to improve the situation, but also a cold winter forecasted
- Messages to the authorities: No “one-fits-all” but individual approaches, increased coordination, sufficient lead time, and transparent information on future plans necessary
Power shortage development after October holidays
At the end of September, many companies had hoped for an improvement of the situation after the National Holidays. However, the situation has only slightly improved in some locations. In many areas there is either no improvement with cuts resulting in capacity reductions between 30%-70% of previous levels, or it has just been worsening the last few days with new sudden total power cuts.
Situation remains dynamic
Often, a weekly schedule is announced by the local authorities: for example, 3/4 (three days production / four days with very limited power supply) or 2/2. Still, companies often receive informal short notice announcements about the electricity supply for the same day.
Pattern?
There is a slight tendency that more often it is smaller companies in rather small cities with relatively high electricity consumption (indicators: value-added or the tax revenue in relation to the kWh) who are affected. Additionally, there are larger companies in areas with a higher electricity consumption, and here there are cuts even after another investment of the company was announced just weeks ago in the respective locality. So, after a month of cuts, it remains a diverse picture.
Some relief
There are cases where companies have been prioritized by a bigger customer as core supplier and have been put on certain lists by the local authorities. These lists can be either “Whitelists” or “ABC categories” with different levels of electricity supply, but the criteria how to get on these lists or in which category a company is integrated, remain vague at best. Other companies managed to negotiate an individual solution with local authorities (see also below).
Major Pain Points for Companies
Safety Issues
Sudden production stops could lead to safety problems on site.
Unstable Production Schedule Increases Costs
Not only that the periods when production is stopped are causing capacity reductions. Also, the ramp up of production only for a short period until the next power cut causes damage to machines or other additional costs. For some industry sectors, especially the process manufacturing industries, only producing at least four days without interruption is feasible.
Insurance/Force Majeure
Companies are in need of written official announcements. The usually used oral or WeChat/SMS announcements make it difficult to handle potential insurance matters. Some Companies consider relying on “force majeure”, if the situation does not change within the next weeks.
Compensation
Some companies approached their local authorities for compensations and in a few locations, companies managed to get some damage compensation.
Planning
Both, precise production planning as well as more mid- and long-term planning, especially also for 2022 are severely affected.
Future Growth / China Strategy
The quite robust growth momentum in China has been stalled now with a new kind of uncertainty many companies who are operating here long-term haven’t seen so far.
Companies' Countermeasures
Night Shift
Shifting as much production as possible into the nightshift.
Negotiating With Authorities
Companies are negotiating with several authorities for an individual approach, mostly with their industrial parks, the local authorities at the district level, the power supply bureaus at the city level as well as the Development and Reform Commissions.
While in some places local authorities do not show willingness to adapt the schedules, sometimes they are indeed able to twist the power supply arrangements a little bit more to companies’ needs. One company, for instance, managed to convince the authorities (the power supply bureau together with their main contact at the district level): Instead of the strict 2/2 pattern the company can now produce every day, but will stop the production quickly when electricity for the region is getting scarce during the day. Such an arrangement is feasible because the company is able to stop their production within 20 minutes. Here it is also necessary to keep the communication line with the authorities constantly open.
Solar Panels
Quite some companies are investing in solar panels. The costs, however, are already rising, so companies need to make quick decisions right now if they would like to invest.
Emergency Diesel Generators
Since a lot of companies opt for this temporary solution, prices are rising at the moment for both leasing and purchasing generators.
Effects on Supply Chain
If companies are not affected by the power cuts, their supply chain in China surely are – both upstream and downstream. Here, long-term relations with suppliers pay out, so companies might be prioritized by those.
Also, for downstream supply chains, even if companies are not affected, they see that their customers might not get some of the other parts needed for the product in time, or the customers would not be able to work with the machines delivered due to facing power cuts themselves. So, there are all kinds of parts in the supply chains which are interrupted or will soon be interrupted.
Still, quite a few companies have materials or finished goods on stock and somehow navigate the situation. However, in the foreseeable future, there might be even more significant distortions – especially since scarcity is starting from the raw material supply.
Indication to Future Development
Trying to estimate the future situation can only be done – if it can be done at all – against the background of the previous situation:
Power Shortages Factors
On the market side, coal prices surged amid a rise in demand and slowdown in supply. While China’s and the global recovery pushed up demand for production and electricity, coal supply was strained against the background of a years-long anti-pollution campaign. Hundreds of coal mines had been closed as the government made pollution control one of its top priorities. China’s coal imports were also interrupted, adding to a constrained supply.
In addition, China sees a hybrid power market, resulting in a less flexible pricing setting. Although coal prices are driven by the market, electricity prices are set by the government or can only fluctuate in a certain range. When coal prices were regarded too high by generators to make a profit, many lost incentives to turn on full capacity. Power producers instead started to make excuses to avoid loss, only adding pressure to the power grid.
But this round of shortages in September happened quite suddenly which is why the weather situation most likely played a significant role. According to a government official, the power situation was seen tense for this year anyway, however, now unfavorable weather conditions affected renewable energy supply, which was especially painful in the northeastern provinces. When power from solar and wind plummeted in September, state grid resorted to turn off power for all, including to traffic and households. Heat waves in the summer in Southern China also pushed up power consumption as households turned on air conditioning. The recent floods in some coal-strong provinces like Shanxi and Inner Mongolia made things only worse.
Future Outlook
On the one hand, the government is making substantial efforts to ease the future situations: Power prices are now allowed to fluctuate further from the official benchmark, power generators signed contracts with coal provinces for granting certain supply, coal mines are now being reactivated as are railways for importing coal.
On the other hand, the forecasted comparatively cold winter adds another layer of uncertainty. Also, in informal talks with governments, their vague estimations rather point towards the end of the year. Since each city at the moment seems to maneuver by themselves through the situation and have their own approach for how to achieve the target provided by the provincial level and each city, predictions are even harder to make.
What is foreseeable, however, is that when the situation stabilizes even more efforts will probably be put into achieving the decarbonization goals – for the purpose of making up for the again ramped up coal usage.
The German Chamber’s Current Messages to the Chinese Authorities - What We are Advocating For
- Individual approaches for companies’ power supplies (no “one-fits-all” approach)
- More coordination among various local authorities
- Earlier announcements to enable companies to adapt their production plans
- Clearer indications on the future electricity supply situation and plans on the national, provincial and city level
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