Analysis! Why does our country impose power restrictions and energy controls?

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Recently, many regions in China have seen red lights appear in terms of energy consumption controls. With less than four months left before the year-end assessment, the areas identified by the Ministry of Industry and Information Technology have begun to take measures to address these energy consumption issues as soon as possible. Provinces with strong chemical industries such as Jiangsu, Guangdong, and Zhejiang took drastic actions, imposing measures such as shutting down factories and cutting off power to thousands of enterprises, leaving local businesses completely caught off guard. Why are power cuts imposed and production halted? What impacts will it have on the industry? Multiple provinces implement power cuts and production restrictions; recently, regions such as Yunnan, Jiangsu, Qinghai, Ningxia, Guangxi, Guangdong, Sichuan, Henan, Chongqing, Inner Mongolia, and Henan have begun taking measures to control energy consumption in line with the dual-control targets for energy use. Power and production restrictions have gradually spread from the central and western regions to areas in the east such as the Yangtze River Delta and the Pearl River Delta. Sichuan: Suspend non-essential production, lighting, and office loads. Henan: Some processing enterprises have had power cuts for over three weeks. Chongqing: Some factories will face power cuts and halt production in early August. Inner Mongolia: Strictly control the duration of power cuts for enterprises, with electricity prices allowed to rise by no more than 10%. Qinghai: Power rationing warnings have been issued, and the scope of power rationing continues to expand. Ningxia: High-energy-consuming enterprises to suspend production for one month. Power cuts in Shaanxi to end of the year: The Development and Reform Commission of Yulin City in Shaanxi has set targets for controlling energy consumption, requiring that no new \"high-energy-consuming and high-emission\" projects be put into operation from September to December. For such projects that were built this year and have already started operating, production must be reduced by 60% compared to last month’s output levels. Other enterprises in this sector are required to reduce the operational load of their production lines and shut down certain furnaces in order to achieve a 50% reduction in production by September. Yunnan: Two rounds of power rationing have been implemented, with further measures to be taken in the future. The average monthly production of industrial silicon manufacturers from September to December shall not exceed 10% of their August production level (i.e., a 90% reduction in production) ； From September to December, the average monthly output of the yellow phosphorus production line shall not exceed 10% of the output in August 2021 (i.e., a 90% reduction in output). Guangxi: Guangxi has introduced new dual-control measures, requiring that starting from September, high-energy-consuming industries such as electrolytic aluminum, alumina, steel, and cement have their production restricted, with clear targets for reducing output set. Shandong faces dual controls on energy consumption, with 9 hours of power shortages per day: According to a warning issued by the Rizhao Power Supply Company, there is a shortage of coal supply across Shandong province, resulting in a daily power deficit of 100,000–200,000 kilowatts in Rizhao. The peak periods for these shortages are between 15:00 and 24:00, and these shortages will continue until September, during which time power rationing measures will be implemented. Jiangsu: At the beginning of September, a meeting held by the Jiangsu Provincial Department of Industry and Information Technology ordered that special energy-saving inspections be conducted on enterprises with an annual comprehensive energy consumption of over 50,000 tons of standard coal. Such inspections were carried out on 323 enterprises in the province that met this threshold, as well as 29 enterprises involved in \"high-energy-consuming and high-emission\" projects. Textile and dyeing clusters have issued orders to suspend production, with over 1,000 enterprises operating for two days and then stopping for two days. Zhejiang: It is implementing measures to reduce electricity consumption for key energy-consuming enterprises within its jurisdiction, and these enterprises will be shut down, with the shutdown period expected to last until September 30. Anhui faces a 2.5 million kilowatt power shortage; orderly electricity use is implemented across the province: According to the Office of the Provincial Energy Supply Assurance Work Leading Group, there will be a shortfall between electricity supply and demand in the province. On September 22, the maximum electricity demand is expected to reach 36 million kilowatts, resulting in a gap of around 2.5 million kilowatts between supply and demand – a situation that is quite critical. It has been decided to implement a province-wide plan for orderly electricity use starting from September 22. Guangdong: Guangdong Power Grid stated that, starting from September 16, a power usage plan of \"operating for two days and shutting down for five\" will be implemented. There will be staggered shutdowns on Sundays, Mondays, Tuesdays, Wednesdays, and Thursdays each week; only the essential power loads will be maintained on these days, with such loads accounting for less than 15% of the total load! Multiple companies announce production halts and reductions; affected by the dual-control policies, various enterprises are issuing announcements regarding the suspension or reduction of their production. On September 24, Limin Co., Ltd. announced that its wholly-owned subsidiary, Limin Chemical, would suspend production temporarily in order to comply with the regional requirements regarding dual control of energy consumption. At noon on September 23, Jinji Shares announced that recently, the management committee of Taixing Economic Development Zone in Jiangsu Province, in accordance with the requirements set by higher-level authorities regarding \"dual control of energy consumption,\" recommended that relevant enterprises in the zone implement measures such as \"temporary shutdowns\" and \"temporary production restrictions.\" The company cooperated actively by implementing temporary production restrictions on its wholly-owned subsidiaries, Jinyun Dyes and Jinhui Chemicals, which are located within the industrial park, starting from September 22. That night, Nanjing Chemical Fibers issued a statement saying that due to the tight electricity supply in Jiangsu Province, its wholly-owned subsidiary Jiangsu Jinling Cellulose Fiber Co., Ltd. had suspended production temporarily starting from September 22, with production expected to resume in early October. On September 22, Yingfeng Shares announced that, in order to alleviate the coal inventory situation and ensure the safe and orderly operation of enterprises that rely on coal for heating, the company would suspend production temporarily from September 22 to 23. In addition, dozens of listed companies such as Chenhua Co., Ltd., Hongbaoli, Xidamen, Tianyuan Co., Ltd., and *ST Chengxing have announced that their subsidiaries have suspended or restricted production due to the ‘dual control measures on energy consumption’. What are the reasons for shutting down power supplies and reducing production? 1. Shortage of coal and electricity: Power cuts are essentially caused by a shortage of coal and electricity. National coal production has hardly increased since 2019, yet electricity generation is on the rise; coal stocks at northern ports and in various power plants have declined significantly and are visibly low. The reasons for the coal shortage are as follows: 1. Previous reforms in the coal supply sector led to the closure of a number of small coal mines and open-pit mines that had safety issues; no new large-scale coal mines were established. With rising demand for coal this year, the supply of coal has become strained ； 2. The export situation is good this year; light industry enterprises and low-end manufacturing firms are using more electricity. Power plants are major consumers of coal, and high coal prices increase their production costs, leaving them with little incentive to increase output ； 3. This year, coal imports have shifted from Australia to other sources; the price of imported coal has risen significantly, and world coal prices remain high. 2. Why not increase coal supply instead of restricting electricity use? In fact, the total power generation in 2021 was not low. In the first half of the year, China’s total electricity generation was 3,871.7 billion kWh, twice that of the United States. At the same time, our country’s foreign trade has grown very rapidly this year. Data released recently by the General Administration of Customs show that in August, the total value of China’s foreign trade imports and exports was 3.43 trillion yuan, representing a year-on-year increase of 18.9%. For 15 consecutive months, there has been positive year-on-year growth, indicating a further trend of stability and improvement. In the first 8 months, China’s total value of foreign trade imports and exports amounted to 24.78 trillion yuan, representing a year-on-year increase of 23.7%, which was 22.8% higher than the same period in 2019. This is because foreign countries were affected by the pandemic and were unable to produce normally, which increased the production burden on our country. It can be said that throughout 2020 and in the first half of 2021, our country almost single-handedly ensured the global supply of goods; as a result, our country’s foreign trade was not affected by the pandemic at all, and its import and export figures were actually much better than those in 2019. As exports increase, the demand for raw materials also rises, leading to a sharp increase in the demand for commodities. The significant rise in steel prices since the end of 2020 was caused by the substantial increase in prices of iron ore and iron concentrate. The main inputs for the manufacturing industry are raw materials and electricity; as production demands increase, so does China’s need for electric power. Returning to the question of why coal supply isn’t expanded when power rationing is instead implemented? On one hand, there is a high demand for electricity generation, yet the costs of generating electricity have also increased. Since the beginning of this year, the supply and demand for coal in the domestic market have remained tight; prices of thermal coal have not declined despite being in the off-season, and coal prices have risen sharply while remaining at high levels. Coal prices remain high and unlikely to fall, resulting in severe cost inversion for coal-fired power companies in terms of production and sales costs, thereby increasing their operational pressures. According to data from the China Electricity Council, the unit price of standard coal for large power generation groups increased by 50.5% on a year-on-year basis, while electricity prices remained largely unchanged. As a result, the number of coal-fired power plants operating at a loss increased significantly, and the entire coal-fired power sector suffered losses. It is estimated that for every unit of electricity generated, power plants incur losses of over 0.1 yuan; generating 100 million units of electricity results in losses of 10 million yuan. For those large-scale power generation companies, the monthly losses exceed 100 million yuan. With coal prices remaining high and electricity prices subject to controlled fluctuations, it is difficult for power plants to cover their costs by raising the price at which they sell electricity; as a result, some power plants prefer to generate less electricity or even stop generating it altogether. Furthermore, the high demand driven by additional orders resulting from the pandemic overseas is not sustainable. The production capacity added in the domestic market to handle additional orders will eventually become the final straw that crushes a large number of small and medium-sized enterprises. Only by restricting production capacity at the source and preventing some downstream enterprises from expanding recklessly can we truly protect them in the event of a future order crisis. On the other hand, there is an urgent need to achieve industrial transformation. Our country needs to phase out outdated production capacities and carry out supply-side reforms. Aside from achieving the dual-carbon goals and meeting environmental protection requirements, there is another important purpose: to facilitate industrial transformation, shifting from traditional energy production to energy-saving production as the main focus. Over the past few years, our country has been moving toward this goal; however, since last year, due to the pandemic, the demand for high-energy-consuming products has increased, placing greater pressure on production in these areas. As the pandemic ravaged the world and global manufacturing came to a standstill, a large number of manufacturing orders flowed back to the mainland. However, the current problem in the manufacturing industry is that the power to set prices for raw materials is in the hands of international capital, leading to soaring prices; meanwhile, the power to set prices for finished products is affected by internal competition resulting from capacity expansion, with companies competing to lower prices. At this moment, the only solution is to limit production; through supply-side reforms, it is possible to enhance China’s manufacturing sector’s position and bargaining power within the global supply chain. Furthermore, we will need efficient production capacity for a long time to come; an increase in the added value of enterprises’ products is the dominant trend going forward. At present, many companies in traditional sectors in China rely on undercutting each other to survive, which is detrimental to the country’s overall competitiveness. New projects are all established by replacing outdated production capacity in a certain proportion. From a technical perspective, reducing energy consumption and carbon emissions in traditional industries significantly requires large-scale technological innovations and equipment upgrades. In the short term, in order to achieve the goals set for the transformation of our country’s industries, it is not possible to simply increase coal supply; power cuts and production restrictions are the main approaches for traditional industries to meet the targets related to energy consumption control. Furthermore, the risk of inflation cannot be ignored. The United States has printed too many dollars, and these dollars won’t disappear; they have come to China. China’s industrial manufactured goods are sold to the United States in exchange for dollars. But these dollars cannot be spent in China; they need to be exchanged for RMB. For every dollar that Chinese companies earn in the United States, the People’s Bank of China must exchange it for an equivalent amount of RMB. As a result, there is more and more RMB. The excessive liquidity in the United States has flowed into China’s market. Furthermore, international capital drives up the prices of commodities wildly; items such as copper, iron, grains, oil, and beans can easily see their prices inflated, thereby creating potential inflation risks. Excess money on the supply side can boost production, but when it shifts to the consumption side in excessive amounts, it can easily lead to rising prices and inflation. Therefore, controlling energy consumption is not just a requirement for carbon neutrality; behind it lies **good intentions! 3. Assessment of “dual control of energy consumption”. Since the beginning of this year, in order to achieve the dual-carbon goals, the assessment of “dual control of energy consumption” and the regulation of high-energy-consuming and high-emission industries has been quite strict; the results of such assessments serve as a basis for evaluating the performance of local leadership teams. The so-called “dual control of energy consumption” policy refers to the policies related to the dual control of energy consumption intensity and total volume. “\"High-energy and high-emission\" projects refer to projects with high energy consumption and high emissions. According to the classification by the Ministry of Ecology and Environment, the scope of \"high-emission and high-consumption\" projects includes six industry categories: coal power, petrochemicals, chemicals, steel, non-ferrous metal smelting, and building materials. On August 12, the **Development and Reform Commission’s ‘Barometer of Progress toward Energy Consumption Control Targets in Various Regions during the First Half of 2021’ showed that in terms of reducing energy intensity, nine provinces (regions) – Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Xinjiang, Yunnan, Shaanxi, and Jiangsu – experienced an increase in energy intensity instead of a decrease during the first half of the year; these regions were classified as being in the red category, indicating a high level of warning ； In terms of controlling the total energy consumption, eight provinces (regions) namely Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Yunnan, Jiangsu, and Hubei have been classified under the red level of warning. In some areas, there are still issues such as the blind expansion of high-energy-consuming projects and an increase rather than a decrease in total energy consumption; during the first three quarters, energy consumption quotas were overused. For example, due to the pandemic in 2020, various regions appealed for support and managed to get approval for many high-energy-consuming projects, such as those in the fiber optics and data center sectors. By the second half of this year, many of these projects began operations, resulting in a rise in overall energy consumption; in fact, 9 provinces and cities saw their energy consumption targets reach critical levels. Entering the fourth quarter, with less than four months left before the year-end ‘exam’, the regions identified by the Ministry of Industry and Information Technology have begun to take measures in an effort to improve their energy consumption levels as soon as possible and avoid exceeding their energy quotas. Provinces with strong chemical industries such as Jiangsu, Guangdong, and Zhejiang took drastic actions, imposing measures such as shutting down factories and cutting off power to thousands of enterprises, leaving local businesses completely caught off guard. Impact on traditional industries: Production restrictions have currently become the most direct and effective way for various regions to control energy consumption. However, for many industries, the changes in the economic landscape this year, the recurring outbreaks of the pandemic abroad, and the complex trends in commodity prices have posed various challenges. The production restrictions imposed as part of efforts to control energy consumption have once again caused disruptions. For the petrochemical industry, although power shortages have occurred during peak electricity demand periods in previous years, situations such as \"operating for two days and shutting down for five\", \"90% production cut\", and \"thousands of enterprises halting or reducing production\" are unprecedented. If there is a prolonged power shortage, production capacity will certainly not be able to keep up with demand, forcing further reductions in orders and thus increasing the shortage on the supply side. For the energy-intensive chemical industry, the traditional peak seasons of \"Golden September and Silver October\" already see a severe shortage of supply. Coupled with the strict measures aimed at controlling energy consumption, this will lead to a reduction in the supply of energy-intensive chemical products. Additionally, the ongoing rise in prices of raw materials such as coal and natural gas will contribute to further increases in the prices of chemical products throughout the fourth quarter. Companies will thus face dual pressures in the form of rising costs and supply shortages, and this challenging situation is set to continue! **Control ● Is there any deviation in the practice of large-scale power cuts and production reductions? The impact of power rationing on the industrial chain will undoubtedly spread to more sectors and regions, and it will also force enterprises to improve efficiency and reduce emissions, which is conducive to the development of China’s green economy. However, during the process of power rationing and reduced production, are there any cases of one-size-fits-all approaches or deviations from the proper course of action? Some time ago, workers at a chemical plant in Ordos, Inner Mongolia Autonomous Region, sought help online: the Ordos Electric Power Bureau experienced frequent power outages recently, sometimes even multiple times a day, with up to 9 outages in one single day. Power outages that cause the calcium carbide furnaces to stop operating lead to the lime kilns having to start and stop frequently due to insufficient gas supply, thereby increasing safety risks in operations such as ignition. Due to repeated power outages, the calcium carbide furnace can sometimes only be operated manually. Previously, one calcium carbide furnace had unstable temperature, and the calcium carbide that sprayed out burned the robot; if human operation had been involved at that time, the consequences would have been disastrous. For the chemical industry, operating at low load poses significant safety risks in the event of a sudden power outage or shutdown of the plants. A representative from the Inner Mongolia Chlor-Alkali Association said that repeated power outages make it difficult to shut down and restart calcium carbide furnaces, and this can lead to safety hazards. Furthermore, the PVC production process associated with calcium carbide plants is classified as a Class 1 load; repeated power outages could lead to chlorine gas leaks, and the potential safety hazards to the entire production system as well as to human life resulting from such leaks cannot be assessed. As the chemical plant worker mentioned above, frequent power outages “not only make it impossible to work, but also eliminate any guarantee of safety.” In the face of the inevitable new wave of fluctuations in raw material prices, power shortages, and potential deviations from the planned course, **measures were taken to ensure a stable supply and maintain price stability. ●**The National Development and Reform Commission and the **Energy Administration jointly carry out supervision efforts to ensure a stable supply of energy and stable prices. This supervision is primarily conducted on-site, with a focus on assessing the implementation of policies aimed at increasing coal production and supply in relevant provinces and enterprises, the expansion and activation of advanced production capacities, the procedures for completing the construction and commissioning of related projects, the full implementation of medium- and long-term contracts for coal used in power generation and heating, the compliance with such contracts, as well as the enforcement of price policies in the areas of coal production, transportation, trading, and sales. It also involves monitoring the implementation of the market-based pricing mechanism for coal-fired power generation, which consists of a base price plus adjustments up or down. To address the difficulties and challenges faced by enterprises in unlocking their productive capacity, supervision efforts will be extended to these enterprises and relevant departments to ensure the implementation of various requirements related to streamlining administration and improving services. These efforts will help enterprises resolve the key issues that hinder the release of their production capacity, and by taking measures such as handling relevant procedures simultaneously, efforts will be made to increase coal supply and meet the people’s needs for coal in their production and daily lives. ●**NDRC: 100% of coal used for heating in the Northeast will be subject to medium- to long-term contract prices. Recently, the NDRC will organize the economic management departments of relevant provinces and regions, as well as the main coal production enterprises in the Northeast, coal mines responsible for ensuring supply, and key power and heating enterprises in that region, to finalize medium- to long-term contracts for coal use during the heating season, thereby ensuring that 100% of the coal used by these power and heating enterprises comes under such contracts. Furthermore, to ensure the effective implementation and success of the range of measures put in place to maintain energy supply and stabilize prices, the **Development and Reform Commission** and the **Energy Bureau** have recently sent inspection teams to oversee the implementation of policies aimed at increasing coal production and supply, the expansion and activation of advanced production capacity, as well as the procedures required for the completion of construction projects. These teams also monitor the enforcement of price policies in all stages of coal production, transportation, trading, and sales, with the goal of increasing coal supply and meeting the needs of the public for coal in their daily lives and industrial activities. ●**NDRC: Maintaining a 7-day coal reserve safety threshold. According to the NDRC, in order to ensure a stable supply of coal and keep prices stable, and to guarantee the safe and steady supply of coal and coal-fired power, relevant authorities have called for the improvement of systems for safe coal storage in coal-fired power plants, with lower standards for coal reserves required during peak periods, in order to maintain a 7-day coal reserve safety threshold. At present, the **Development and Reform Commission** and the **Energy Bureau** have established special teams to ensure a stable supply of thermal coal. Power plants that adopt a differentiated coal storage system based on peak and off-peak periods are included in the scope of priority protection, so as to ensure that these plants maintain a minimum stock of coal sufficient for 7 days of operation. When the available days of thermal coal inventory during the operation of the power plant fall below 7 days, the special supply guarantee mechanism is immediately activated; relevant departments and key enterprises will provide coordinated support in terms of coal sources and transportation capacity.