Unlit streets, no AC, and higher bills: China’s energy crisis is finally hitting households where it hurts

September 27, 2021, 11:40 AM UTC

Chinese households are beginning to feel the pinch of Beijing’s push to decarbonize the economy as a summer of high energy prices and low electricity supply force local authorities to ration electricity usage.

Blackouts across several of China’s northern provinces switched traffic and street lights off last weekend, causing miles-long traffic jams in several cities. Residents of high-rise apartment buildings were forced to take the stairs in some cities where building management suspended elevator services to conserve electricity. On Sunday, the provincial energy administration in China’s southern Guangdong province called for residents to stop using air conditioning and rely on natural light instead of electric bulbs.

Ordinarily, Chinese authorities spare household consumers from the shock of power outages, preferring to force industrial users to scale back their energy usage first—which they have. On Sunday, several Apple and Tesla suppliers announced days-long factory closures to comply with orders from local authorities to ration electricity.

But targeting industry alone hasn’t been enough. With Beijing lumbering towards its 2060 deadline of achieving a net-zero carbon economy, ordinary citizens have discovered rather suddenly that they will have to adjust, too.

The South

The primary reasons for power shortages in the south of China are different from what’s causing them in the north. The south is running low on hydropower; the north is suffering from surging coal prices.

China’s southern provinces—like the manufacturing hub of Guangdong—have suffered power shortages since June, when local officials ordered manufacturers to ration power, forcing factories to cut output.

Guangdong obtains some 30% of its electricity from hydropower, which is generated in nearby Yunnan province. But a warmer-than-average summer drained reservoirs and evaporated energy supply in Yunnan. At the same time, surging export volumes caused a spike in industrial energy demand in Guangdong, leading to a power shortage.

Yunnan’s local demand for hydropower has spiked, too. Beijing’s push to decarbonize its industrial sector prompted power-hungry aluminum smelters to relocate to the hydro-rich province. The increased presence of metalworks heightened competition for local green energy. (One loser in the energy grab? Crypto-miners, who were forced out of the province.)

The North

China’s northern provinces—the nation’s coal country—are more reliant on fossil fuels for energy than their southern counterparts. The arid and frigid north relies heavily on coal-fired power plants to generate electricity, which has made it difficult for provincial authorities to meet Beijing’s low quota for provincial carbon emissions, which the government introduced in 2019.

“A number of provinces were fingered for exceeding their emission reduction targets [in August] and so their immediate action was to start rationing power,” says David Fishman, a consultant at energy consultancy Lantau Group. Authorities rationed energy-hungry industries, like Bitcoin mining and aluminum smelting, first.

But China’s policy of emission reduction is a secondary cause of the power shortages, Fishman says. The primary culprit, he argues, is coal and gas prices which have more than doubled in China this year due to a resurgence in “post-pandemic” global demand. The problem extends beyond China. The U.K. is suffering an energy crisis so severe that it’s threatening the food supply.

But in China, the government’s tight regulation of its energy markets has forced electricity producers to swallow the rising costs of feedstock, like coal, rather than pass them on to consumers. For many of those power producers, the cost has gotten too high.

“Because of the way China’s pricing mechanisms work, energy producers have had to accept thinner and thinner margins on electricity generation until, with coal prices spiking, they just can’t justify operating anymore,” Fishman says.

Consumer Costs

With production costs ballooning, China’s energy producers are lobbying the government to permit the unthinkable: let consumers bear the cost.

Until two years ago, the government permitted energy producers to raise electricity rates a mere 10% to account for a sudden spike in operating costs. But, in October 2019, China’s state planner, the National Development and Reform Commission (NDRC), ordered a freeze on rate hikes and set no end date for the policy.

Last month, 11 power producers in north China petitioned the government to permit grid operators to increase prices for end-users. If rocketing costs can’t be passed on to users, the power producers warned, those 11 companies faced bankruptcy. Early this month, the Beijing Electric Power Industry Association sounded a similar alarm.

In Guangdong on Monday—where temperatures reached 91 degrees Fahrenheit (33 degrees Celsius) and households were asked to turn off the AC—the provincial government announced it would permit generators to pass costs on to consumers. Fishman says this is a good thing.

“We’re about to find out for the first time ever just how much more Chinese consumers are willing to pay for fossil fuels,” Fishman says, adding that “if you want to have a market-driven approach to decarbonization you got to expose end-users to the true cost of their power.”

While China continues towards decarbonization, making consumers pay more for pollution will help spur that transition. The challenge for Beijing will be minimizing the disruption of forcing its people to fund the change.

More must-read business news and analysis from Fortune:

Subscribe to Fortune Daily to get essential business stories straight to your inbox each morning.