Hydropower Shortage In China Sends Coal Prices Higher

• Rocked by an earthquake and extreme heat wave, China’s Sichuan province is grappling with power shortages.
• The region’s reliance on hydropower has made it particularly vulnerable to drought.
• The lack of hydropower has sparked a dramatic increase in coal use.

Times are tough in China’s Sichuan province. The landlocked province in southwestern China is in the midst of an extreme heat wave and resulting drought conditions ranging from severe to extreme. Extreme drought conditions are characterized by major crop losses and widespread water shortages. On top of these desperate conditions, Sichuan was wracked by a magnitude 6.6 earthquake on Monday, leaving at least 74 dead and 26 missing. The mounting humanitarian crisis in Sichuan does not only impact the local residents. While the Sichuanese are suffering acutely from these compound crises, the dire conditions are set to send ripple effects throughout China and the rest of the world.  As a result of the drought (and now the earthquake), Sichuan is not only experiencing loss of crops, it’s also experiencing extreme energy scarcity. The province sources about three-quarters of its electricity from hydropower, which is now greatly reduced as the region’s reservoirs and rivers are drying up. Sichuan water levels are currently at half their normal amount thanks to a punishingly hot summer. Consequently, Sichuanese residents' “power suddenly became scarce for big users in August,” according to a report from Nikkei Asia.

Those “big users” include Toyota Motor, Apple assembler Foxconn Technology Group, among a longer list of major companies that had to shutter their factories in Sichuan and Chongqing for over a week – and that’s before the earthquake hit. As a result, calls are growing louder for China to build more coal-fired plants in Sichuan to shore up energy security. What’s more, the shortage of hydropower in China has sent coal prices through the roof around the world. “China's tightening coal supply has started to spill over into higher prices internationally because the country accounts for more than half of global consumption,” Reuters reported this week.

While context-specific, China’s current coal renaissance is far from an anomaly. As the rest of the world faces severe energy shortages due to the Russian war in Ukraine, many countries have begrudgingly returned to coal, a relatively cheap and available fuel source. In times of widespread uncertainty concerning short-term energy security, world leaders have felt pressured to prioritize the present energy crisis over the longer-term global warming crisis. The trend is a sadly ironic catch-22: China’s current drought woes are almost certainly a result of climate change and are a harbinger of harder times to come. Shifting weather patterns and longer and more extreme heat waves are the new normal, and running back to coal every time there is a hiccup in the energy supply will only make things worse. 

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The common thread between the energy crises in China and Europe is not that renewable energies are unreliable; rather, it’s a reminder not to put all your eggs in one energy basket. In Sichuan, that basket was hydropower. In Europe, it was (predominantly Russian) natural gas. The way out and the way forward in Sichuan, Europe, and the rest of the world is through diversification of energy markets. 

According to Nikkei Asia, ramping up coal production in Sichuan doesn’t make economic sense. Over the last ten years, the province’s existing coal plants ran fewer than 3,000 hours annually on average. “This means they were idle for about two-thirds of the time due to plentiful hydropower,” the article reports. “As a technology requiring high capital investment, this low utilization rate cannot justify new coal capacity.” 

However, it’s also clear that returning to near-total dependency on hydropower would also be a mistake. China should also focus on ramping up resilience efforts, including more robust intra-province energy transmission, diversifying energy sources with solar and wind, and improving pumped hydro energy storage for when hydropower’s supply outstrips demand. And the rest of the world should take notes. 

By Haley Zaremba for Oilprice.com

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