Wikistrat Insider: Why Is China Dependent on Coal?

The worst power shortages in decades and coal prices that keep hitting record highs are only a part of the crisis that China is facing right now. As the world's second-largest economy is suffering from an acute energy supply deficiency, we talked to David Fishman, an expert on China's energy sector, in order to learn the possible solutions, how the world will be affected by the crisis, whether there any winners from this situation or only losers, and when we will see an end to it.


David Fishman is a manager at The Lantau Group and a specialist on the Chinese power sector and energy policy.



Full Transcript:


Marina Guimarães:

Our podcast today discusses China's fuel crisis. We invited Mr. David Fishman, who is a specialist on China's power sector and a Manager at the Lantau Group. Mr. Fishman, thank you so much for joining us here at Wikistrat.


David Fishman:

Good morning or good evening, wherever you are. Thank you for having me.


Marina Guimarães:

So China is the world's second-biggest economy. Still, it's suffering from an energy supply crisis, and last week, coal prices hit a record high, and gas prices soared. Mr. Fishman, why did this deepen China's fuel crisis even more?


David Fishman:

Well, because you have a situation where the supply of fuel is more of an open market situation. So coal suppliers can sell their coal to energy generators in a very open market way, and the price that they pay is determined by supply and demand. But then the rate that the power generators charge for their power when they earn the coal and sell it to the grid, or they sell it to power users is not so open.


David Fishman:

It's not much of an open market compared to the rate that they can pay for the coal, or that they have to pay for the coal. So as a result, you can have a mismatch where costs can rise, but your ability to recover your costs is limited.


Marina Guimarães:

But then is there an alternative for energy supply in China right now? Is China investing in other sources of energy?


David Fishman:

Well, right now, China's building all kinds of energy, all kinds of generation, from coal, wind storage, nuclear of course, but when you have an energy crisis that becomes very apparent in a matter of weeks or a month, you don't really have an option to go build other types of generation very quickly.


David Fishman:

You have to find a way to use the generation that you have right now. Keep in mind, China is not suffering from a lack of capacity. They're suffering from expensive coal, which means they can't use the capacity that they have right now.


Marina Guimarães:

But China is pushing miners to increase the coal production, and it is increasing imports so that power stations can rebuild stockpiles before the winter heating season. But analysts say shortages are likely to persist for at least a few other months. Is there another way out?


David Fishman:

I think that's an accurate assessment that althogh supply of coal-they're certainly pulling out all the stops to try to increase the supply of coal. Like you mentioned, increasing imports, increasing domestic mining, but that in the short-term, I think we've seen all the relief we're going to see in terms of adjusting the price that generators can earn for their power.


David Fishman:

It's already been revised twice and I think we're already at just about the most the policies will flex in order to allow generators to earn more for the power. So really now, the relief has to come from the coal supply. And where else can you get power from? The nuclear power plants are being dispatched at full, you've got your wind and your solar being dispatched at full. You've got your hydro being dispatched at full, and now you need to get more coal onto the grid.


David Fishman:

And so, increasing the coal supply and controlling the price of coal, which are the steps that the Chinese government has been taking in the last week, ensuring that coal supply has a price cap, ensuring that it can't get too expensive for generators to buy, that's the state that we're at right now.


David Fishman:

We are moving into the winter heating season. There's going to be increasing demand for this coal and with prices very high, the only option, really, is going to be for industrial and commercial power users to have to eat the higher costs. The coal generators are going to pay more for coal. They're going to pass those costs on to power users, and the power users are going to find some way to make that work for their cost structure. Probably they're going to raise the price of their products.


Marina Guimarães:

How can these power shortages affect the rest of the world? Is this a global matter or is it a China matter?


David Fishman:

Well, right now, clearly we do have a global energy crisis and we have a global coal market. We have a fairly global gas market. So what happens in China is both a reflection of what's happening around the world, as well as something that will affect the rest of the world because it is indeed a global energy market.


David Fishman:

So certainly, we would expect to say, or we could fairly say that coal prices in China are high because prices in the rest of the world are also high. But also, that demand in China will also contribute, just like demand elsewhere, to keeping those prices high. It's a global economic phenomenon.


Marina Guimarães:

But is there another country that is actually winning with the Chinese fuel crisis?


David Fishman:

You've got coal supplying nations and that's not just the Chinese fuel crisis. Everywhere that is relying on coal and where coal is expensive, your coal-producing nations are doing well, or rather your coal producers are doing well. Indonesia, Australia, I think some North American coal companies, certainly you would expect to see them happy about the very strong prices of coal, although coal-burning power generators obviously are not happy about it.


David Fishman:

Steel producers relying on coal are obviously not happy about it, but coal generating nations and nations where their GDP is really tied up with their coal producers, their coal miners, there's nothing for them to be upset about. Their revenues are higher than ever.


Marina Guimarães:

And looking ahead, what can we expect from 2022? When is this crisis going to be over?


David Fishman:

Well, I think in the short term, with all the efforts that have been made to stabilize the price of coal, I do think we're going to see the most severe scarcity issues for coal in China to be resolved. We're reaching the end of October right now, throughout October, November. I think we're going to hear that the story coming out of China is much less about power curves because of scarce, expensive coal, although I do think it's going to remain scarce and expensive.


David Fishman:

I think we're going to hear more about power curves because of China chasing its energy emissions policies, and controlling its energy emissions and energy intensity. It's a separate factor. It's come up at the same time as the coal scarcity issue, and I think it's going to last longer in the coal scarcity issue.


David Fishman:

So I think by this month or next month, coal prices will stay high, but the policy reform has been such that the generators, the coal fire generators will continue operating their plants, but then the longer-term mid to long-term, three months, four months, six months, I think it's reasonable to believe that we would still have some type of power curbing or power rationing in China, especially for high intensity, high emitting industries. I'm talking chemicals, coal, cement, steel, all of these especially high emitting industries.


David Fishman:

I expect we will continue to see restrictions on their usage of power going into 2022, certainly for the first quarter, maybe going into the second quarter as well.


Marina Guimarães:

And are we likely to see more investments in other sources of energy coming from China?


David Fishman:

Yeah, I think so. I think with the recent market reforms, China has taken a big step towards a liberalized power market where different forms of electricity compete cleanly against each other on the basis of their cost.


David Fishman:

Right now, of course, the markets are a little bit weird. The power markets are new and they're a little bit weird with the very high price of coal. But over the long-term, we see a downward trend for solar and wind development costs, and we see a long-term upward trend for the marginal cost of coal because taking aside the very crazy coal prices right now, we would expect to see coal prices over the long-term to trend upward, which means you have two different types of energy with their long-term costs heading apart from each other. When power consumers are given the choice in open markets to procure the type of energy that they want to use to power their facilities, they're going to choose the most affordable and the most reliable power supply.


David Fishman:

And so going forward, we would expect to see the types of generation capacity that are installed in China to reflect the desires of market players, of buyers. In this case, of consumers that want to procure affordable, reliable power. And right now, those adjectives don't really describe coal as it is both expensive and because it's expensive, it's not even that reliable at the moment.


David Fishman:

Going forward, of course, because of all of the environmental objectives and the decarbonization goals that China has, we are all going to see a lot more wind and solar, and nuclear. And now, not just because of regulatory, because of policy decisions, but also because consumers in the power market will be demanding that type of power generation.


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