Global Energy Shortage (ca. 2021)
A story in 3 parts with a beginning, middle, and ... another middle?
Here are a few headlines from leading publications about the current energy crisis sweeping the world —
Whenever countries speak of energy security, the tone is overtly defensive and is inevitably about persisting with fossil fuels to power its industries and homes.
Coal is a climate menace, but it is hard to argue that it is the safest bet for year-round supply of electricity to meet energy demand. That was until now.
Coal futures continued to break fresh records to $228 per metric ton, after gaining 27% in September, and adding 171% so far on the year.
Yikes.
When coal prices increase to such levels, a lot of countries (ironically) feel the ‘heat’ *chuckles*.
As with everything about coal, our story starts in China.
TL;DR
Part 1 - China
— Steep global post-pandemic recovery sent Chinese manufacturing on overdrive, increasing the demand for coal
— Demand outmatched supply significantly, and importing coal wasn’t straightforward for various reasons
— Droughts in 2020 further affected hydroelectricity generation in China, additionally stressing coal demand
— Regulations stop power companies from increasing electricity prices, and they had no choice but to ration available electricity resulting in widespread power outages in homes and industries
Part 2 - Europe
— Natural gas caters to a quarter of the electricity demand
— Lower volumes of gas piped in from Russia, underperformance of usual gas suppliers, lower levels of gas stored, and very low wind speeds have resulted in sky-high electricity prices in certain markets, and affected the financial health of utilities in others
— Heightened demand for natural gas globally further reduced supply to Europe and increased prices
Part 3 - India
— India is the 3rd largest importer of coal, after China and Japan
— Inefficiencies within its domestic coal sector and the fine margins on which it operates were laid bare when coal supply was stretched
— Industrial demand shot up after the second wave of Coronavirus battered the country, and power supply could not keep pace
— Unanticipated rains in September affected production significantly and sent the domestic power sector into a crisis, at a time when coal imports are prohibitively priced
— Coal stocks are currently down to an average of 4 days of power, and widespread outages can be expected if imports aren’t ramped up quickly
Part 1: Origin Story - China
If the tourism industry and pop-media have successfully convinced you that ‘revenge travel’ is a real thing, you’d surely not have trouble believing me when I say ‘revenge manufacturing’ is also very real.
Post-pandemic pent-up demand went through the roof globally, and China, being the world’s factory, happily obliged. (Read here about Aluminium prices and the early markers of the energy crisis)
Demand for coal increased by almost 15%, according to certain estimates, while production of coal increased by only 5%.
China is the largest coal importer globally, and relies on imports to offset domestic demand to a significant degree. Its top 3 suppliers are Australia, Indonesia, and Russia. It is safe to say imports ran into all sorts of trouble.
— China and Australia are caught in a diplomatic spat, and China has banned imports of all Australian products, including coal
— Heavy rains in Indonesia continues to affect coal production and supply of coal for exports, amidst an export ban on 30+ coal manufacturers for failing to meet domestic supply obligations
— Coal supplies from Russia dropped 40% YTD, primarily due to stringent sanitary-epidemic checks over railroads and limited rolling stock with the railway companies.
The power deficit was further compounded by severe droughts that affected hydropower generation. Hydropower is the next best source of electricity with an installed capacity of 19%. (Coal leads the way at 54%.)
Last year's drought in China's Yunnan province slashed hydro power generation by nearly 30% during the first five months of 2020, according to official data. Output this year remains curtailed by around 10%.
(Yunnan usually accounts for roughly a quarter of China's total hydro generation.)
All this is playing out quite poorly over the last couple of weeks.
According to the South China Morning Post, quoting analysis by Sinolink Securities, stocks of coal used to generate electricity – held by the nation’s six biggest power-generation groups – stood at a record low of just 11.31m tonnes as of 21 September – enough to produce power for 15 days.
Despite sky-high coal prices, regulations do not allow power companies to raise electricity prices, and power outages have become quite common across the country.
This doesn’t bode well for the global supply chain that is ever so reliant on Chinese manufacturing output, or for the Chinese winter.
Part 2: The Sequel - Europe
If China is the largest coal importer, the EU imports a quarter of the global natural gas supply.
Increased economic activity and a heightened demand for natural gas has driven prices to its highest in seven years.
Natural gas prices have risen 24% in the last month, and over a 120% in the last year
This coincides with an underperformance of several key European gas suppliers.
Exports from Norway have fallen 93 percent so far this year, from Trinidad 37 percent, and from Nigeria 19 percent. These countries accounted for 10 percent of global supplies in 2020, so their shortfall is material
The underperformance is because of a scale-back in production and drilling activity during the pandemic, which unfortunately comes at the back of Europe’s transition away from natural gas production. The Netherlands, Europe’s top domestic producer, began phasing out their main gas field in 2018.
This, alongside a generally poor year for wind power generation, has significantly driven up the need for an already reduced supply of natural gas. The percentage of working gas in storage in Europe is at about 75%, compared to 94% this time last year.
And for the big reveal…
China has been consistently importing natural gas over the last year and at an increasing pace
Volumetrically, China’s demand has absorbed 80 percent of the growth in global LNG supply. In other words, 80 percent of the new LNG produced in 2021 has gone to China, forcing the rest of the world to apportion the remainder. Europe has lost out, its imports falling 20 percent.
From Russia, With(out) Love?
Russia supplied nearly 40% of Europe’s natural gas demand in 2019 and 2020, but has since scaled back distribution. Natural gas flows per day in the 2000-km Yamal pipeline, that originates in Russia and ends in Germany through Belarus and Poland, fell to just below a quarter of its typical rate in July this year and hasn’t increased since.
There have been claims that Russia has intentionally reduced supply, with a view to hasten approvals for Nord Stream 2 (NS2). NS2 is an underwater gas pipeline proposed to be constructed across the Baltic Sea that would directly connect Russia and Germany.
NS2 comes with political baggage, primarily because it takes away Ukraine’s leverage to be relevant to the European energy landscape. Ukraine is an important ally to the West, and the EU-bloc did not view Russia’s incursions in Crimea very kindly.
There’s no way to know Russian motivations for sure, but educated guesses can be made.
Special section on Britain (because Brexit)
Britain finds itself in soup over natural gas suppliers going belly-up because of an inability to pass on increased gas prices to customers due to regulations (like China).
Seven natural gas suppliers have gone bankrupt in the past six weeks from a gas price increase of 70 percent in August. Three others may face bankruptcy as well.
The idea of state-backed loans to the power companies has been floated, but it is not going to be a straightforward option. There is stiff opposition over the use of taxpayer money to offset fossil-fuel price shocks in a country with a ratified green policy. That it is also hosting the UN Climate Summit later this year certainly does not help the cause of these power companies.
All this while electricity prices are at 3x or 4x the averages seen in the last couple of years in countries like Spain and Germany.
It is going to be a long winter in Europe (and Britain).
Part 3: Post-credits - India
India is the third largest importer of coal after China (17.3%) and Japan (16.8%), at 16.7% of total imports in 2020.
According to India’s power ministry, the 135 thermal power plants of Asia’s third-largest economy had an average of just four days of coal stocks as of Friday, down from 13 days of supplies in early August. Of the plants monitored daily, more than half have less than three days of stocks.
India is facing knock-on effects of the severe power crunch in China, and is competing with its neighbour to meet its domestic demand.
Coal India, the State-run coal mining and refining company, is responsible for over 80% of India’s coal production. While it has kept prices of domestic coal steady during the global price surge, low stocks and a competitive import landscape make it difficult to continue doing so.
India has one of the lowest electricity tariffs in the world, and is set by the public distribution companies independently in each Indian State. Any increase in tariff is a politically sensitive decision given the inflationary effects it is likely to have within the economy. (So much so that these distribution companies have run up severe debts.)
The supply shortage in India, although catalysed by global developments, has been in the works for some time. India relies heavily on a single, State-run entity, that is largely inefficient and consistently misses production targets. The heavy rains in September affected coal production, but the plants also failed to stock up beforehand due to poor production efficiencies.
A sudden shock to the system has exposed the fine margins of thermal production within the country.
Unless imports are ramped up, the country can expect widespread power cuts and increased electricity tariffs in the coming weeks.
What the shortage means for the green transition?
— Coal Capacity ≠ Energy Security
For the longest, coal capacity within fossil-fuel powered nations was considered a virtual guarantee of steady supply of power. Recent developments have told a different story.
While it is easy to consider this a one-off occurrence where demand has significantly increased and supply has significantly decreased for independent reasons, it only tells half the story.
China’s ambition to become a climate leader requires coordinated planning all the way in its top-down hierarchy. There appears to be a disconnect between Beijing’s plans and provincial performance, largely because of Beijing’s legacy incentives to provincial governments that enabled prioritising GDP growth and industrial production over recent climate priorities.
Reports originating from China point fingers at the country’s strident climate policies, but the real reason behind the crisis is a shortage of coal and the country’s over-reliance on it.
Countries with a high dependence on coal like India and China are tethered to the vagaries of global commodity markets.
— Domestic Fossil Fuels > Domestic Renewable Energy > Imported Fossil Fuels … for now
Every commentary that you read on the subject will tell you about how the power markets are caught in a ‘perfect storm’ or that renewable energy isn’t dependable. The former is a cliche and the latter isn’t true.
The electricity mix of large markets is a tried-and-tested combination of primary sources of energy, and the maturity of renewables isn’t at a level where it can replace fossil fuels completely (as I have always said). Read this piece here to make sense of how political narratives describe the tone of the crisis commentary in different countries.
The crisis is a consequence of domestic fossil fuel capacity being insufficient to meet domestic demand, plus the previous sub-section. Period.
When in doubt, read the sub-heading.
— Interim flexibility is as important as sweeping policies
Europe’s case is slightly tricky, given the progress it has made on phasing out thermal capacity. There could be arguments of ‘too eager to make too many changes too soon’, but the current situation is reflective of the inefficient energy policy of the bloc, starting with a universal benchmarking of electricity tariffs with natural gas prices.
EU’s marginal pricing mechanism also means that what should otherwise be cheap, renewable energy is being sold for the same price as the costlier, fossil-fuel generated power. Member states also negotiate with power suppliers independently, and current policy does not allow for a centralised approach to natural gas purchases or building strategic reserves.
One bittersweet upside to this is the hyperactivity in the European carbon markets - an uptick in demand for carbon permits that allow manufacturing entities to pay for emissions they generate.
Why? Because it is more economical to do so than to pay for soaring gas prices.