China is facing another power crunch. But this time it’s likely to be different

China’s power cuts this year are not likely to stretch too far beyond summer, as conditions of this year’s power crunch are different from last year’s, according to analysts.

Power rationing in parts of China including parts of the Yangtze region has sparked concerns of a repeat of last year’s electricity crunch that hurt many of China’s main manufacturing hubs.

In Shanghai, Chinese authorities turned off the lights on the city’s famous riverfront spot, The Bund on Monday and Tuesday to conserve power.

But analysts say this time around, things are different.

This year’s power problems are related to weather and will ease once the heatwave has abated, analysts say, while last year’s crisis was caused by long-running structural problems in the electricity supply.

“Since China had a nationwide power crunch one year ago, the concern is rising that it might happen again this year,” Macquarie’s chief China Economist Larry Hu said in a note late last week.

“In our view, the chance is low, because the cause and the scale of the two power rationings are very different.”

Areas of the Yangtze River and China’s southwestern province Sichuan province are battling a record-breaking heatwave amid a severe drought. Scorching temperatures have disrupted crop growth and are threatening livestock.

With a reduction in rainfall flowing into the Yangtze River — in particular the Three Gorges Dam — water levels in hydro-electric power reservoirs have dropped, curtailing energy production.

In Sichuan, power supplies to factories have been cut in favor of electricity use by households, reminiscent of the nationwide crisis in September and October last year. At that time, homes and businesses were forced to cut or stagger usage, while public amenities such as traffic lights were turned off to save energy.

There’s a distinction to be made between the two crises, Hu says.

This year’s crisis is the result of two factors: “abnormally hot weather” and a lack of rainfall, he adds.

The heatwave this year has also persisted longer — for 64 days, and is the longest since 1961, according to the China Meteorological Administration.

Residential power usage in July was 26.8% higher compared with last year, Fitch Ratings said in a note on Monday.

Last year, power generation plants cut back on production due to high coal costs which they could not offset with fixed electricity sales. Plants were not able to lift power tariffs charged to users as they were set at a fixed rate by Chinese authorities, Hu said.

Provincial governments, then in full drive to kick off carbon emissions, also rationed power usage in an effort to meet yearly targets, Hu added.

“We do not expect the regional power rationing to extend much beyond summer, as temperatures will fall,” Fitch Ratings’ Associate Director Diana Xia said in a note on Monday.

“On a national basis, we maintain our assumption for China’s power consumption to increase by a mid-to-low single digit in 2022, aligned with our latest forecast of 3.7% for China’s GDP growth.”

“In the long run, we expect the country’s ability to meet its peak-load demand to improve.”

The impact of this year’s blackouts on the overall Chinese economy will also be different from last year’s, Hu predicted.

Last year, the power outage contributed to a slowdown in GDP growth in the third quarter of the year, China’s National Bureau of Statistics had said. It said power rationings in parts of China had impacted “normal production.”

Many of the country’s major manufacturing areas such as Guangdong in southern China were affected by the power cuts last year.

Sichuan province which bore the brunt of the power outages this time around, only accounts for 4% of China’s industrial production, Hu pointed out.

That said, Sichuan’s production would be under pressure given that hydropower accounted for 78% of Sichuan’s power capacity and 73% of local consumption last year — higher than the national average, Fitch Ratings said.

There may also be some disruptions to supply chains of raw materials like lithium given that Sichuan produces around 20% of lithium, 5% of aluminum, and 13% of polysilicon in China but the impact will be temporary, Hu said.

“It could then translate into higher costs of electronic products such as electric-car batteries, but the impact should be short-lived,” Hu said.