The end of the global energy crisis is in sight. But we are not there yet and it will take the rest of the year to resolve. China is both driver:
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Chinese Premier Li Keqiang has called for market-oriented approaches and reform measures to safeguard the supply of power and coal for this winter and next spring, in order to ensure people’s basic needs and keep the economy running steadily.
Li made the remarks while presiding over an executive meeting of the State Council held on Friday, which also approved a law draft on protecting the Yellow River.
First, we need to give high priority to people’s wellbeing and ensure their living standards and energy supply for heating and heating in winter. In particular, we need to ensure that northeast China has access to coal and electricity in winter.
Second, on the premise of ensuring production safety, we need to encourage potential coal mines to release their production capacity and speed up the production of approved and basically completed open pit coal mines. Transportation departments should give priority to ensuring coal transportation.
Third, we will support coal power enterprises in increasing power supply. In response to the difficulties of coal and power enterprises, we implemented the policy of delaying tax payment for a period of time, and guided financial institutions to ensure reasonable financing needs
Fourth, reform and improve the formation mechanism of coal price marketization. Promote all coal-fired power generation to enter the electricity market. On the premise of stabilizing the electricity prices of residents, agriculture and public welfare undertakings, adjust the fluctuation range of market transaction electricity prices from no more than 10% and 15% respectively to no more than 20% in principle, and strengthen classification and regulation. For industries with high energy consumption, the price will be formed by market transactions, and it will not be subject to the limit of 20% fluctuation. Encourage local governments to implement phased preferential treatment for small and micro enterprises and individual industrial and commercial households.
Fifth, we should promote the construction of large-scale wind power and photovoltaic bases and make good reserves of coal, gas and oil.
Sixth, we need to resolutely curb the blind development of these projects. We will improve the dual-control mechanism for local energy consumption, and encourage new renewable energy consumption not to be included in total energy consumption for a certain period of time
The meeting called for consolidating all parties’ responsibility for energy supply and production safety and to strengthen overall planning and consideration. Local governments should fulfill their responsibility for local management, manage electricity consumption in an orderly manner, correct the practice of suspending production and limiting production or cutting carbon emissions through campaigns in some localities, and oppose inaction or disorderly action. Coal-producing provinces and key coal enterprises should increase production and supply as required. The thermal power units of the central power generation enterprises shall be fully operational. Power grid enterprises should strengthen operation scheduling and safety management. Those who fail to fulfill their obligations to guarantee supply will be held accountable.
An urgent notice dated Thursday and issued by Inner Mongolia’s energy bureau gave the nod to 72 mines in the three cities of Wuhai, Ordos, Hulunbuir and the region of Xilingol league to raise annual production capacity by 98.35 million tons, or 55.11%, provided they do so safely.
Three of China’s major coal-producing provinces have pledged to increase long-term coal supply to power plants by a total of 145 million tons at a discount price in the fourth quarter amid a severe power shortage which has left millions of homes and businesses hit by power cuts.
Inner Mongolia and Shanxi told coal miners to lift combined annual production capacity by more than 160 million tonnes, while China’s cabinet said market coal-fired power prices may now fluctuate up to 20% from base rates, an increase on previous limits, or more for high energy consuming sectors.
The pricing adjustment is designed to prevent high energy consumption, state media reported, adding that prices for residential and agricultural users, as well as public welfare initiatives, would be kept stable.
The circular, released by the China Banking and Insurance Regulatory Commission, urges efforts to satisfy reasonable financing needs of power, coal, steel and non-ferrous metal producers to ensure supplies and stabilize prices.
It urges banks and insurance institutions to offer sound financial services to secure energy and electricity supplies for the winter and spring, and actively support major coal-producing areas and key enterprises to increase the supply of thermal coal.
It’s the worst electricity crisis China has faced in a decade. The immediate cause is that China is still highly dependent on coal, which provides 70 percent of the country’s power generation. The electricity prices paid to generators are regulated by the central government, while coal prices are set on the market. When coal prices rise, unless regulators increase electricity prices, it doesn’t make economic sense for coal power plants to keep supplying electricity. Plants can then avoid generating at a loss by claiming they have a technical malfunction or by failing to purchase the coal they need to run, both of which happened in the run-up to the current crisis.
But the reasons for the crisis can also be traced back to a string of policy missteps and poorly thought-out market interventions after the beginning of the pandemic. The crisis has put China’s continued dependence on coal in stark relief, even as its market shares of renewable and nuclear energy have continued to increase…
Beijing’s attempt in late 2019 to introduce flexibility to pricing appears to have made things worse. Power plants were given the ability to negotiate long-term contracts with grid operators within a certain price band. This could have allowed plants to negotiate higher margins, but as some warned already in January 2020, it had the opposite effect: Because China has overcapacity in coal-fired power, it was the grid operator that had the pricing power, and generators bid low, further lowering prices
China is releasing Australian coal from bonded storage, despite a nearly year-long unofficial import ban on the fuel, as it scrambles to ease a national power crunch stemming from a coal shortage, traders familiar with the matter said.
China is so big that seemingly obscure provincial corruption crackdowns in key areas can roil energy markets.
China has started unloading a small number of Australian coal shipments despite an unofficial import ban, analysts said, in a move underscoring the intensity of the power crunch facing the world’s second-largest economy.
Nick Ristic, lead dry cargo analyst at Braemar ACM Shipbroking, said a handful of Australian cargoes waiting outside Chinese ports since a ban came into force a year ago had headed into berth last month and draft change had been observed, indicating that the coal had been unloaded. He said 450,000 tonnes of coal had been discharged.
Nearly 200m new tonnes of thermal coal is on deck in the next six months. But, another butterfly is flapping:
Shanxi province suspended output at 60 coal mines, 372 non-coal mines and 14 dangerous chemical factories, the provincial government said in a statement published on its official WeChat account Saturday. Heavy rainfall earlier this week led to collapses and landslides in many cities in the province, causing fatalities, the government said, without providing further details.
In Europe, the Russia standoff goes on. Goldman:
Statements by several Russian government officials this week have raised questions as to what extent Russian gas supplies can alleviate the ongoing tightness in European gas markets. We believe these statements, which we discuss in more detail below, are similar in nature to what officials have communicated for the past few months and bring no new information as to how we should think about this winter’s gas balances in Europe.
Accordingly, we maintain our base case, which assumes Russian flows to NW Europe through existing pipelines will normalize from November from reduced levels this month and that the newly built 55 Bcm NordStream 2 pipeline will be operational this winter, but with only a marginal net contribution to NW European supplies. Until then, we continue to see a risk that Gazprom might have to rely on taking physical delivery at the TTF hub to complement their pipeline flows to the region to satisfy winter contractual obligations given its local storage sites remain nearly empty.
Such physical tightening of the market could take TTF prices well above current levels. Should Russian flows increase as we base case, we would expect EU gas prices to decline from current levels but remain above the threshold for gas-to-oil switching of $27/mmBtu at current oil prices (rising to $30/mmBtu at our year-end Brent price forecast) until we know more about winter weather. Should winter weather remain average, we would then expect prices to decline further to our base case$17/mmBtu forecast by likely year-end.
That seems to me to be about right. The end is in sight but we are not there yet. Warm northern weather will pop the bubble before Xmas. Cold weather will delay the crash until after NY.