The Development and Reform Commission of Inner Mongolia has cancelled the preferential discounted electricity price for energy-intensive industries – one of the biggest and most significant electricity price hikes in China so far, in a trend going back 12 months.
As is typical for many Chinese policies, each of its 33 province-level territories have discretion to enact price rises differently. Back in January, five provinces throughout the heartland announced electricity price rises of 50% to 70% during peak hours. In May, wealthy coastal Zhejiang announced a $25 per MWh, 35% increase for energy-intensive businesses. By June, the grids of Hebei, Shandong, Henan, Shaanxi, Gansu, Ningxia and Xinjiang – five of those seven are in the northwestern periphery – had raised their prices, and now at least 26 provinces, likely all 33, have announced some manner of price increase this year.
For renewable energy manufacturing and other industries, typically located in the desert periphery for products which are low in value per MWh, the price rises are significant, but far from a serious problem. For example, in solar the high polysilicon prices are due to shortage. In Inner Mongolia, the “1970s Texas” of modern China with its rapid development based on raw materials and energy-intensive industries, prices of as little as $40 per MWh are to rise to $65 per MWh, which will take the marginal production cost of polysilicon from $6 to $7.5 per kilogram. But this is not very much compared to the shortage-based sale price of $44 per kilogram, and electricity price rises will be offset by a constant reduction in the energy intensity of polysilicon production, which is currently falling around 5% per annum from the current 60 kWh per kilogram.
This event is noteworthy not because it represents a painful disruption, but because it represents a shift in one of modern China’s core policies, of guaranteeing the world’s cheapest electricity to foster industry, with energy-intensive industries having received special low prices in various provinces and sub-provincial locations. Before the current wave of increases, the last major price increases occurred in 2011, and in 2018 prices were even lowered significantly.
This shift has now become a consistent pattern since late last year, when time-of-day pricing was made more variable, straying further from the baseline determined by the coal price, as part of the measures addressing the September 2021 coal supply shortage. Similarly, this 2022 reform will have been conducted in light of the 2022 heatwave and hydropower shortage of August, but there has been a constant stream of lesser moves and commentary earlier in the year as well.
Energy-intensive industries account for fully 40% of China’s electricity demand, with steel, cement and non-ferrous metals accounting for 20%. As China grows wealthier, the low added value of such industries becomes more irritating, and one intention of the reforms is to push these businesses to put more effort into energy efficiency. Another underlying factor is of course the global disruption to fossil fuel trade, which has included coal as well to a lesser extent, though China’s gas dependency is low compared to the West and it has not sanctioned Russia.
Chinese coal development has likely been secured in the minds of state planners for a few more years after the near crises of summer 2021 and 2022 – China is continuing to develop every power source, from renewables and batteries to coal to gas to nuclear and hydropower. Even as the water supply from the Tibetan plateau is liable to be reduced by climate change, and further hydropower investment will likely decelerate, a bank of dispatchable hydropower including pumped hydro will be an asset to combine with variable renewables.