China's Fuel Fiasco Leaves Citizens in The Cold

An analysis by Michael Lelyveld
2017-12-26
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A Chinese worker sorts coal on a conveyor belt near a coal mine in Datong, northern China's Shanxi province, Nov. 20, 2015.
A Chinese worker sorts coal on a conveyor belt near a coal mine in Datong, northern China's Shanxi province, Nov. 20, 2015.
AFP

China's government has cancelled a ban on coal-fired heating in northern cities after blaming local officials for "hasty" gas conversions that left residents without winter fuel.

On Dec. 4, the Ministry of Environmental Protection (MEP) sent an "extra urgent" notice authorizing 28 northern cities to resume using coal for winter heating if their mandated projects for switching to natural gas or electricity remained incomplete.

The about-face on the government's order to replace coal with cleaner fuel in the Beijing-Tianjin-Hebei region in time for the heating season was first reported by the independent daily The Paper following complaints from citizens who were left with no heat at all.

Public anger boiled over after China Youth Daily published video images of children at a primary school in Hebei province's Quyang county who were forced to sit outside in the winter sun because their classrooms were too cold.

The Ministry of Education demanded "immediate" action to provide heating after students at another primary school showed signs of frostbite, the official English-language China Daily said.

The incidents have been a major embarrassment for the government's environmental policy, which has sought to avoid a repeat of last winter's smog crisis with a crash program of fuel conversions in areas where coal burning affected air quality in Beijing.

A joint government and municipal action plan for the 28 cities was released as far back as last March, calling for Beijing, Tianjin, Langfang and Baoding to ban small coal- fired furnaces by the end of October, among a host of other measures for the region.

"Areas in these cities will be declared completely 'coal free,'" the official Xinhua news agency reported on March 31.

But it wasn't until Aug. 24 that the MEP issued its own 143-page action plan, laying out a series of tough targets and penalties.

The goals included a 25-percent cut in smog-causing particles known as PM2.5 for the region by the end of this year compared with 2012, echoing targets first set by the government in 2013.

To meet the standards, some coal-fired industries were ordered to suspend operations completely for the winter, while others faced steep production cuts.

The MEP plan also required 3 million households in the 28 cities to substitute gas or electricity for coal as a heating source for this winter, which runs from mid-November to mid- March.

By mid-September, the fuel switching had turned into an outright coal ban.

"In the Beijing-Tianjin-Hebei region and nearby areas, 28 cities will now use only natural gas, electricity and renewable energy for heating," Xinhua reported at the time.

Scramble for heating equipment

The new goals touched off a scramble for new boilers, heating equipment, distribution networks, power lines and gas connections.

"The construction of the necessary pipelines and storage tanks to support this dash for gas at the household level has been an immense task and cost billions of yuan," said China energy expert Philip Andrews-Speed at National University of Singapore in a recent post.

But the wholesale replacement of entire urban heating systems by the deadline proved too big a challenge.

"It doesn't matter how much money is available and how much governments push," Andrews-Speed said by email. "It is not possible to transform urban energy systems in a few months."

One official at a power plant owned by China Huadian Corp. stated the obvious in a quote cited by China Daily.

"To replace coal with clean energy for heating in all of Hebei is a huge project, and it takes time," the official said.

Government pressure to meet the deadlines apparently outweighed realistic assessments of how long the conversions would take, leaving consumers with no heat when winter began.

In areas where gas service became available, the sudden jump in demand produced price spikes and shortages.

As early as mid-October, the government's top planning agency warned local authorities and petroleum producers that supplies would be "insufficient" during peak demand periods.

A cold winter would make the "supply and demand situation ... more severe," the National Development and Reform Commission (NDRC) said on Oct. 16.

By the first week of December, prices for liquefied natural gas (LNG) had jumped 60.2 percent from September levels, the Communist Party-affiliated Global Times said.

Last week, the NDRC reported that gas consumption through November soared 18.9 percent from a year earlier to 209.7 billion cubic meters (bcm), while domestic gas production of 133.8 bcm rose only 10.5 percent.

Despite the sequence of decisions and statements from the central government, some state media tried to blame local officials for the fiasco.

"That the supply of gas has been insufficient to meet the demand has resulted in many residents in north China's Hebei province not having the heating they need, which indicates local policymakers were too hasty in implementing their gas-for-coal energy policy," said China Daily on Dec. 5.

"What has gone wrong in northern China is the way this laudatory policy has been implemented," it said.

china-lng-storage-facility-baoding-hebei-dec5-2017-400.jpg
Chinese energy company ENN Group builds a liquified natural gas storage facility in Baoding, northern China's Hebei province, Dec. 5, 2017. Credit: Reuters
Blame the NDRC

Despite efforts to shift the blame, responsibility for the poor policy coordination seemed to fall squarely on the NDRC and the central government.

The episode is reminiscent of the NDRC's effort in 2010 to meet five-year energy efficiency targets by cutting electricity to homes, factories and even hospitals as the deadline approached at the end of the year.

"As with the energy intensity reduction program for 2005-2010, central and local governments are struggling to meet at the last moment the targets set by the 2012-2017 air pollution reduction program," Andrews-Speed said. "Unintended consequences are the side effect."

It may be too soon to tell how long the disruptions will last, but the blunders are likely to result in a cycle of higher energy costs, shortages and renewed coal consumption that could go on for months.

There were signs last week that the problems were spreading beyond the northern areas.

In central China's Hubei province, the government of Wuhan city imposed a limit on household gas supplies of 150 cubic meters per month after shortages reduced pressure in pipelines, threatening safe operation, state media said.

In another Xinhua report suggesting less impact, the MEP said Sunday that 5.6 percent of villages in the northern region had encountered gas shortages after completing conversions from coal.

In November, the region experienced a 41.2-percent drop in PM2.5 concentrations from a year earlier, the MEP said.

On Monday, the MEP said that 96,000 households that had no heat on Dec. 15 had now been supplied either with gas, coal or electric heaters, China Daily reported.

The impact on gas supplies has already driven coal prices to new highs. On Dec. 11, coal futures hit a record of 689.8 yuan (U.S. $104.86) per metric ton, Reuters said.

But in some cities where old boilers and furnaces have been scrapped, a return to coal for heating this winter may prove difficult.

In its criticism of "local policymakers," China Daily also slammed city officials for not conducting "thorough investigations in advance" and having the foresight to know that the central government's fuel-switching initiative might not come off as planned.

"Some of the coal-burning boilers might also have been kept in operation to provide heating when necessary if there was an insufficient supply of gas," the paper said.

Unexpected, indirect costs

Aside from the suffering and expense it has caused, the bureaucratic debacle may result in a host of unexpected and indirect costs.

China's state-owned petroleum companies have been ordered to take costly steps and "keep natural gas prices basically stable" to ease the sudden gas shortages, according to Xinhua.

In one instance, China National Offshore Oil Co. (CNOOC) is spending U.S. $10 million (66 million yuan) to lease two LNG tankers for increased storage to meet emergency demand, Reuters reported on Dec. 6.

"LNG tankers are not only among the most expensive merchant vessels to hire, but keeping the fuel super-chilled is energy intensive and costly, much more expensive than putting crude on an oil tanker for later sale," the report said.

CNOOC may take a beating on the deal because LNG prices are likely to drop by the time it sells the stored gas, according to Reuters.

CNOOC is planning to send over 100 trucks to make round- the-clock deliveries of LNG from southern import terminals in Guangdong province to the cities in the north, China Daily said.

The fuel mix-up may be a setback for the air quality gains that Beijing hoped to achieve this winter by closing its coal-fired power plants and switching to gas.

On Dec. 7, Beijing's City Management Commission said the NDRC had "ordered an immediate restart to coal-fueled generators to ease the shortage of liquefied natural gas in northern China," Caixin magazine said.

The backtracking on coal-fired power in the capital may bring the consequences of the crisis full circle after the 28 northern cities were ordered to switch fuels in order to reduce the smog in Beijing.

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