Power Crisis a Huge Problem for the Global Economy

Even as the Evergrande crisis has become the highlight of all that is wrong with the China model, the country is facing another crisis at a macro level. That is the rampant power shortage in China. It is not just China,  but even the UK and the countries in the European Union are facing an acute crisis of power. What is this crisis and why has it come about?

Like in many other industries, this is again a supply chain issue that has cropped up. An important input to power production, natural gas, has seen a sharp spike in prices in the last one year. This has made it tough to maintain power flows. Also, the sharp surge in demand in power post pandemic means that supply is just not equipped to handle it.

Some interesting, yet scary, facts are emerging from various countries. Fertilizer companies in Europe are forced to cut down output due to input shortage. That was evident as India’s farmers found themselves short of fertilizers during the Rabi season. In Europe, the concern is that energy demand could surge once the peak winter starts as home heating becomes a major source of power demand. That could only worsen the power shortage.

The sharp spike in coal has also impacted the thermal power generators. China is trying to cool its own power crisis by limiting exports of key inputs. This is having a cascading impact on power output in other countries too. But there are larger repercussions which will go much beyond just the power sector and that could be quite an intimidating reality.

China still relies on thermal plants to fire 70% of its power output and China is suffering from one of the world shortage. The tighter environmental regulations also impact fresh production of coal. The bigger challenge is for Europe where the peak winter demand is yet to begin. The power shortage could mean more shut factories across the world, more supply chain constraints and a freezing and long winter in Western Europe.

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