Economy

Hung out to Dry

Aluminum producers, lured to southwest China on the promise of cheap and abundant hydropower, are reassessing investments in the region as a prolonged drought hits electricity supplies

By Chen Weishan Updated Jun.1

A converter station along the ultra-high voltage transmission lines sending power from west to east, Kunming, Yunnan Province (Photo by Xinhua)

Trickling down from snow-capped mountains on the Qinghai-Tibet Plateau, rivers spreading from meandering streams cascade from the highlands to the low through the southwestern Chinese province of Yunnan, where numerous hydropower stations generate huge amounts of electricity.

But a sustained drought has severely affected this powerhouse of renewable energy, with precipitation levels low since last summer. From July 1 to 28, 2022, precipitation in Yunnan dropped by 43.9 percent to 114 millimeters, China News Service reported on August 3, 2022, the lowest since 1961 when meteorological records began. Many manufacturers, especially high-energy consumers, were forced to halt or slow production, while the province is still committed to supplying energy at fixed amounts and prices to more developed eastern regions. 　

In September 2022, Yunnan’s aluminum processors were asked to cut their power consumption twice, first by 10 percent and then by 15-30 percent. This led to an estimated 1.9 million-ton drop in production capacity for that month, decreasing the annual capacity from nearly 8.4 million tons in 2021 to 5.32 million tons last year, according to China Nonferrous Metals News, a metal industry newspaper. 　

Between 2018 and 2020, several aluminum makers, collectively producing five million tons, relocated from the thermal power centers of Shandong, Henan and Shaanxi provinces to Yunnan. There, the hydropower supply was supposed to be cheaper and cleaner, enabling cost reduction and facilitating the country’s goals of carbon peaking by 2030 and carbon neutrality by 2060. 　

But as drought continues to parch the southwest, a stable and cheap supply of hydroelectricity cannot be guaranteed. While other forms of renewable energy are still being developed, and building more thermal power stations are contrary to the country’s decarbonization goals, experts cautioned Yunnan to be wary about granting new approvals to power-hungry projects in the province.

Production Restrictions

Renewed restrictions on energy use in February mostly affected three aluminum manufacturers – Yunnan Aluminum, Yunnan Shenhuo Aluminum Industry and Yunnan Qiya Metal, and their combined capacity fell by 800,000 tons, Liu Xiaolei, director of the big data sector at smm.cn, a nonferrous metal data provider in Shanghai, told NewsChina in March. 　

Due to scarce water resources, Yunnan issued a plan in 2022 that prioritizes domestic electricity consumption over manufacturers, especially aluminum makers, which make up 40 to 50 percent of a plant’s total operating costs. 　

From 2018, aluminum manufacturers, which had been sited near thermal power generators, moved to Yunnan, lured by promises of cheaper and greener electricity. As well as helping fulfill China’s emission reduction goals, the EU is introducing a Carbon Border Adjustment Mechanism from October 1. This will levy a carbon tax on production of carbon intensive goods that are entering the EU, and encourage greener and cleaner production in non-EU countries, according to the European Commission. After the plants relocated, aluminum-related production in Yunnan soared by 72.1 percent year-on-year in 2020. 　

Aluminum is extensively used for window frames, food foil packages, electronic gadgets, transportation facilities and home appliances. According to China’s National Bureau of Statistics, production hit 40.2 million tons in 2022, up 4.5 percent from the year before. It is expected to grow by 3.6 percent to nearly 41.5 million tons in 2023. 　

“But this year, overall growth in production will depend on whether full production capacity is restored, especially in the southwest,” Yao Xin, an aluminum analyst at Mysteel Research Institute in Shanghai, told Securities Daily. Regional precipitation, which influences the scale and stability of the hydropower supply, is critical to the industry’s continued growth, she said. 　

But that growth may be short-lived. In 2022, with a production of 4.3 million tons in Yunnan, aluminum plants gobbled up nearly 30 percent of the province’s total electricity supply, China Nonferrous Metals News reported. If drought persists, the industry may fail. 　

An anonymous industry insider told NewsChina that the restrictions are more likely to be the new normal, as the power supply shortages are unlikely to be resolved in the short term.

A hydropower station during a drought, Yunnan Province (Photo by Xinhua)

A dry reservoir, Xinping County, Yunnan Province, April 30, 2010 (Photo by VCG)

Challenge for Change

The climate in Yunnan remains unpredictable. According to the local Hydrological and Water Resources Bureau, drought will persist. January precipitation plummeted to 2.1 millimeters, a 92 percent decrease compared to the January average in previous years, and 96 percent less than the same month last year. By April 6, the precipitation decreased by 60 percent on a yearly basis, the lowest among the past decade, as the cumulative precipitation of more than 40 percent of the entire province dropped to less than 10 millimeters, the local meteorological authority announced. About 85 percent of the province has seen moderate to severe drought, according to local meteorological stations. 　

Meteorologists suspect China’s rain band is moving northward, which would be devastating to Yunnan, where hydro-power generates over 70 percent of the region’s electricity. 　

Yunnan has two broad seasons – dry from October to April and rainy from May to October. If reservoirs are not replenished, hydroelectric generation could drop by half in the dry season. In the wet season, water resources are generally sufficient to provide electricity to the province and elsewhere. 　

Nearly eight years ago, China began transmitting hydroelectricity from the water-rich southwestern provinces of Yunnan, Guizhou and Sichuan to the industrial east, where power demand exceeded less-developed areas. 　

As a major contributor, Yunnan established 12 direct and alternating current cables to meet the voracious demand, particularly from prosperous Guangdong Province. In 2022, the electricity transmitted from Yunnan hit 143.6 billion kilowatts per hour (kWh), accounting for 38 percent of the entire amount generated in the province, although a drop of 2.48 percent year-on-year. The transmission is expected to increase by 1 percent this year to 145.2 billion kWh, even though Yunnan itself is suffering from electricity shortages. But the eastward supply remains a yardstick to assess local government’s performances. 　

The ultra-high voltage transmission lines sending power from west to east are designed and contracted rigidly, said Li Xiang, the deputy PCOSS-Fellow at the Institute of Energy, Peking University. He told NewsChina that the long-term protocol, with fixed destinations, times and amounts, offers far less flexibility than the market-oriented price system. Li suggests a two-way transmission, allowing southwestern regions like Sichuan and Yunnan to replenish shortages by reversing the eastward supply when needed. 　

Yuan Jiahai, a professor at the School of Economy and Management of North China Electric Power University, told NewsChina that gone are the days when power generated in the southwest far exceeded the regional electrical load, which was set during the 13th Five-Year Plan (2016-2020). 　

Today, the protocol should be altered to allow southwestern suppliers more say in how much electricity they send. Yuan suggested that all power suppliers should be integrated into the unified electricity market in the country, where prices and resource distributions are dependent on market operations.

Hard Choice

In 2022, Yunnan’s electric generator capacity hit 111 million kW, with hydropower at 80.6 million kW (nearly 80 percent) and renewables like wind and solar at 13.7 million kW (12.3 percent). Since the province is lagging in developing renewable energy and faced with a prolonged drought, Yunnan is pondering resuming thermal power plant construction, which contributed over 15.3 million kW last year, second to hydropower. 　

But this option is complicated, not only because coal furnaces produce immense carbon emissions, but also because thermal power is more expensive now, edged out over the past few years when water resources remained bountiful. 　

Li told NewsChina that the generating hours of Yunnan’s thermal power stations plunged from 5,014 hours in 2007 to 2,113 hours in 2020, less than half of the national average in 2019. At the end of 2019, Yunnan Xuanwei Power Station, the biggest thermal generator in the province and operated by China Guodian Corporation, declared bankruptcy with a debt-to-asset ratio of 400 percent. 　

“In our immature electricity market, thermal power can’t really compete with hydropower in terms of cost,” Li said. “However, in overseas markets, thermal power can be sold at negative prices if a temporary shutdown would prove more costly.” 　

Li said that a pragmatic way to address China’s electricity shortage is that the government helps State-owned thermal power stations break even. “Yunnan is exploring capacity markets for power plants, where surplus power can be stored and prepaid for future use, such as during the dry seasons,” he added. The surplus power could be stored in pumped hydropower stations, batteries or other storage technologies, some of which are not yet fully developed. 　

From the start of 2023, Yunnan’s thermal power plants were allowed to price their on-grid supply with fluctuations up to 20 percent, in line with a reform plan announced by the Yunnan government in late 2022. 　

The province has also launched a trial market for a flexible thermal power capacity system to balance wind and solar power. Costs may vary depending on power sources and demand. 　

The province is also planning to build a thermal power generator unit with a capacity of 4.8 million kW for peak load seasons, according to a three-year action plan (2022-2024) for enhancing industrial capacity. Despite the widening gap between local power supply and demand, the government aims to become a high-end aluminum alloy manufacturing base, with an estimated industrial chain production value of 350 billion yuan (US$50.96b) in 2024. 　

An anonymous industrial insider told NewsChina that many enterprises would still have relocated to Yunnan, even if their electricity costs had remained the same. But the unstable hydropower supply that forces halts to production is making them think twice. 　

Aluminum producers such as Yunnan Hongtai New Material, are reluctant to establish more plants in Wenshan in the southeast of Yunnan. Backed by Shandong Weiqiao Pioneering Group in 2019, Hongtai planned to set up a new production base in Honghe Hani and Yi Autonomous Prefecture also in the southeast of Yunnan. Now it is hesitating to launch the new project, which would have a production capacity of two million tons. 　

“The cheap and stable hydropower supply, which was essential to producers in southwestern regions like Yunnan, is gone,” Yuan Jiahai said. “By phasing into a period when water resources are insufficient, the governments concerned should ensure there’s enough power for domestic and industrial use. They should be prudent enough to weigh the economic pros and cons of energy-consuming projects.”

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Hung out to Dry