Sichuan drought jeopardizes hydropower in China's decarbonization roadmap

China's Sichuan province, long vaunted for its panda conservation and abundant hydropower exports, is suffering from the province's most severe drought on record, raising concerns over the reliability of hydropower as a pillar for China's decarbonization.

The drought has caused power shortages which have impacted electricity supply to other eastern coastal provinces and snowballed into a crisis as critical clean technology and manufacturing industries have shut capacity to divert electricity for residential use.

"In the short-term very little can be done to adjust to losses of hydropower production. Over the longer term, power sector reform is vital to bring about a more efficient power system," Dan Klein, head of Future Energy Pathways with Platts Analytics said.

"But a greater geographic diversity of clean energy production, including nuclear, and investments in transmission may be required to limit the potential impact of a regional hydropower shortage on the wider Chinese energy system," he added. Platts Analytics is part of S&P Global Commodity Insights.

The situation has deteriorated in the past week, with extreme heat reported in many cities. On Aug. 18, China's national observatory raised the nationwide drought alert level to 'yellow' amid low precipitation and high temperatures, state-media Xinhua reported. China's four-tier, color-coded weather warning system has red as the most severe, followed by orange, yellow and blue.

The National Meteorological Center has observed that droughts above the moderate level continue to linger in some areas of Jiangsu, Anhui, Hubei, Zhejiang, Jiangxi, Hunan, Guizhou, Chongqing, Sichuan and Tibet, the report said.

"Hydropower has never been 100% reliable. All regions suffer periodic droughts," Philip Andrews-Speed, Senior Principal Fellow at Energy Studies Institute of the National University of Singapore said, adding that Southwest China, Brazil and Norway are countries with significant dependence on hydropower and have long faced periodic declines in power availability due to drought.

"The key question is, are the droughts in southern China becoming more frequent and more severe? If so, China faces a problem," Andrews-Speed said.

"In the longer term, the problem [faced by China] will get worse as the glaciers in Tibet and the Himalaya melt due to climate change," Andrews-Speed said. "This will cause a reduction in the volume of water flowing down the rivers that generate hydroelectricity."

Hydropower exports

In 2021, hydropower accounted for 7.7% of China's primary energy demand and 15% of its electricity generation mix, greater than solar and wind combined, S&P Global data showed. Hydropower accounts for 85% of Sichuan's generation mix, and in normal times, the surplus is exported to developed coastal regions like Shanghai, Zhejiang, and Jiangsu with larger population density and energy demand.

In 2020, Sichuan alone exported 101 billion kilowatt-hours of electricity, while its own electricity consumption was 286.52 billion kilowatt-hours, official data showed. Its neighboring Yunnan province is also a large hydropower producer.

Transmission of electricity from renewables-rich western and northern provinces to eastern ones is strategic to China's net zero roadmap. With hydropower's vulnerability to climate change becoming a global issue, Beijing may have to reassess energy policy in the light of climate change.

Andrews-Speed said the most likely and logical response would be "build more of everything", especially coal fired plants and wind and solar plants.

"Security of energy supply will remain a high priority and efforts to boost domestic supplies of energy will be enhanced. This will likely be at the cost of climate policy, at least in the short-term," he said.

S&P Global's Klein said extreme weather risks are leading more entities to weigh the impact of climate on their businesses and may boost energy transition goals, which will be a boon for China, because it is a leader in the manufacture of clean energy technologies.

Balancing transition and security

On Aug. 20, Sichuan's provincial government extended a power rationing plan requesting all energy-intensive industrial users to halt production completely from Aug. 20 to Aug. 25, after a previous notice to shut production over Aug. 15-20. Other neighboring regions like Chongqing city, and eastern provinces like Zhejiang and Jiangsu have also started power rationing.

China has tools in the form of state funds to invest in managing supply security, but the question is whether such investments are sufficiently well coordinated, and on the demand side, more rigorous measures will have to be put in place to constrain growth in a systematic way to avoid periodic outages, Andrews-Speed said.

"The slowing economy is helping in the short-term [to constrain the energy demand growth], but any significant economic stimulus may exacerbate the problem," he said.

"If climate mitigation remains a priority (along with security of supply), then the high levels of investment in renewables and energy storage need to continue, and investment in transmission lines needs to continue," he said.

Andrews-Speed said the size of electricity balancing areas needs to be increased along with measures to undermine local preferences for cheap local coal rather than distant renewables, rules on economic dispatch need to be rigorously enforced and all end-users should pay the full cost of electricity.