Explained | Why Europe and China are facing an energy crisis and how it affects India

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China ordered power rationing as far back as June.

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Factories in several provinces including Guangdong, an industrial hub, were directed to conserve power, which forced factories to reduce output and even temporarily suspend operations. The situation has worsened, the rationing is affecting households in certain provinces. Restrictions on the use of airconditioning and elevators have worsened to blackouts in many cities.

The soaring price of natural gas and shortfall in its supply were among the key causes of the energy crisis in China. Though the country, one of the worst emitters of pollutants, had increased its reliance on cleaner fuels in recent years, its dependence on coal continues to be very high.

Across Europe, the energy crisis has deepened due to a slow supply of natural gas and its rising prices. The power supply was also affected by the lower output of wind turbines in recent months, which led to higher reliance on fossil fuels. As power consumption rose during summer, inventory levels of natural gas fell to historic lows. The situation may worsen when winter sets in, as demand for natural gas to heat homes and water during the bitter winter months across Europe will rise. Fertiliser plants in Europe are among the industrial units most affected by shortages of natural gas, many were forced to curtail output as the crisis deepened.

The soaring prices of other fossil fuels added to the woes of consumers, not just in China and Europe but across the world. Petroleum and coal prices have surged in the past few weeks. Brent crude crossed $80 a barrel on Monday. Coal prices are nearly at their highest in 13 years.

Fuel prices were responding to a sharp surge in demand for energy across China, Europe and elsewhere following the opening up of economies after multiple lockdowns and prolonged restrictions on the movement of people. The mad scramble to stock up inventories of natural gas and coal has pushed prices higher.

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China's demand for electricity was also driven up by a rapid increase in production in factories producing smartphones, appliances, and other manufactured goods that China's factories churn out has driven the rise.

Why is the demand for natural gas surging?

Nations across the world are committed to reducing carbon emissions. China has committed to becoming carbon neutral by 2060. It expects its carbon emissions to peak before 2030. To reduce its emissions, China needs to give up coal, reduce consumption of other dirty fossil fuels and adopt cleaner energy such as natural gas and renewables. The country is also taking harsh measures to reduce pollution in Beijing before the February 2022 Winter Olympics and thus display its commitment to decarbonisation.

The targets China has set for itself is seen to have escalated the current energy crisis in the nation where two-thirds of the electricity was generated from burning coal.

European Union has targeted to become carbon neutral by 2050 and reduce greenhouse gas emissions by 55% by 2030 compared to 2005 levels. Countries across the continent are reducing their dependence on coal as a source of energy and adopting greener sources such as wind turbines and solar panels. Natural gas, as a cleaner fossil fuel, acts as a bridge in this transition.

Is natural gas shortages alone causing the energy crisis?

Not really. A fall in generation from other sources has also affected the availability of electricity. Lower production from hydropower plants in the southern regions of China and a decline in output of wind turbines in Europe exacerbated the energy crisis. A warmer than usual summer drained reservoirs in Yunnan province in south China, affecting power generation. In Europe, the output of wind turbines was affected by calm weather.

In the northern parts of China, a fall in generation from coal-fired power plants added to the power shortage. Power plants are reported to have lowered output or shut down for maintenance to reduce their losses amid rising coal prices and cost of production and restrictions on raising tariffs. China's decision to ban the purchase of Australian coal due to political tensions between the two is also hurting power output in the Asian nation.

Globally, the output of coal mining was affected by heavy rains in countries such as Indonesia and Colombia. Elsewhere, labour shortages caused by the pandemic affected production. With demand outstripping supply, prices are likely to stay firm in the coming winter.

What does the deepening energy crisis mean for India?

The sharp rise in global coal prices came as a boon for domestic suppliers such as Coal India. As the supply crunch in the key overseas markets grew and prices soared, the demand for coal from domestic sources climbed. Coal India and other producers increased output, yet supply remains quite tight.

Over 70% of India's power is generated from burning coal while the share of natural gas is just about 5%. Thus, rising natural gas prices had a limited impact on the cost of power generation in India.

India, however, suffered a scare in August when the inventory of coal with power plants reached critically low levels, as demand surged about 11%. The situation was resolved by diverting coal away from non-power uses. The power demand is set to climb higher next month when more restrictions are eased, including those on cinema halls and multiplexes. While efforts are on to provide an uninterrupted supply of coal to power plants, non-power users are likely to suffer.

Indian households were more affected by the rise in prices of petroleum products as consumption of cooking gas, petrol and diesel grew. The total demand for petroleum products was about 11% higher in August.

How has the energy crisis affected China and Europe?

The energy crisis has hurt industry and households in both places. Households in Europe have seen their power bills shoot up as power companies passed on the increased cost of producing power. Households in China have so far been spared higher bills due to government control on tariffs.

The energy crisis is taking a toll on manufacturing in China, threatening the economy's growth for the rest of the year. Analysts and brokerages have already cautioned that factory shutdowns will hurt the economy that had been slowing due to stringent virus control measures and tight restrictions to rein in the property market.

Some industries such as fertiliser manufacturers in Europe curtailed operations due to natural gas shortages and rising prices. Fertiliser prices are set to climb higher and push up food prices. Therefore, households and regulators will see inflationary pressure rise due to higher fuel and food prices.

Will the crisis spill over to the rest of the world?

Fuel price increases are not restricted to a single country or a continent in a globalised world. The rising price of fuel affects all nations and all consumers. Indian consumers are already paying more for their cooking gas delivered through pipelines and cylinders. Pump prices of petrol, diesel, and compressed natural gas have also been rising.

Fuel supplies are likely to remain tight in the winter months when power demand shoots up in Europe and North Asian countries. Competition among nations to procure the available supplies and tactics to divert ships carrying liquefied natural gas and coal from their predesignated destinations has also added pushed prices higher.

European nations suspect Russia of manipulating natural gas prices by choking supplies delivered through pipelines to the continent. Russia is a major producer of natural gas and an important supplier to Europe.

What does it mean for global recovery?

Higher fuel prices are only one part of the problem. Temporary closures of factories in China will slow the repair of global value chains that broke down last year when countries locked down their economies in the face of a rising pandemic. These shutdowns will lead to another round of disruption in the supply of parts to makers of various goods across the globe.

The temporary shutdowns also mean missed deadlines for delivery of merchandise ahead of the November-January holiday season sales in many parts of the world. When power rationing was ordered, factories in China were racing to meet the global and domestic demand for everything from apparel to mobile phones and other gadgets.

Apple is one of the manufacturers that has been affected by power disruptions. Higher fuel prices and shortages will add to inflationary pressures in the global economy and hurt the recovery of demand in lower-income economies.