Limited Effects On Mainland China's Overall Hydropower Sector From Severe Heatwaves - REGlobal

By Fitch Solutions

Key View

On June 24 2023, Mainland China extended the ‘red’ alert to most of Beijing and the provinces of Hebei, Shandong, Henan, and Inner Mongolia, reflecting the severity of the heatwaves that have been affecting the market.
As the heatwaves are currently localised in the Northern regions, which depend less on hydropower than the Southern regions, we expect the implications for the overall hydropower sector to be limited.
We believe that the hotter summers China is experiencing will push the market to strengthen support for other power types, with a focus on non-hydropower renewables expansion and dominating the market’s capacity additions.

On June 24 2023, Mainland China extended the ‘red’ alert to most of Beijing and the provinces of Hebei, Shandong, Henan, and Inner Mongolia, reflecting the severity of the heatwaves that have been affecting the market. Since April 2023, China has been experiencing periods of high temperatures of above 40°C across various provinces. The high temperatures and heatwaves persisted, notably in the Northern regions, prompting the government to issue ‘red’ alert levels for Beijing and extending alerts to further provinces. We highlight that China also experienced severe heatwaves and droughts around the same period in 2022, prominently in August 2022, affecting its hydropower generation output despite its strong capacity growth (refer to chart below). This resulted in the government halting manufacturing operations that are heavy electricity consumers, affecting supply chains. As for this year’s heatwaves, disruptions to manufacturing and supply chains are less severe, though China’s agricultural sector will still be affected. Within the power sector, we expect project developments to remain unhindered, allowing for robust capacity expansion in the power market. Power demand could surge during this period as well, as the demand for cooling solutions increases amid the higher temperatures.

As the heatwaves are currently localised in the Northern regions, which depend less on hydropower than the Southern regions, we expect the implications for the overall hydropower sector to be limited. Hydropower is not the dominant power type in the regions that are most affected by the heatwave this year. As such, we believe that the implications for their power supply and the national power mix will be limited. We highlight that hydropower contributes about an average of 4% to the capacity mixes of Beijing, Hebei, Shandong, and Henan, the highest being 7% in Beijing and the lowest at 2% in Shandong. As of May 2023, these provinces have a combined hydropower capacity of 13.7GW, which is about 3% of the market’s net installed hydropower capacity of 413.5GW in end-2022. Therefore, we expect the heatwaves and potential low water levels to present little risk of hindering the electricity supply in the Northern regions and the overall power supply of the market. This is in contrast to Sichuan, the heaviest hit province in 2022’s drought, which has 101.9GW of installed hydropower capacity, contributing about 80% to its mix. However, we note downside risks to hydropower generation for this year if heatwaves spread to the Southern and hydropower-reliant regions.

We believe that the hotter summers China is experiencing will push the market to strengthen support for other power types, with a focus on non-hydropower renewables expansion and dominating the market’s capacity additions. Despite the heatwaves only affecting the Northern regions at the moment and their limited threats to the overall power supply, we expect more frequent extreme heat to urge the government to increase efforts of growing the other power types. This compounds the challenges faced last year with hydropower deficits in manufacturing hubs in Sichuan. We expect efforts to capitalise on the vast land areas in Western provinces for solar photovoltaics and onshore wind and also coastal regions for offshore wind. Notably, provincial governments have gone ahead of the central government to set capacity targets specific to offshore wind for their own regions, while the market registered unprecedented solar photovoltaics capacity growth in the span of five months (69.2GW from end-December 2022 to May 2023). With the State Grid Corporation of China (SGCC) continuing efforts to increase links between various provincial electricity grids and ramp up the construction of ultra-high voltage (UHV) lines, the integration of renewables into the national grid shows little signs of slowing. The company recently completed the UHV for the Shaanxi power grid in May 2023, connecting it with Beijing, Hebei, Shandong, and Tianjin. In June 2023, another line was completed in Beijing connecting it with Tianjin, and Tangshan (a city in the Hebei province). These improvements, while aimed at increasing power transmission in times of peak electricity demand during the summer period, will ensure that electricity generated from solar and wind projects in the west is supplied to high-demand centres in the east. Overall, we expect China’s net installed capacity to increase by about 2,030GW from end-2022 to 2032, with non-hydropower renewables contributing about 75% of these additions.