(Bloomberg) — Cheap hydropower lured energy-intensive aluminum producers to China’s Yunnan province, but more frequent droughts due to climate change are upending what seemed like a win-win.
Around 80% of the southwestern province’s electricity comes from hydropower. That’s attracted producers of the metal that takes so much power to produce it’s been described as congealed electricity. Yunnan now accounts for around 13% of Chinese aluminum output.
The province’s reservoirs are running dry this year amid a historic drought that also hit neighboring Sichuan. Authorities in Yunnan have ordered smelters to cut production by 10%, according to people with knowledge of the issue, with the duration and scale of the cuts dependent on when it gets enough rain.
The electricity shortages are compounded by the fact that much of Yunnan’s energy is sent to China’s south including the industrial powerhouse of Guangdong. It’s a key part of Beijing’s strategy, initiated about three decades ago, to send electricity from west to east via long-distance power lines.
“Energy-intensive industries have made a conscious, strategic decision to relocate or open new facilities in southwest China, where they can take advantage of the very cheap hydropower,” said David Fishman, an analyst with consultancy The Lantau Group. “Both Yunnan and Sichuan have been confronted with rapidly tightening power supply in the last few years as the bulk of their new capacity is earmarked for exports to other provinces, at the same time as their industrial demand is soaring.”
The cost of electricity in hydro-rich provinces tends to be about half the price of the coal-power benchmark, and can be as little as a third during the rainy season, Fishman said. That relationship may change this year as a result of the drought, he said.
See also: China’s Historic Drought Spawns Power Crisis in Test for Xi
Yunnan’s smelters are cutting production just as factories in Sichuan are restarting idled capacity amid wetter weather following the worst drought since the 1960s. With climate change likely to deliver more heat waves, there are long-term questions about China’s reliance on hydropower, its largest source of clean energy.
Yunnan may continue facing a severe power shortage until the dry season ends next April, putting prolonged pressure on aluminum supply, researcher Mysteel said in a note on Monday.
There’s likely to be “low river run-offs through the third quarter that would continue to strain power supply in Yunnan,” said Lara Dong, an analyst at S&P Global Commodity Insights. The depleted reservoirs and the government-guaranteed power exports to Guangdong will keep electricity supply in Yunnan tight, she said.