Will China build hundreds of new coal power stations?

From Carbon Brief

China’s 14th five-year plan (FYP), setting out its national goals for 2021-2025, will arguably be one of the world’s most important documents for global efforts to tackle climate change.

The overarching plan for economic and social development in the world’s largest emitter is to be finalised and approved in early 2021, followed by more detailed sectoral targets over the next year. A power sector plan can be expected around winter 2021-22.

Ahead of the FYP’s publication, powerful stakeholders, such as the network operator State Grid and industry body the China Electricity Council, are lobbying for targets that would allow hundreds of new coal-fired power stations to be built. And a recent update to the “traffic light system” for new coal-power construction signaled further relaxation of permitting.

This is all despite significant overcapacity in the sector, with more than half of coal-power firms already loss-making and with typical plants running at less than 50% of their capacity.

The push for more coal power also appears at odds with China’s climate goals, including a target to peak its CO2 emissions no later than 2030. To reach this goal, low-carbon sources will need to cover any increases in energy demand, meaning less need for additional electricity generation from coal.

As the country grapples with the coronavirus pandemic, however, controls on overcapacity may be vulnerable to the political priority of propping up economic growth. As a result, the restraints on another coal power boom are likely to be financial and economic, rather than regulatory.

China’s coal-power overcapacity dates back to the 12th FYP. This was formulated in the early 2010s as part of the largest economic stimulus programme in history, launched in response to the global financial crisis. It targeted a huge expansion in coal mining and coal-fired power generation.

Then, from 2014, the authority to approve new coal-fired power plants was transferred from the central government to the provincial level, in a drive to cut red tape.

Many local governments jumped at the opportunity to prop up [local] GDP and create demand for locally mined coal with new power projects, leading to around 210 projects with a total capacity of 169GW being rubber-stamped in less than a year.

China’s economic system is based on abundant and cheap capital being made available to the state-owned sector with little concern for economic viability, as long as the investments made are broadly aligned with the five-year plans.

This system can mobilise vast amounts of resources, but is prone to over-investment, as companies and local governments use capacity expansion to boost GDP and gain market share. The planning machinery limits overcapacity with control policies – with varying levels of success.

Many experts and industry bodies argue for a move away from top-down targets and controls, to investment driven by market forces. However, the spending needed to fuel a new stimulus program can only be mobilized if investment is directed at the behest of the state, rather than the market – as a rule, China does not fund stimulus with on-budget spending, but by directing state-owned enterprises and commercial banks to spend more. In these circumstances, lack of controls on capacity additions runs a high risk of over-investment.

While the planning machinery appears to lean towards another wave of coal-power expansion, the industry itself seems more cautious, given the current economic and institutional situation.

Moreover, CO2 emissions depend on coal consumption, not the amount of generating capacity. This means that even if there is a surge of new coal-plant construction, there is no guarantee that China’s coal-power CO2 emissions will rise.

China’s coal-fired capacity currently stands at around 1,050GW, so the targets being pushed by some imply a net increase of 150-250GW. At least 100GW of capacity built before 2000 can be expected to retire by 2030, putting the amount of new capacity being proposed at 250-350GW.

There is already 100GW of new coal power under construction, meaning that another 150-250GW of capacity would have to secure permits and financing and go into construction.

Yet even before the economic havoc wreaked by efforts to contain the coronavirus, Beijing was expected to freeze regulated electricity prices for the next year or two, to help the manufacturing industry and other economic sectors, but undermining the profitability of power generation.

Meanwhile, the annual operating hours of coal power are expected to decline further over time, due to competition from renewable energy and severe overcapacity of the whole system.

With coal plants averaging around 4,000 hours of operation per year, less than half of the 8,760 theoretical maximum, the profitability of major power companies is already extremely low. Last year saw the first bankruptcies in the sector, with pressure from wind and solar one of the key factors.

Electricity market reforms, due to be implemented over the next few years, make the profitability of new coal plants even lower and more uncertain, as the power system moves away from guaranteed operating hours and prices.

The need for capacity to meet peak demand will also be substantially reduced when cross-region transmission and flexibility increases, instead of every province building capacity as if it was an island. Many of the proposed capacity targets and projections appear to ignore these changes.

Chinese energy data published in late February made it clear that clean-energy investment will need to accelerate substantially to meet China’s climate goals. CO2 emissions increased for the third year in a row in 2019, by around 2%, and only 35% of the increase in energy demand was covered by low-carbon sources.

This share will have to reach 100% or more for emissions to peak and decline, especially as the focus on energy security limits the scope for switching from coal to gas and oil.

Taken together, the evidence points to multiple reasons why some of the major state-owned coal power developers are hesitant to commit to new coal. This is fundamentally different from the assumptions of the policymaking bodies and lobby groups mentioned above.

In a recent magazine interview [no longer online, but cached in summary], a researcher within China’s official thinktank, the Energy Research Institute (ERI), argued that new coal-power development should cease and that coal power should be phased out altogether by 2050. This interview appeared on Chinese social media site WeChat only a few hours before it disappeared, exposing the sensitivity of the issue.

China and coal are key to preventing global temperatures from rising 2 degrees C or more.

New coal capacity in China is trending lower (note that the chart shows gross new capacity not net—globally, net additions are close to zero)  However, there should prob'ly be no new capacity given how low current capacity utilisation is.  And since this year, and going forward, the cost of new-build solar has reached "grid parity", i.e.,  its cost is now below the wholesale price of a predominantly coal-powered grid, it makes no sense.   However, bureaucratic institutions like to do things the way they always have done.  But if China and the world are to cut emissions to zero by 2050, the rate at which new coal capacity is installed in China needs to fall faster than it is.