The effects of COVID-19 on China’s coal sector

climate
Jun 11, 2020

Alvin Lin – Climate and Energy Policy Director, China Program, NRDC

What effects is the current COVID-19 situation having on the coal sector in China?

Alvin Lin: Let me take a step back. In the first quarter of this year, we saw a 6.8% drop in GDP in China, and electricity consumption also fell by 6.5%. However, coal power generation dropped by 13.6%, while renewables generation actually increased, with a rise of 10.4% for wind power and 20.3% for solar power. Even before COVID-19 took hold in China, there had been signs that the National Energy Administration (NEA) was moving to relax some of the restrictions on provinces approving new coal plants. Approvals for 200 GW of capacity were issued in 2014 and 2015, but these projects were put on hold and are still in the pipeline for construction.

In February, the NEA gave six more provinces the green light to approve new coal plants. This was before the economic impacts of COVID-19 had been fully felt. That said, about half of China’s coal plants are not profitable; their utilisation rate has dropped below 50% and is likely to see a further decline because of COVID-19. During the last three months, this has put them under greater pressure. And so, you have a situation where there are some provinces and some companies, mostly provincial rather than central state-owned enterprises, that may want to build new coal plants, and the industry groups are also looking to increase coal power. This presents a risk of financing coal power plants that will not be profitable and that will put pressure on existing plants at a time when electricity demand is falling, and renewables are continuing to increase their share in the generation mix.

Nevertheless, there is nothing, as yet, to suggest that there will be a huge new pipeline of projects for coal power plants as a result of COVID-19. The central government is being more careful about stimulating the economy than in 2008. They are focusing on new infrastructure, such as 5G networks, electric vehicle (EV) charging stations and ultra-high voltage lines. There has been no sign that the central government wants to include coal power plants as one of the key focus areas for economic stimulus as high-quality growth and environmental protection are the priority.

Much of this depends on the situation at the provincial level. There are some provinces that, at least before COVID-19, were arguing that they lacked sufficient generation capacity and wanted to build more coal power plants. These were mostly places in the south and west, for example Guangxi, Guizhou, Hubei and Hunan. Provinces such as Shandong and Jiangsu in the east, which are more developed, have, in fact, been trying to cut their coal power consumption, because of air pollution, and are not going to be building many more coal power plants. So far this year, we have seen 12 GW of new plants approved through April in Guangdong, Inner Mongolia and Shaanxi. We will need to see if more provinces decide to seek new coal plant approvals now that the risk of investing in such plants is increasing, as electricity consumption and economic growth slow.

Will the coal cap stay the same?

Alvin Lin: China’s key energy and climate targets for the end of 2020, such as the goal of reducing the share of coal in energy consumption to 58% or less, are not likely to change. Energy and coal consumption will obviously be much lower than expected this year, so most provinces should be able to meet their targets. Shandong, for example, aims to cut consumption by 37 million tonnes of coal between 2018 and 2020 and has been working hard to achieve that. Those provinces that were really pushing to reduce their coal consumption, because of air pollution, are not going to use the COVID-19 economic situation as a reason to stop the drive for continued coal reduction.

Shaanxi, Shanxi and Inner Mongolia, which have the most coal resources, may view the current economic slowdown as a reason to develop more coal power or coal chemicals projects, with a view to boosting investment. The COVID-19 situation has also brought even more attention to energy security. Coal-to-gas or coal-to-oil production, although not profitable, is viewed, now more than ever, as an energy security issue, and there may be more of a push to develop such projects as a way of improving energy independence. However, these projects are carbon and water-intensive and are not profitable, so this kind of investment must be evaluated very carefully.

Would the new coal power capacities necessarily lead to more emissions or might older, less efficient plants be shut down as new ones open?

Alvin Lin: In general, in provinces such as Shandong, if they were to add even one new coal power plant, they would need to close down an equivalent amount of coal power capacity, but some other provinces that have less generation capacity may argue that they need to build coal power. Hubei, Hunan, Guizhou and Guangxi, for example, may face a situation in which they perceive that they do not have enough electricity to meet the anticipated growth in demand. So, there may be some provinces that would see a net increase in coal consumption and net emissions from the power sector, while other provinces would reduce coal-fired capacity if they were adding a new plant. And, of course, we should also look at how cleaner electricity resources, such as renewables, energy efficiency and demand response, can replace coal power before considering building any new coal plants. With the growth in EVs in China, there is a huge potential to leverage demand response from EV batteries to help absorb more renewables in the grid. We supported a Shanghai EV demand response pilot last year and have released a report (Chinese) on how EVs could help to make the grid more flexible. We have also conducted research with Huzhou partners and found that demand response could reduce summertime peak load by up to 16%.

So, it is true to say that the decision to give provinces the green light to approve new coal power plants was not due to COVID-19 but had already been taken before the pandemic.

Alvin Lin: The provinces that have plans to build coal plants, such as Shanxi, Inner Mongolia, Shaanxi, Jiangxi, Hubei and Hunan, will have them on their key project list. Whether they will get approved and whether they can secure financing is another question. I think the growing scrutiny of coal plant profitability will result in more careful consideration of such decisions by banks and by central government.

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Sino-German Climate Partnership III

Project country
China
Political Partners
German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU); Ministry of Ecology and Environment of the People's Republic of China (MEE); National Energy Administration of the People's Republic of China (NEA)
Implementation Partners
Energy Research Institute of the National Development and Reform Commission of the People's Republic of China
Duration
09/2017 – 09/2020

Germany and China signed the Memorandum of Understanding on Cooperation in Combatting Climate Change and initiated this bilateral dialogue as "Sino-German Climate Partnership". The project has been established to support the cooperation between the German Ministry of Environment, Nature Conservation and Nuclear Safety (BMU) and the Chinese Ministry of Ecology and Environment (MEE). The new phase of the project starts in 2018 with close alignment to the restructuring at the Chinese government. In this phase, the project aims to advance the policy dialogue and cooperation with the Chinese partners domestically as well as within the international context of climate change. Part of the work will be supporting the development and implementation of China's medium- and long-term low-carbon development strategies, hence by supporting the Chinese government in strengthening the climate governance system. Domestically the SGCP project supports the policy dialogue on climate change (Sino-German Working Group on Climate Change) and enhances the exchange of German experiences and best practices, this includes strengthening capacities for the development of integrated climate and energy action plans as well as adaptation concepts for cities. On international level the SGCP project enhances the knowledge of both patterns about best practices in regard of climate policies and their implementation. For new cooperation topics identified by the Working Group on Climate Change, the project acts as an incubator for IKI development. As interface for information management, it serves a as a hub for exchange between partners of the IKI within and outside China, especially within the UNFCCC process.