Coal power plant (Copyright: Shutterstock/Kodda)

 

With the release of its annual coal early warning system in February, China’s energy authority NEA has signalled increased scope for licencing new coal-fired power plants.

On 26 February 2020, China’s National Energy Administration (NEA) published its ‘Circular on 2023 risk and early warning for coal power planning and construction’. The outcomes of this early warning system are of high relevance because its projections are used to determine whether provinces will be allowed to licence the construction of new coal power plants.

The system was introduced as a reaction to the excessive licencing of coal power plants and to avoid overcapacities. The central government had previously devolved the authority for approving new plants to the provinces, which led to an increase in new licences and construction that outpaced demand. This development ultimately resulted in the NEA blocking the construction of any new coal power plants in 2016 and 2017. Subsequently, the forecast with a traffic light rating system was introduced to give more guidance to the provinces. It is published annually, with assessments for the three years ahead. When a province is set to ‘red’, no new construction is allowed in that year; when set to ‘yellow’, a licence can only be granted under certain conditions.

The forecast is divided into three separate ratings based on 1) the adequacy of generation capacity in terms of the required supply and reserves, 2) resource restrictions such as air and water pollutants, 3) the economic feasibility of projects based on the expected return on investment in comparison to Chinese National Bonds. The latter factor is non-binding. When the system was introduced, nearly all provinces were marked as ‘red’, but in recent years, more and more provinces have been allowed to licence new constructions. With the new issue, this trend proceeds, and until 2023, 19 provinces will be fully or partially set to ‘green’.

This change in coal regulation comes at a time when the Chinese economy is struggling with the effects of the COVID-19 pandemic, which has led to speculations that the goal of the loosened regulations is to boost the economy by supporting large-scale investment and construction, for which coal-fired power plants are particularly suitable. Another factor in the decision may be that Chinese energy demand is expected to grow from 7,000 TWh as of now to 12,000 TWh in 2030. To cover the expected demand, especially in peak hours, the China Electricity Council (CEC), which is affiliated with the big utility companies, and the China Electric Power Planning and Engineering Institute (EPPEI), which is part of the state grid, suggest increasing the coal power capacity limit from 1,100 GW in the current Five-Year Plan to 1,200-1,300 GW in the next one. Some experts, however, have pointed out that the need for peak hour production is smaller than expected, given the potential of intensified electricity exchange between provinces and the growth both in renewable and nuclear energy.

The recent decision by the NEA comes amid domestic and international debates about significant overcapacities in the coal sector. A few observers have expressed concerns over the economic risks of excessive capacity. More than half of all coal power companies are not profitable, and the average utilisation of capacity is less than 50%. Due to the long lifespan of an investment in coal plants, concerns have been voiced about the risk of stranded assets.

Whereas an increase in installed coal capacity is very likely to lead to higher emissions, it must be noted that this increase in emissions will not necessarily be in proportion to the additional installed capacity. Whereas installed capacity increased by 4% in 2019, coal consumption increased by 1%. Therefore, an expansion of capacity could see the average utilisation of plants drop even further in the future, further deepening the operators’ economic problems. Another notable aspect is that newly constructed capacities may replace older and less efficient plants that have higher emissions per unit of power produced.

With an installed capacity of 1,000 GW in 2019 and a share of 58% in China’s primary energy consumption, coal still dominates China’s energy system, despite fast-growing renewable energy capacities (including hydropower), which amounted to 13% of primary energy consumption in 2019.