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New Coal Plants in China: A (Carbon) Bubble Waiting to Burst

While China’s coal consumption growth has slowed down, and fell in 2014, coal-fired power generating capacity continues to grow rapidly. This apparent contradiction has led some observers to conclude that China’s coal consumption growth is bound to resume. In reality, continued buildup of coal-fired power plants represents an investment bubble that will burst as overcapacity becomes too large to ignore.

If there is one factoid that every media consumer knows about energy in China, it must be that the country is “building one coal power plant per week”. While coal-fired power generation capacity growth has slowed from the peak years – 2006 saw the equivalent of 1.5 large units added every week – the rate of coal-fired power plant additions and construction initiations in China is still breathtaking: 39 gigawatts were added in 2014, or three 1000MW units every four weeks, up from 36 gigawatts in 2013.

At the same time, power generation from coal fell by approximately 1.6% in 2014, due to record increases in power generation from hydropower, wind, solar, nuclear and gas, along with slower power consumption growth.  Total coal consumption, including coal use outside of the power sector, fell by anywhere between 0.5-2.5% according to different preliminary statistics and estimates.

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Source: Calculated from China Electricity Council and National Energy Administration statistics for 2014.

In fact, coal-fired capacity growth has outstripped coal-fired generation growth since 2011, leading to dramatically reduced capacity utilization and financial pain to power plant operators. The headline making the rounds in China is that capacity utilization, at 54%, was at its lowest level since the reforms of 1978 (which is when statistics began to be made available).

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Source: Compiled from China Electricity Council statistical releases

Outlook for coal-fired power generation in China

The Obama – Xi deal on peaking China’s CO2 emissions before 2030 has grabbed the headlines in English-speaking media, leaving many observers with the impression that China is planning to slack for another 15 years before starting to pull its weight in cutting CO2. However, real action is in the implementation of China’s energy targets for 2020 and the air pollution action plans for 2017. For the power sector, the most impactful target is for non-fossil energy to make up 15% of all energy consumed in China.

Hitting the 15% target will require raising share of renewable energy and nuclear power in power generation from 22% in 2013 to 33-35% in 2020. Gas-fired power generation is also forecast by the IEA to grow to around 5% of total power generation, implying that the share of coal will shrink to about 60% in 2020, from 72% in 2013. This will require almost doubling non-fossil power generation from 2014 to 2020, meaning that, on average, non-fossil power generation will have increase as much as it did in 2014, every year until 2020. As in so many other respects, the radical changes in 2014 were not a one-off anomaly, but the “new normal”.

As a result of booming non-fossil power generation, even assuming GDP growth of 7% per year until 2020, growth in coal-fired power generation will be limited to around 1.5% per year on average, slowing down towards 2020 as non-fossil generation additions are ramped up. Together with a targeted 0.7% per year reduction in coal use per unit of power generated, this means that coal use growth in the power sector will average less than 1% and will stabilize before 2020. If capacity utilization is to return to financially sustainable levels, there is room for little more capacity to be added until 2020.

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Source: Calculated from State Council Energy Plan for 2014-2020 and IEA New Policies scenario

So what’s the deal with all the new coal power plants?

To grasp why coal-fired power plants can still get built in the face of a worsening overcapacity problem, it is necessary to understand the basics of China’s economic model. The country’s growth miracle has been based on an economic system designed to enable extremely high levels of investment spending, particularly by state-owned companies and local governments. These actors have a very liberal access to near-zero interest loans from state-owned banks, and state-owned companies are generally not required to pay dividends to the state, enabling (or forcing) them to re-invest their profits. Banks exercise minimal due diligence on loans, which have implicit government backing. As a result, investment spending now amounts to over 4 trillion USD per year, making up a staggering 50% of China’s GDP, higher than any other major economy in history, and compared to around 20% in developed economies.

This model served China well for decades, enabling the growth miracle and lifting hundreds of millions from poverty. However, finding profitable and sensible investment projects worth trillions of dollars every year is bound to become harder and harder as the investment boom goes on. Recently published research estimated that 67 trillion yuan (US$11 trillion) has been spent on projects that generated no or almost no economic output – ghost cities being the most famous example.

In this context, it is not too hard to see how investment in coal-fired power plants can speed way ahead of demand growth. A new coal-fired power plant will still generate power and revenue even if there is overcapacity, as the lower capacity utilization gets spread across the entire coal power fleet and across all power plant operators.

What does continued coal-fired power buildup mean for the climate?

The conventional assumption in power business is that once a coal-fired power plant or other capital-intensive generating asset gets built, it will run pretty much at full steam for 40 years or more. Even if there is overcapacity at the moment, demand growth will raise utilization and the existing capacity will crowd out future investment.

However, this is not how things work in China. The government is not going to scrap the internationally pledged 15% non-fossil energy target for 2020 because of excess coal-fired capacity. Rather the overcapacity will lead to losses for power generators and will be eliminated by closing down older plants, as has happened with coal mining, steel and cement already.

Therefore, continued investment in coal-fired power plants does not mean locking in more coal-burning. It does, however, mean massive economic waste, and a missed opportunity to channel the investment spending into renewable energy, enabling even faster growth. Furthermore, the underutilized coal-fired capacity can exacerbate the conflict between coal and variable renewable energy in the grid, as grid operators are known to curtail renewable power in favor of coal.

Hence, investment in coal-fired power plants needs to be rapidly scaled back by restricting approvals and finance for new coal. The first step has already been taken with China banning new coal power plants in its three key economic regions, home to one third of currently operating coal-fired capacity.

Content Discussion

donough shanahan's picture
donough shanahan on February 23, 2015

“At the same time, power generation from coal fell by approximately 1.6% in 2014, due to record increases in power generation from hydropower, wind, solar, nuclear and gas, along with slower power consumption growth. “

Don’t forget steel as imports of coking coal have declined as stockpiles are being run down. Wind and solar have had very little to do with the system.

“In fact, coal-fired capacity growth has outstripped coal-fired generation growth since 2011, leading to dramatically reduced capacity utilization and financial pain to power plant operators.”

This makes perfect sense when much of your population is without electricity and industrial activity (rightly or wrongly) is increasing. What you should look at is the rate of increase of both sets to see if they match.

“If capacity utilization is to return to financially sustainable levels, there is room for little more capacity to be added until 2020.”

? You have not provided one wit of evidence to say that it is not sustainable. In fact you say that “A new coal-fired power plant will still generate power and revenue even if there is overcapacity, as the lower capacity utilization gets spread across the entire coal power fleet and across all power plant operators.” thereby making the case that the sustainability cliff has not been approached yet.

“”However, this is not how things work in China. The government is not going to scrap the internationally pledged 15% non-fossil energy target for 2020 because of excess coal-fired capacity. Rather the overcapacity will lead to losses for power generators and will be eliminated by closing down older plants, as has happened with coal mining, steel and cement already.”

This only happens if demand actually decreases. As we can see in cement and steel, despite pledges, both respective world associations are showing increases in production.

The real problem with this article though is that you have picked the wrong country. China is still very much developing its grid. Therefore drawing conclusions about short term trends cannot be accurate. Indeed there is a good case to be made that China’s steel industry is way over capacity and if that falls over, so does a chunk of electricity demand. 

A better country would have been one with a stable grid such as the UK or Germany. There demand is actually falling yet capacity expansions are occurring. A lot of that will be associated with forward outlook but at least you have a stable and known baseline.

 
Arthur Yip's picture
Arthur Yip on February 23, 2015

Nice work. Gives me something to compare my analysis with: http://theenergycollective.com/arthurhcyip/2170121/us-china-climate-deal-underscores-need-substantial-energy-innovation

My analysis differs from yours in assumptions about economic/demand growth and efficiency. It seems your hypothesis is that a lot of old coal plants will close due to economic and environmental pressure, while new efficient ones farther away will open. That depends on economic/demand growth and efficiency roll-out. I fear that with the installed capacity, demand for electricity e.g. air conditioning (exacerbated by smog), electrification e.g. electric heat, will trump pressure to close plants as quickly as hoped or to meet 15% target. My analysis expects China to miss “15% by 2020” by 1%, based on their technology targets, largely due to nuclear delays. Accelerated renewables could help, but their 200 GW wind target and 100 GW solar target (and 58GW nuclear and 350 GW hydro) for 2020 takes them to 14%.

Here’s my analysis, which can be compared to yours above:

Either way, a lot of coal power in both our analyses. Whether it’s 4000 -> 4500 TWh/yr or 4000 -> 5500 TWh/yr, it spells big trouble for the climate if even China cannot deploy enough non-fossil power to push down coal power during the 2015-2030 period.

Bruce McFarling's picture
Bruce McFarling on February 25, 2015

Note that it is not just age, but also location, as there is continued pressure to shut down the worst polluting plants in the most heavily polluted large cities. A program of not distributing reduction in demand evenly, but rather in line with age of plant and proximity to cities suffering extended severe air pollution events could easily leave new plants in a position of economic viability while old plants lose their viability.

In such a scenario, it will be the pace of transmission capacity roll-out that governs the speed of shut down of older plants, as a new remote plant can only take a place in the, eg, Beijing region merit-order curve if there is sufficient capacity to bring the power to Beijing, so the more transmission capacity, the more financial strain can be placed on older plants that emit into Beijing airsheds.

donough shanahan's picture
donough shanahan on February 25, 2015

Either way, a lot of coal power in both our analyses. Whether it’s 4000 -> 4500 TWh/yr or 4000 -> 5500 TWh/yr, it spells big trouble for the climate if even China cannot deploy enough non-fossil power to push down coal power during the 2015-2030 period.”

And this is the point that most green oriented media sites and groups have decided to ignore. Even if China started declining now, there is decades of growth to role back and there is no indication (short of economic collapse) that this can happen in a timeframe quicker than it took to deploy. Essentially we have are counting summer based on one swallow.

Wilmot McCutchen's picture
Wilmot McCutchen on February 27, 2015

Non-hydro renewables presently contribute only 6.8% of US electricity, after all the subsidies and mandates.  For China, there seems to be no realistic alternative to coal power.  India too. 

Let’s hope China can solve the air pollution problems incident to coal power.  The US has failed, so now the world must look to China to develop the technology to capture CO2 and then dispose of it. 

Enhanced oil recovery (EOR) could use only a tiny fraction of the billions of tonnes each year from coal power.  Even if the huge infrastructure to transport that much CO2 could be built, CO2 compressed to a supercritical state has to be hammered into rocks whose pore space is full of very salty brine.  Where would that displaced ocean of brine go?  The risk of salting the groundwater is not negligible, as energy experts seem to assume.

Earthquakes from injection wells are another unsolved problem for sequestration.  The earthquake risk is not negligible, and very likely a worse disaster than global warming.   https://www.sciencenews.org/article/pumping-carbon-dioxide-deep-underground-may-trigger-earthquakes

At the scale of 2 billion tonnes per year, sequestration in the US looks fundamentally impractical, and attempts to make it work (like the recently punted FutureGen2 project in Illinois) are a waste of time and money.  Trying to extrapolate EOR experience to sequestration is an elementary error, as petroleum engineers (Ehlig-Economides, et al.) have pointed out, because EOR is an open system, and sequestration by definition (if it’s secure) is a closed system.  Secure storage in an open system is nonsense. 

 Post-combustion CO2 capture by surface chemistry is another fundamentally wrong approach that could never work at a scale that would make an impact on global warming.  https://www.sciencenews.org/article/carbon-capture-and-storage-finally-approaching-debut

Amine sweetening, to remove CO2 from natural gas, is a mature technology (from the ’30s) but it can’t possibly scale from the oil field to what’s needed for a coal plant (5,000 tpd).  Water consumption would double.  Quenching the hot flue gas to 30-60C so the amine sorbents can work is possible but not economical.  Wet cooling at thermal power plants already consumes more fresh water than any other use, and doubling that waste of water during a drought is not a realistic plan. 

But the goal of mitigating global warming while developing the Chinese economy could be achieved by kinematic separation in the open von Karman geometry (for CO2 capture by stripping the nitrogen ballast) and CO2 cracking (by radial counterflow shear electrolysis).  CO2 cracking would take a lot of energy (about the same as water electrolysis) but that energy could come from wind at night and the spinning reserve, and the oxygen could be used for combustion instead of air.  The energy for cracking would be about the same as the energy for taking oxygen from the air using a conventional air separation unit.  The elemental carbon thus produced could be very useful carbon nanotubes. 

Lauri Myllyvirta's picture
Lauri Myllyvirta on February 27, 2015

Yangtze River Delta has been addressing capacity adequacy by building quite a lot of gas. The region has a ban on permitting new coal-fired power as a part of the National Air Pollution Action Plan. The existing hydro and thermal capacity are definitely sufficient to cover peaks on the national level, so capacity adequacy is more of a grid issue.

Lauri Myllyvirta's picture
Lauri Myllyvirta on February 27, 2015

I’ve written a lot on this platform and elsewhere on total coal use, this post focused on power only.

The Chinese population has essentially full electricity access (>99%) and providing the rural villages that have no or partial access with electricity would have no discernible impact on total demand – residential demand is <10% of total.

I kind of assumed that you don’t need much evidence that building capital-intensive coal plants that run at 50% utilization is not financially sustainable. In any case, having state-owned companies spending hundreds of billions of dollars on assets that there is absolutely no need for is certainly economic waste on the national level.

And no, there is no need for demand to decrease for the overcapacity problem to keep getting worse. If you have ~200 TWh/a of non-fossil generation being added every year, and keep adding coal-fired generating capacity at 5% per year, you will see plummeting utilization rates even when total demand grows according to forecasts.

I certainly agree that there are easier countries to study than China, but I’m not sure that doing a damn near perfect forecast of what’s going to happen on Isle of Man or in Monaco is a substitute for trying to understand what’s happening in China.

Lauri Myllyvirta's picture
Lauri Myllyvirta on February 27, 2015

What you’re seeing in China are fundamental long term trends shifting the outlook dramatically. Of course there are short term factors as well at play in 2014 – I’m not saying total coal use will drop by 3% every year from now on.

And oh yes, bringing global CO2 emissions down to sustainable levels (at least 80% below current Chinese per capita emissions and 95% below U.S. level) is a pretty big undertaking, and I’m not saying China has solved it for all of us in the past two years. However the prospect of China’s CO2 emissions stabilizing in the next years as opposed to >5% growth in the past decade is a huge step towards that long term goal:

http://www.greenpeace.org.uk/newsdesk/energy/analysis/china-and-us-move-away-coal-there-new-opportunity-global-emissions-peak

Lauri Myllyvirta's picture
Lauri Myllyvirta on February 27, 2015

Power sector uses half of China’s coal — what matters is that total coal use is likely to peak well before the end of the decade as a result of the 2020 energy targets. It seems to me that your projection and ours are in neat agreement: If China misses the 2020 energy targets AND economic growth stays in the 7% range (which you assume), coal will not peak. If China meets the 2020 targets coal will peak even at 6-7% growth (which I assume). 

Also note that when you factor in the upward corrections to total primary energy consumption and coal consumption included in yesterday’s statistical releases, the 2020 targets just became hugely more ambitious.

Grace Adams's picture
Grace Adams on February 27, 2015

Between savings on health care and time lost from work by reducing air pollution, and the fact that once renewable energy is installed it is cheaper to make good use of whatever electric power you get from it than to mine ship and burn coal, China has at least some incentize to use wind and solar as much as it has of them rather than using any more coal than it needs to meet demand.

donough shanahan's picture
donough shanahan on March 1, 2015

The Chinese population has essentially full electricity access (>99%)”

Indeed but not 24 hours a day.

 kind of assumed that you don’t need much evidence that building capital-intensive coal plants that run at 50% utilization is not financially sustainable. “

That is a huge assumption and as I said, there is little evidence to support this claim though I agree it is stupid to run this way. However if this is the case, then I fail to see how technologies with lower capactiy factors havem uch chance either, state owned or not.

And no, there is no need for demand to decrease for the overcapacity problem to keep getting worse. If you have ~200 TWh/a of non-fossil generation being added every year”

And the point I made regarding Germany and the UK gives much better countries to do this study on. China is still in flux with increasing demand for electricity. Germany/UK for example is not with flat or decreasing demand. Yet these are adding additional capacity to their systems. 

but I’m not sure that doing a damn near perfect forecast of what’s going to happen on Isle of Man or in Monaco is a substitute for trying to understand what’s happening in China.”

Germany/UK.

Willem Post's picture
Willem Post on April 29, 2015

Lauri,

This article does not mention the efficiency of China’s NEWER coal plants, 40% – 45% which is much greater than the about 30% of EXISTING plants.

These newer plants also have high efficiency, 99+%, air quality control systems, the existing plants do not.

China is building new plants and retiring old plants; energy production from coal is going up, while coal consumption goes down!!

The article completely misses that important point.

 

 

Grace Adams's picture
Grace Adams on May 8, 2015

I hope that energy storage including large batteries can help to better match supply and demand in such a way as to give preference to using renewable energy over using coal, and reduce the amount of coal burned. I am sure there will still be times when all those coal plants held in reserve will be needed, but I hope total greenhouse gas emissions can be at leat reduced.