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China risks wasting US$490 billion on unneeded coal plants

No new coal plants are needed in China’s 13th Five Year Plan (FYP) as slower power demand growth and low carbon capacity targets squeeze coal generation out of power mix, new Carbon Tracker report finds.

China risks wasting US$490 billion on new coal plants that will be unneeded as structural changes to its economy, increased non-coal capacity targets, power sector reforms and carbon pricing slashes coal-fired generation, according to an analysis report released today by the Carbon Tracker Initiative, a UK-headed independent financial think tank which provides in-depth analysis on the impact of climate change on capital markets and investment in fossil fuels.

The study, “Chasing the Dragon? China’s coal overcapacity crisis and what it means for investors“, shows that as of July this year China has 895 GW of operating coal capacity or 2 689 plants being utilised less than half the time, with another 205 GW of capacity under construction. This is inconsistent with the goals of the 13th Five-Year Plan (FYP).

Matrix of needed or unneeded coal capacity (GW) in 2020 based on existing plants as of 2016 and plants under construction under different coal plant capacity factors and power generation growth rates (source & illustration courtesy CTI).

Matrix of needed or unneeded coal capacity (GW) in 2020 based on existing plants as of 2016 and plants under construction under different coal plant capacity factors and power generation growth rates (source & illustration courtesy CTI).

The report suggests that under the 13th FYP, slower power demand growth and low carbon capacity targets will likely strand coal capacity. For example, additional capacity beyond existing plants is only required by 2020 if power generation growth exceeds 4 percent per year and coal plants are run at utilisation rate of 45 percent or less.

– It is clear that China is coming to terms with the fact it does not need any more coal capacity in a market where existing plants are not even running half the time. The dynamic policy environment suggests China is trying to work out how to avoid wasting half a trillion dollars on unneeded coal plants, said Matthew Gray, senior analyst at Carbon Tracker and author of the report.

Coal generation peaking already?

As power demand growth is slowing from a historical average of 10 percent to 3 percent or less per year, China has come to realise it needs to take its foot off the pedal when it comes to coal capacity. Given the expected increases in non-coal generation — hydro, wind, solar, gas, nuclear and biomass — under the 13 FYP, which can more than meet this level of power demand increase, indicates coal generation could fall by up to 8 percent from 2015 to 2020.

– There are clear signs that Chinese coal generation is peaking, as the growth in alternative energy sources can meet lower power demand growth during the 13 FYP. This can only spell bad news for exporters betting on China propping up the seaborne thermal coal market in the future, said James Leaton, Head of Research at Carbon Tracker.

A drop in coal-fired power, combined with the removal of domestic production restrictions spells the death knell for coal imports from overseas. China could become a net exporter of coal again before 2020, which would see the seaborne thermal coal market weakened again, the report finds.

Going cash flow negative

Having analysed the implications of the 2020 targets contained in China’s 13 FYP for plants under construction, the analysis then looks at the gross profitability of the existing coal fleet. According to the report, a new era of power market reforms and the introduction of a national Emissions Trading Scheme (ETS) will erode the margins for coal plants to unattractive levels by 2020.

Incorporating a carbon price of US$10 per tonne CO2 to reflect the introduction of a national ETS in 2017 and a 15 percent reduction in coal power tariffs from ongoing power market reforms, the gross profitability of the operating fleet halves by 2020. As a result, 27 GW becomes cash flow negative and 140 GW makes a gross profit of US$5 per MWh or less.

– Reforms to the power sector and the introduction of a national ETS mean that the current profitability of the coal fleet is not likely to continue. This is essential in order for China to start planning a phase-out of its coal capacity, said Matthew Gray.

A longer-term scenario in the study analyses the implications of limiting global averages temperature increases to 2˚C, confirming the need for China to start planning the early retirement of coal plants not retrofitted with Carbon Capture and Storage (CCS).

The clear direction of travel for coal consumption is underscored by the International Energy Agency (IEA) 2016 World Energy Outlook that brought forward the peak for thermal coal demand in China by 17 years in its New Policies Scenario- recognising demand peaked in 2013 as opposed to 2030.

Graphic below shows needed & unneeded coal capacity (GW) in 2020 based on existing plants as of 2016 and under construction under different coal plant capacity factors and power generation growth rates.

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