China's Coal-Fired Power Glut Grows

An analysis by Michael Lelyveld
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Cooling towers are pictured at a coal-fired power plant in Huaian, east China's Jiangsu province, June 20, 2016.
Cooling towers are pictured at a coal-fired power plant in Huaian, east China's Jiangsu province, June 20, 2016.

China's power producers and provinces face staggering losses due to low utilization of coal-fired plants and loopholes in bans on new projects, a recent study has found.

In one of a series of studies on China's electricity sector, Greenpeace East Asia estimated that China could waste as much as 1.4 trillion yuan (U.S. $210 billion) in capital spending on unneeded coal-fired power projects by 2020.

The environmental group said losses could reach 500 billion yuan (U.S. $74.3 billion) per year.

Greenpeace previously warned last November that China's environmental authorities had given approvals for some 155 new coal-fired power plants despite utilization rates that had already dropped to the lowest level in 37 years.

Since then, rapid permitting has continued in spite of China's economic slowdown and slack demand growth.

The latest study last month found that 210 new coal-fired generators have been cleared for construction, largely under exceptions to National Energy Administration (NEA) guidelines in April that threatened to block projects and approvals in 28 provinces until 2018.

On July 11, the state-controlled Economic Information Daily said the government would include a ban until 2018 on new coal-fired power and coal-based chemical projects in its forthcoming five-year energy plan, but it was unclear how rigidly it would be enforced.

The exemptions to the NEA policy in April, largely for plants in coal mining bases and remote regions, will drive capacity utilization rates down from the dismally low level of 49 percent now to 35 percent in 2020, the Greenpeace study said.

The utilization rate for coal-fired plants stood at 60 percent in 2011, according to The Australian Financial Review.

"China's worsening coal overcapacity crisis is acting as a dead weight on the country's ongoing energy transition," said Greenpeace coal campaigner Lauri Myllyvirta in the group's press release.

Drop in electricity use

The pace of new coal-fired power projects has been seemingly unaffected by the sharp deceleration in electricity use from the double-digit growth rates of the last decade.

Overall power consumption rose a scant 0.5 percent in 2015 and recovered only slightly with growth of 2.7 percent in the first half of this year, the National Development and Reform Commission (NDRC) planning agency reported.

The falloff in demand has followed slumping consumption by heavy industry, which used 1.9 percent less power last year.

In the first half of 2016, electricity use by the entire industrial sector increased only 0.5 percent from a year earlier, the official Xinhua news agency said.

But according to Greenpeace, China is still adding new coal-fired power plants at the stunning rate of one per week, a pace that could continue for another seven years if the exemptions persist.

Since the NEA guidelines took effect, new coal-fired projects have been going into construction at the rate of two per week, the study said.

More of the highly-polluting coal capacity will be idled by non-fossil sources, which are expected to bring some 800 terawatt-hours (TWh) of electricity to consumers by 2020 as more wind, solar and hydropower projects get connected to the grid.

By 2020, China's coal-fired generating overcapacity could exceed 400 gigawatts (GW), Greenpeace estimates, or more than one-third of the installed generating capacity of the United States in 2014, as reported by the U.S. Department of Energy.

Smoke belches from a coal-fired power station near Datong in northern's China's Shanxi province, Nov. 19, 2015.
Smoke belches from a coal-fired power station near Datong in northern's China's Shanxi province, Nov. 19, 2015. Credit: AFP
Policy contradictions

The contradictions in China's energy and environmental policies are the result of conflicting interests at a time of changing conditions brought on by the country's economic transition.

In its previous study, Greenpeace traced the flood of new power plant projects to the central government's decision in 2013 to transfer approval authority to the provinces as a way to speed development by cutting red tape.

The measure "has now become a carte blanche for local governments to increase GDP (gross domestic product), especially in provinces heavily relied on coal," the group said last year.

But the pace of planning and development has since been overtaken by the slide in demand, while local economic pressures keep pushing unneeded projects ahead.

Philip Andrews-Speed, a China energy expert and principal fellow at the National University of Singapore, cited "a convergence of perceived interests between local governments for GDP and employment and the state-owned power companies, which still see competition in terms of market share."

The developers and local authorities "face soft budgetary constraints and have easy access to capital," Andrews-Speed said by email.

The power glut also speaks to the splits between development and environmental interests within the central government, which has been slow to curb new coal-fired capacity while simultaneously fighting pollution and promoting economic stimulus projects.

Under the five-year plan, the government hopes to cut coal's share of China's energy mix from 64 percent now to 58 percent in 2020, Reuters reported.

But so far, the government's reported plan to ban new projects until 2018 seems likely to fall short of Greenpeace's recommendation in November to stop issuing permits through 2020.

In the more recent study, the group calls for extending the ban on new permits and construction starts to all provinces and all conventional coal-fired projects.

The government appears unwilling to go that far.

"The extent of new plant approvals in 2019-20 will depend on results of the capacity elimination," said an unnamed official involved in the five-year planning as cited by Xinhua and Reuters.

Developers argue for exemptions

Developers have successfully argued for exemptions to replace older plants with more efficient combined heat and power (CHP) projects, as well as projects in underdeveloped regions and coal bases like Shanxi and Xinjiang.

But the addition of new capacity threatens to far outstrip the retirement of older power plants. Expansions in remote provinces like southwestern Guizhou are unneeded because of hydropower supplies and unlikely to export through the national grid, the study said.

In what may be the most striking departure from current government policy, Greenpeace urged power producers to reduce their investment in retrofitting older plants to curtail emissions and retire the capacity instead.

China's power companies are unlikely to abandon their investments in older plants willingly, but the recommendation suggests that the looming losses from overcapacity could be far worse.

The situation raises the question of why companies would continue to invest in increasing production capacity in an industry already suffering from such underutilization and excess.

Andrews-Speed cited the continuing struggle for market share, suggesting that the big power companies believe their competitors will suffer large losses first, leaving potential profits for those that remain.

But the potential losses by 2020 are so large that the costs are likely to be shared.

"Who will pay? The state-owned enterprises supported by the state banks, supported by the government, and eventually the citizens," Andrews-Speed said.





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