Caixin
Oct 04, 2021 08:21 PM

Opinion: How China’s Funding Halt for Overseas Coal Projects Will Affect Developing Countries

Public finance from China, Japan and South Korea accounted for more than 95% of total foreign financing for coal-fired power plants between 2013 and 2020. Photo: VCG
Public finance from China, Japan and South Korea accounted for more than 95% of total foreign financing for coal-fired power plants between 2013 and 2020. Photo: VCG

On September 21, at the 2021 United Nations General Assembly, President Xi Jinping announced that China will no longer build new overseas coal power projects. That was big news.

That’s a right step in view of a global shift to a low-carbon, net-zero emission economy. It is also a proactive Chinese response to the intensifying competition between the major powers and the ongoing battle between China and the U.S. on climate change and energy transition.

How significant the pledge is? According to the World Resources Institute (WRI) estimates, public finance from China, Japan and South Korea accounted for more than 95% of total foreign financing for coal-fired power plants between 2013 and 2020. The three countries are the primary funders and builders of overseas coal-fired power projects across the world. Among them, China’s funds accounted for more than half of the global amount.

South Korea and Japan have pledged to stop investing in new coal-fired power projects abroad in 2021. On April 22, South Korean President Moon Jae-in said at the Leaders Summit on Climate that South Korea would end public financing for overseas coal power plants. On June 13, the Group of Seven (G7), which includes Japan, issued a joint statement saying that they would end the funding for overseas coal projects by the end of 2021 and phase out such support for all fossil fuels.

China as a major investor

China is undoubtedly the world’s largest funder, investor and builder of overseas coal power projects. According to the Global Coal Public Financing Tracker, China has invested about $50 billion in building overseas coal power projects, ranking first in the world. Japan, totalling $17.4 billion, is second and South Korea is in the third place with $5.8 billion.

Chinese enterprises and financial institutions have actively participated in overseas coal-fired power projects over the past years in various ways, such as equity investment, financial support, equipment export, as well as Engineering, Procurement and Construction (EPC) contracts. Indonesia is one of the most popular destinations for such investments. According to Greenpeace’s Overseas Coal-fired Power Investment Database, the total installed power generation capacity that Chinese enterprises and financial institutions have participated in reached 257.7 gigawatts, including 32.9 gigawatts in Indonesia.

In the past few years, Chinese enterprises that have directly participated in overseas coal-fired power projects include China Huadian Corporation Ltd., China Datang Corporation, China Energy Investment Corporation Ltd. (formerly known as Shenhua Group), Power Construction Corporation of China and China Energy Engineering Group Co. Ltd. In addition, many electric construction companies, such as China National Machinery Import & Export Corporation, SEPCO Electric Power Construction Corporation and China Chengda Engineering Co. Ltd., have also participated in EPC projects.

Let us take Huadian Group as an example. It is the leading Chinese company that adopts “going global” strategy and engages in investment and operation of overseas coal-fired power projects. Its investments in overseas coal power projects are mainly concentrated in Indonesia and Vietnam, including Batam Coal-fired Power Plants in Indonesia, Coal-fired Power Plants in Bali, Indonesia, Bukit Asam Power Plant in Indonesia and Vietnam Duyen Hai II Coal-fired Power Plant. The total installed capacity of these projects is close to 4 gigawatts.

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After China’s exit

Some experts predict that once China, Japan and South Korea stop financing and building overseas coal power projects, the number of new overseas coal power projects will drop drastically, leading the world into a new energy era.

Is this really the case? Highly unlikely.

In fact, except developed European countries, the U.S. and China, most countries — particularly developing countries and low-ranking countries by standards of the development Index — still adopt the basic principle of realism. They develop and use their energy resources according to their natural resource endowments and local conditions. The composition of the energy mix varies greatly from one country to another.

Some Southeast Asian countries and emerging countries where a sound economic foundation has been laid, such as Thailand and Brazil, have issued energy policies to increase the share of renewable energies in their energy mix. Their investments in renewables have brought an opportunity for investors from the European countries, the U.S., China, Japan and South Korea. However, countries rich in mineral resources, especially coal resources, in Africa, Latin America, Central Asia and South Asia, might still have to rely on foreign investment to build coal-fired power plants far into the future. These countries have not announced deadlines for carbon peak or carbon neutrality and thus have no pressure of undertaking a transition to low-carbon energy and protecting the environment.

So the obvious question is who will be the primary supporter for coal power plants globally when China, Japan, South Korea, the U.S. and the European countries have all promised to stop building new coal-fired power projects abroad?

The answer is India.

India as the likely future builder

Strategically, India is set to be at the forefront and is likely to replace China, Japan and South Korea as the largest supporter for overseas coal-fired power projects, and there are various reasons for this.

Those reasons include the country’s “developing country” tag, liberal democratic values, support from the U.S. and European countries, relatively strong comprehensive national power, companies with first-class management standards and their inner desire to compete with China. Tactically, India has made strides to increase domestic coal power capacity and advance equipment manufacturing levels over the past few years. At present, India is capable of building small and medium-sized coal power plants of 300,000 kilowatts. India could well follow the investment and operating model that China, Japan, South Korea, the U.S. and the European countries had built for overseas coal power projects.

So while China, Japan and South Korea once followed the U.S. and the European countries in taking over power plant building , India might follow China, Japan and South Korea. It is highly likely that India will be replacing China as the world’s largest supporter of overseas coal power projects.

Therefore, even if China has announced that it would end involvement in coal power plants abroad, the construction of overseas coal power projects will not stop, as long as there are countries (such as India) capable of building them.

Industrialization of developing countries

Fossil fuel, such as coal and petroleum, is an important symbol of industrial civilization and has underpinned industrialization that brought prosperity to many people. Its importance in human development is undeniable, despite the coal’s high carbon intensity.

Without external investment, technology, management skills, and equipment support, many developing countries will experience a slowdown in their industrialization and modernization progress. Moreover, as the renewable energy industry faces steep challenges in those countries, they will drift further away while the developed world marches toward a net-zero economy.

We need to remember that sound and reliable infrastructure is essential for the renewable energy industry to thrive. However, most developing countries do not have power grid infrastructure like that of China, Europe, and the U.S., as the grid’s scale effect is vital for the renewable energy industry to advance. Developing countries do not have basic power grids consisting of thermal power plants or the grid infrastructure as in China, Europe and the U.S., let alone the scale effect that ultra-high voltage transmission could take advantage of.

“How do we start?” is a pressing question for developing countries in light of the current race toward renewables. Thanks to its well-developed thermal power plants, China enjoys a relatively stable power grid, something that other developing countries cannot replicate. Even then, many new ideas and new business models have failed in China. It would be more challenging for them to survive in other developing countries.

Fossil fuel, represented by coal and petroleum, provides a cheap, stable, safe, and sufficient energy source, creating a path dependence on future use. It took humankind 300 years to build a modern energy system that relies on fossil fuels, it is therefore extremely difficult to replace it in just a short period of time.

Therefore, in my opinion, energy transition should focus on increasing energy diversification and advancing utilization processes. The last thing we need is a radical shift. During the transition, a wise approach would be to reduce carbon intensity during the utilization process by enhancing scientific research and promoting technological innovation, especially where there are profitable solutions and controllable costs. This is the only right way.

Lu Ruquan is director of the International Department of China National Petroleum Corp.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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