Caixin
Oct 15, 2021 06:18 PM
ECONOMY

In Depth: China’s Struggle to Balance Green Goals With Keeping Lights On

A coal-fired thermal power plant’s coal reserves piled up in Xiangyang, Central China’s Hubei province, in December 2020. Photo: VCG
A coal-fired thermal power plant’s coal reserves piled up in Xiangyang, Central China’s Hubei province, in December 2020. Photo: VCG

The massive power crunch that’s darkening businesses and homes in many parts of China throws into sharp relief the struggle of world’s largest coal burner to balance its ambitious goals for slashing greenhouse gas emissions with its appetite for energy to power the economy.

The world’s second-largest economy is consuming far more electricity than expected to keep its factories running as businesses rebound from the pandemic. But production of coal — the main fuel for generating electricity in China — is slowing under the government’s green transition policy to fight climate change by achieving carbon neutrality by 2060.

Nearly 70% of China’s electricity comes from burning coal, which spews into the atmosphere tons and tons of carbon dioxide, the main greenhouse gas causing global warming. Power generation accounts for 53% of the country’s coal consumption. 

In the first eight months this year, China produced nearly 2.6 billion tons of coal, up just 4.4% from a year ago as production was slashed on safety and environment concerns. During the same period, the country’s power consumption surged 13.8%.

This mismatched pace of growth led to a widening shortfall of coal for keeping up with demand for electricity, pushing prices to levels that power plants couldn’t afford. 

Coal prices in China started taking off in May 2020 as the Covid-19 pandemic eased domestically. During the winter heating season, benchmark 5,500 kcal/kg grade thermal coal traded as high as 1,000 yuan ($155) per ton in northern China, the highest in a decade. 

After a short retreat in early 2021, coal prices entered an unprecedented upward trajectory in late February. As of Sept. 28, the most-traded thermal coal futures contract on the Zhengzhou Commodity Exchange rose to 1,253.8 yuan per ton, up 90% from 671.4 yuan Jan. 4. 

Soaring coal prices are wiping out power plants’ profits. According to a study by the China Electricity Council (CEC), 70% of coal-fired power plants were operating at a loss in June as the cost of coal surged more than 50% from a year earlier. Huadian Energy Co. Ltd., one of the largest generators, posted a net loss in the first half that nearly doubled from a year before to 523 million yuan. Beijing Jingneng Power Co. Ltd. recorded a 300 million yuan net loss during the period, reversing a net profit of 841 million yuan for the previous year.

Generators’ troubles also reflect a state-led power pricing regime that limits power plants’ ability to raise prices even when squeezed by rising costs. According to Sinolink Securities Co. Ltd., when the coal price tops 800 yuan per ton, coal-fired power plants on average lose 0.03 yuan for every kilowatt-hour of electricity as production costs exceed the state-set power tariff. This means many generators have to cut output at a time when supply is already short. The government moved this week to lift curbs on electricity pricing.

This year’s coal crunch reflects misjudgments on supply and demand by policymakers and market investors, analysts said. “Soaring global orders and increased domestic construction have both pushed up (energy) demand that exceeded policymakers’ expectations,” said Chai Linmin, a researcher at the National Center for Climate Change Strategy and International Cooperation.

The export boom this year beat many analysts’ forecasts. The customs administration published data for the first nine months showing that exports in yuan terms climbed 22.7% from a year earlier. “No one predicted that exports would perform so well,” one financial analyst said.

Beijing’s goal of reducing carbon emissions means a large portion of the country’s coal production capacity will be phased out in coming decades, a process that will test policymakers’ wisdom and determination, analysts said. Without proper measures, the current trend will push coal prices as high as 2,000 yuan per ton, further worsening the coal shortage and the power crunch, they said.

Widening supply shortfall

“The main issue this year is the growth of demand for coal exceeded the growth of supply, causing an imbalance,” said a person close to policymakers. 

In the first eight months, China’s total power consumption rose 13.8% year-on-year to 5.47 trillion kilowatt-hours, data from the National Statistics Bureau showed. During the period, major coal-fired power plants generated 3.87 trillion kilowatt-hours, up 12.6% from the same period last year.

While the post-pandemic business recovery and recovering overseas demand drove up power consumption in China, the supply of coal didn’t keep up. During the first eight months, China’s coal consumption rose 10.7% to 2.1 billion tons, but domestic production grew only 6.4% to 1.95 billion tons. Meanwhile, coal imports declined 19.7%. 

About 90% of China’s coal comes from domestic mines, which have come under mounting regulatory scrutiny for safety and environment impacts in recent years. In 2020, a crackdown on substandard mining operations slashed coal production by 11% in the Inner Mongolia autonomous region, one of the largest coal mining regions in China. 

In early summer, several coal mines with total annual capacity of 20 million tons were shuttered in Central China’s Henan province after a series of deadly accidents. Another mining province, Shandong, plans to close mines with combined capacity of 31.6 million tons by the end of this year on safety concerns. Coal mines in many places have also been hit by production restrictions under the government campaign to cut emissions and energy consumption.

Coal imports, meanwhile, are shrinking as prices climb amid the global recovery. A CEC price index tracking China’s coal imports showed that the average price between Sept. 16 and Sept. 23 reached 1,283 yuan per ton, up 162.9% from the same period a year ago. In the first eight months, China imported 198 million tons of the fuel, down 10.3% year-on-year.

The National Development and Reform Commission (NDRC) since April has taken a series of steps to deal with the worsening supply shortage, including releasing strategic reserves into the market, speeding up approvals of new facilities and ordering production hikes.

But the effects of the measures have so far been limited, partly reflecting the lack of new production capacity that can be put into use, analysts said. China’s construction of new coal mines has been declining after years of efforts to reduce overcapacity. According to the China National Coal Association, the country’s coal mining capacity stood at 5.19 billion tons by the end of 2019, including 3.9 billion tons in operation and 1 billion tons under construction. That compared with 5.7 billion tons of capacity at the end of 2015.

“It usually takes two to three years to complete construction on a coal mine,” said Zeng Hao, the chief analyst at Shanxi Jingzhen Energy Technology Group Co. Ltd. “How much capacity you can increase now depends on what was invested a couple of years ago.” 

The challenging path ahead

Under Beijing’s 2060 carbon neutrality goal, slashing coal consumption will be crucial. Emissions from burning coal account for nearly 70% of China’s carbon emissions.

According to Yuan Jiahai, a professor at North China Electric Power University in Beijing, coal consumption in China will drop to 400 million to 500 million tons per year by 2060 as the fuel will mainly be used as a supplement for power generation. That means a dramatic cut in consumption from today’s 4 billion tons a year. 

According to a roadmap released last year by the NDRC, China will reduce the share of coal in primary energy consumption from 57% in 2020 to 47% by 2025, and to 23% by 2035 and 11% by 2050.

Power generation currently accounts for 53% of total coal usage in China, followed by the steel, construction materials and coal chemical industries. As of the end of June, China’s coal-fired power generation capacity was 1.09 billion kilowatts, 48.2% of power generation capacity.

Analysts project that coal will remain the main fuel for generating electricity in China for the next four years because of unresolved technological issues in renewable energy. Installed coal-fired power capacity will start declining after 2025, they said. 

“The changes will be dramatic over the next 40 years,” said Kang Junjie, an energy expert at Peking University. Technology development will be the biggest driver, and carbon neutrality can be achieved only with breakthroughs in key technologies such as energy storage and carbon capture, Kang said.

Industries relying on coal as an energy source will also need significant revamping of technology and production, analysts said.

The path to downsizing coal consumption will have a profound impact on local economies, especially in regions with a heavy dependence on coal mining, like Shanxi, Inner Mongolia, Shaanxi and Xinjiang. 

Provinces need to start the economic transition as soon as possible to find new growth sources and work out policy arrangements to help settle businesses and people affected by the immense transformation, Yuan said. 

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (hello@caixin.com)

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