HONG KONG — With its slowest economic growth in a quarter-century and rising desire for clean energy, it is no surprise that China’s demand for coal has fallen far behind its supply.
The surprise is this: China is continuing to approve new coal-fired power plants despite the excess capacity.
According to a study published yesterday by Greenpeace, 210 coal-fired power plants with a capacity of 169 gigawatts were granted environmental permits in China last year. Of those, 95 projects have already received final approval from local authorities, meaning that project developers can go ahead with construction.
The environmental group says an additional 66 coal-fired power plants with minimum production capacity of 73 GW broke ground in 2015 — a large increase over previous years.
“Warnings about China’s overcapacity crisis are coming in left, right and center, and yet the rate at which new coal power plants are being approved is increasing,” said Lauri Myllyvirta, a senior coal campaigner at Greenpeace and the primary author of the study. “These plants do nothing but fuel the overcapacity crisis and add huge debt burdens. It is a trend which must be halted immediately.”
Data from the China Electricity Council show that in 2015, the country’s thermal generated electricity — mostly coming from burning coal — decreased for two years in a row. At the same time, the industry group says, the annual operation hours of power plants dropped to 4,329 on average — the lowest since 1969.
So why did Chinese regulators and power generators still want to build more coal-fired power plants?
“Despite the apparent slowdown in consumption growth, China’s coal power generators are in their best time and have fat profits in 2015,” explained Yuan Jiahai, a professor at the North China Electric Power University in Beijing.
Yuan said that record low coal prices together with disproportionately high electricity prices have created large profits for generators, despite the sharp decline in operation hours.
“Such distortion, it seems to me, is the most important and deep-rooted factor for the coal power surge despite weak demand growth,” Yuan said.
Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, agrees. He said that Chinese generators prefer coal-fired power plants because delays in receiving state subsidies are lowering the profitability of their renewable energy units.
In recent years, Chinese wind and solar developers have been getting fewer subsidies than they anticipated because government programs can’t match the pace of the nation’s growing renewable energy sector. Official newspaper China Energy News reported that as of the end of 2015, about 70 billion yuan ($10.6 billion) may have been owed by the Chinese government to renewable energy developers in unpaid subsidies. Some developers have been waiting since 2012 or earlier for payments they have yet to receive.
But Myllyvirta of Greenpeace argued that a return on the investment in coal-fired power plants is not certain, either.
“Since there is already gross overcapacity in coal-fired power, new supply does nothing to create new demand. So the new plants can only divert revenue from existing plants — owned by the same operators,” Myllyvirta said.
The buildup of new coal power units, however, provides benefits to Chinese power producers in another way. Beijing is in favor of cleaner coal, so newer and more efficient coal plants get more operating hours and have access to government subsidies for environmentally friendly technologies.
Besides that, “one important driver behind the continued investment in coal-fired power plants is that the utilities are trying to increase their share of the shrinking market,” Myllyvirta said. “Supposedly, once the government gets serious about reducing overcapacity, the more capacity you have, the more you will be left with post-crackdown.”
Trying to avoid a bubble
For Chinese regulators, there are also strong incentives to build new coal-fired power plants. The shortage of investment opportunities, which poses a threat to overall economic growth, has for now replaced the glut of power generation capacity as the top concern.
“With China’s leadership now encouraging banks to increase lending and local governments and state-owned companies to increase spending on projects, there is a real risk that these white elephant projects go ahead, contrary to any commercial or market logic,” the study authors noted.
Then China’s decision to decentralize authority comes in. In recent years, Chinese provincial governments have begun to take over the approval process for new coal-fired power plants. That has led to a competition among provincial authorities to expand their power generation capacity, according to Sophie Lu, a Beijing-based analyst at market research company Bloomberg New Energy Finance.
As new transmission lines make it possible to deliver electricity to regions far away, “they think they can export the power as long as they can build it,” Lu said. In China, coal-generated electricity is a commodity that is far more profitable than coal.
Still, it’s unclear how many of the newly approved coal plants will translate into power generation.
“The central government is aware of it, and they are trying to implement different measures to prevent it from becoming an actual bubble,” Lu said, referring to the surge of new approvals.
Last month, China’s National Energy Administration said it would limit the construction of new coal plants in some provinces, while postponing and even canceling others.
But the pressure on Beijing to avoid overcapacity in coal-fired power generation is not going away.
“The central government has one point of view, but the provincial government may have a different point of view,” Lu said. “It is really an issue of enforcement. Current measures are difficult to enforce, so a big part is not just what they say they will do, but what they are actually doing to fix the problems.”
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