In a fascinating article, Collin Smith, graduate student at the Hopkins-Nanjing Center in China, explains why China has been building a large amount of new coal-fired capacity the past two years, despite its climate commitments and drive for renewable energy. He also explains why this capacity does not necessarily translate into more coal power production: the power plants are and will be heavily underutilised. There is a danger though that the power will get exported.

China’s pledges to combat climate change have been some of its most lauded actions by the international community, but an ongoing domestic build-out of coal-fired power generation capacity has caused some within this community to doubt the country’s commitment. The oft-cited “one new coal plant per week” statistic (recently upped in a Bloomberg article to “two new plants per week”) is often offered as definitive proof that the country’s expansion of its coal-fired generation capacity is excessive, and thus its climate goals untenable. However, although the first of these assumptions is almost definitely true, the latter does not necessarily follow.

China’s coal-fired capacity additions have been a confusing and controversial component of its energy policy for a few years now, with the country continuously approving and cancelling new projects since early 2015. The reasons for this are tied up with bureaucratic mismanagement and distorted economic incentives, factors that China’s top leaders have been actively attempting to rectify. As such, the country’s ongoing coal capacity additions function more as an indication of administrative failure than a confirmed policy direction.

China’s current headache with coal-fired capacity was precipitated by a policy change the country enacted two years ago. Starting in October 2014, authority for approval of new coal capacity additions shifted from the national to the provincial government

By contrast, China’s commitments to reducing greenhouse gas emissions are long-term policy signals that have only been growing in strength since the US-China bilateral climate agreement in November 2014. In China’s climate change work plan for the 13th Five Year Plan (FYP) period (released in late October), top government officials implemented an official cap on coal consumption, a policy that had been in discussion for years and has now been strengthened by its inclusion in this FYP document. It is accompanied by a number of other climate mitigation measures meant to buttress the continued de-carbonization of the country’s power sector (not to mention new low-carbon policies in construction, transportation, and carbon pricing). These measures, combined with falling electricity demand driven by the restructuring of China’s economic growth model, ensure that China’s climate goals are on track even with its run-away coal plant development.

China’s coal capacity glut: past, present, future?

China’s current headache with coal-fired capacity was precipitated by a policy change the country enacted two years ago. Starting in October 2014, authority for approval of new coal capacity additions shifted from the national to the provincial government, causing the approval of new coal plants to surge in 2015 as the central government ceded control of the country’s thermal generation sector. Altogether, 165 GW of new capacity received permits over the course of this year alone. This happened despite a national slowdown in the consumption of coal-fired power, with total coal consumption in China dropping by 2.9% in 2014 and another 3.7% in 2015. With China’s economy showing a permanent trend away from energy-intensive heavy industry, there is little reason to believe its coal use will return to its 2013 high, making the provincial-level push to build more capacity especially troubling.

In October 2016, China’s coal-fired power plants had an average load factor of 46%, meaning these plants were sitting idle more often than they were run

This is the crux of the confusion that Bloomberg identified when they asserted that China’s “two plants per week” building spree indicated that they were trashing their climate goals. In traditional market systems, coal-fired capacity wouldn’t be built if there wasn’t a reason to use it – hence, more coal plants equals more emissions. However, in China’s state-dominated economy, this isn’t necessarily the case. In a country whose past economic growth was driven largely by investment in fixed assets, building new coal plants was a proven way for provincial leaders to head off an economic slump. Regional banks would still provide capital because China’s high tariffs on coal-fired electricity, coupled by historically low coal prices, meant that these projects could be profitable even if the plants themselves were run far less often than they were supposed to.

This is exactly what is happening. In October 2016, China’s coal-fired power plants had an average load factor of 46%, meaning these plants were sitting idle more often than they were run. If China’s current build-out of capacity continues, these load factors will drop even more in the future. The graph below models utilization rates for coal plants in different regions in China given current expansion plans, with some variability based on the number of ultra-high voltage (UHV) power lines the country builds to move power to major load centers.

Source: Greenpeace, “Burning Money.”  July 2016

Given that this wasted capacity represents around $200 billion in unneeded expenditures, the central government has been eager to rein in the expansion. In March 2016, China’s National Energy Administration (NEA) released orders for 13 provinces to suspend approvals of new projects until 2017, and another 15 to delay construction of new projects that had already been approved. Taken together, this required about 110 GW of suspensions, a promising start to tackling an already dangerous capacity bubble.

However, coverage under the policy wasn’t complete. In addition to only applying to certain provinces, the NEA’s orders also allowed exemptions for combined heat and power plants, as well as coal plants that would be transferring their power from the west to the east of China using the country’s growing UHV network. As a result, the policy was followed by another surge in project approvals that pushed the number of capacity additions under construction to 200 GW – with even more in the permitting and planning stages.

The lesson from China’s coal overcapacity challenge is that capacity levels are not the best measure of success for the country’s climate goals. More important is its actual consumption of coal

The central government responded in October with even more draconian measures, calling for a halt to construction work on an additional 17 GW of projects and scaling down plans to build out the country’s west-east power transfer capacity, which ended up stranding another 30 coal projects that were left with no connection to the grid. This was a significant step, as it was the first time the government moved to stop projects that were already under construction. However, concerns over the economic fall-out from additional closures make it difficult for the government to completely shut down the country’s planned capacity expansion.

The latest development in this ongoing tug-of-war comes from this November’s release of China’s Five Year Plan for its power sector, which set a target of 1,100 GW of coal-fired capacity by 2020. As the country’s current coal-fired capacity is around 920 GW, this leaves room for roughly 180 GW of new coal plants to come online. Although this presumably means some of China’s current expansion plans will be shelved, it’s still far more capacity than the country needs. The continuation of China’s economic restructuring, coupled with other planned additions of non-fossil fuel capacity like wind and nuclear, means that new coal-fired plants won’t be needed to meet future growth in the country’s energy demand.

China’s climate goals: a demand-side story

The lesson from China’s coal overcapacity challenge is that capacity levels are not the best measure of success for the country’s climate goals. More important is its actual consumption of coal, and in this respect China is exceeding expectations. The country’s coal consumption has been falling since 2013, and the NEA’s 2016 work plan expects coal use to continue to fall in 2016 and its CO2 emissions to level off. This is huge news and almost guarantees that China will meet its goal of peaking CO2 by 2030, the most high-profile goal it set at the Paris Climate Conference in December 2015. Climate Action Tracker’s recent evaluation of China’s climate pledges concluded that, given the country’s current emissions trend and internal power sector goals, China is on track to achieve the commitments it made at COP 21.

Further strengthening China’s de-carbonization are plans to develop a national spot market for electricity by 2018, outlined in the power sector FYP

In fairness, this is partly because China’s COP 21 goals weren’t particularly ambitious, but it’s still important to recognize that China’s new coal plants won’t invalidate its climate pledges. One provision to ensure this is the cap on coal consumption that China included in its FYP work plan on climate change, which stipulates that China’s coal consumption will not rise above 4.2 billion tons – roughly the level of consumption at China’s peak in 2013. This coal cap was first introduced two years ago in a State Council energy action plan, but including it in this new FYP document gives the target additional weight.

Local-level action has been significant as well. In 2015, 20 provinces and over 30 cities in China had developed their own targets for coal consumption, most for 2017. While many of these targets allowed coal consumption to continue growing in the short term, several cities/provinces (including traditionally coal-heavy areas like Hebei and Shandong) required coal use to fall below 2012 levels by 2017.

These controls on coal consumption are accompanied by government efforts to reduce coal production, another supply glut the country’s falling coal demand had exacerbated. In early 2016, the NEA passed measures requiring the closure of 1,000 coal mines in that year, part of a long-term goal of cutting 500 million tons of production capacity over the next three to five years. China has also stopped approval of all new coal mines until 2019. Overall, China’s ongoing attempts to curb production of both physical coal and coal-fired power illustrate that the supply side shouldn’t be viewed as an indicator of China’s future emissions; rather, it’s action on the demand side that will determine how well the country will meet its emission targets.

Further strengthening China’s de-carbonization are plans to develop a national spot market for electricity by 2018, outlined in the power sector FYP. Currently, electricity dispatch in China is administratively controlled, with most coal plants provided a guaranteed number of operating hours per year. With a spot market, electricity will instead be dispatched according to the cost of its production. This will assumedly eliminate the entrenched advantage China’s coal plants currently have in the dispatch order while also favoring renewable technologies like wind and solar that can produce electricity at a lower marginal cost.

The country has raised the possibility of building an Asian “supergrid” that will allow China to export electricity to nearby countries like Vietnam and South Korea

Accompanying this electricity sector reform is a new national target to reduce curtailment of wind generation to 5%. This target that will do more than just ensure more wind energy is used; a major reason for China’s previously high rates of wind energy curtailment was a tendency for China’s State Grid to prioritize coal plants in the dispatch order. If this new curtailment target is to be met, then this practice will have to be phased out*. Combined with the creation of a spot market, this target indicates that renewable energy sources will be prioritized over coal in the future, regardless of how much new coal-fired capacity comes online.

Looking forward

Even with these policy assurances in place, there are still issues that will need to be worked out. China’s climate action is only “on target” in terms of the commitments it made at Paris. Climate Action Tracker still found that their current goals are insufficient for the world to stay within 2 degrees of global warming (which is really what the aforementioned Bloomberg article was focused on anyway). China’s 2030 “peak” pledge also only applies to CO2 emissions; non-CO2 greenhouse gas emissions like methane and HFCs may still continue to rise past that date if the country doesn’t take steps to reduce them.

Finally, a market may yet develop for China’s idling coal-fired capacity. The country has raised the possibility of building an Asian “supergrid” that will allow China to export electricity to nearby countries like Vietnam and South Korea. Although this could help China use electricity from variable resources like wind and solar more effectively, it could also allow China to export coal-fired power if the coal new plants it’s building are connected to these cross-border power lines. Even the strongest climate commitments may falter under the temptation to use those billions in energy investments to turn a profit.

China’s over-expansion of its coal-fired power capacity will result in billions in economic losses as valuable capital is thrown into projects that will operate at far below their optimal capacity

In the near term, however, the jeremiads against China’s ballooning coal capacity seem overblown. Bloomberg’s “two new plants a week” statistic is a troubling one, but mainly from an economic standpoint. China’s over-expansion of its coal-fired power capacity will result in billions in economic losses as valuable capital is thrown into projects that will operate at far below their optimal capacity, but the realities of China’s economic restructuring and slowing energy demand growth, coupled with its continued efforts to develop emission-free sources like wind, solar, and nuclear, mean that these new additions are unlikely to derail the country’s climate commitments. The country’s power sector will continue to become cleaner, greener, and more efficient, no matter how many idle smokestacks ultimately dot its skyline.

*China has technically required that its electricity grid purchase all available renewable energy since 2007, but this administrative requirement was frequently ignored. A hard target in an FYP is much stronger and more likely to be met.

Editor’s Note

Collin Smith is a graduate student at the Hopkins-Nanjing Center studying US-China relations with a focus on energy and the environment. Prior to his studies, Collin worked on the Energy and Climate Team at the Natural Resource Defense Council’s Beijing office, where he was involved in projects aimed at reducing coal consumption and improving power sector efficiency. He is also a former director of the Beijing Energy Network, a China-based knowledge-sharing platform for professionals in the energy and environment space.