This blog was authored by Yang Fuqiang, Wu Di and Kang Junjie.
The energy revolution and transition are profoundly shifting the trajectory of China’s power industry development. Coal power, as China’s dominant power source, is also coming to a crossroad in its development. During the process of power system transition, coal power’s role and position has become the focus of recent industry discussions. Some experts believe that coal power should be phased out as soon as possible to provide development space for renewable energy, achieve low-carbon development and ecological and environmental governance goals, as well as contribute to implementing the Paris Agreement global warming control targets and achieving the 2035 “Beautiful China” vision. Others focus on the fact that China has already retrofitted more than 800 GW of coal power capacity to meet ultra-low emissions standards, with air pollutant emissions levels equivalent to that of gas-fired power plants. This perspective believes that, considering China’s resource endowment of being “rich in coal and poor in oil and gas,” coal power should still be moderately developed and continue to play a role as baseload of the electricity system, and provide peak load and frequency regulation services for renewable energy as appropriate.
However, ultra-low emissions standards don’t address coal power’s carbon emissions problem, so coal power continues to pose severe challenges for addressing climate change. The other additional major challenge facing the coal power industry is the issue of financial losses. Presently, around 50% of China’s coal power companies are losing money, with high debt ratios and tight capital chains. Some companies even face the risk of closure or bankruptcy. Taking China’s five government-owned utilities (i.e., Huaneng, Datang, Huadian, State Power Investment Corporation and the China Energy Group) as an example, in 2018, more than 43% of their thermal power (mainly coal) businesses were suffering losses. The asset-liability ratio of thermal power companies in Qinghai reached close to 90%, and nine of ten units were out of operation.
There are three reasons for these losses: 1. Coal power over capacity leading to low utilization hours, 2. Coal prices are increasing while coal power prices are falling, and 3. Climate change risks are increasing and phasing out coal has become a global trend.
1. China’s coal power industry has significant overcapacity, low utilization hours. As of the end of 2018, China’s coal power installed capacity was 1010 GW, accounting for 53% of the country’s total installed capacity. In 2018, coal generated 4450 TWh of power, accounting for 63% of the country’s total power generation. Although China has phased out over 20 GW of coal power capacity during the 13th Five-Year Plan period, the total installed capacity in 2018 was still 10% greater than 2015. By contrast, China’s electricity demand growth is slowing down. The annual growth rate of electricity consumption is no longer in the double digits. The average annual growth rate for electricity consumption during the 13th Five-Year Plan period is predicted to be around 6%, less than half that of the 10th Five-Year Plan period.
In addition, the rapid development of renewable energy is further squeezing out space for coal power. China is number one in the world in both newly added wind and solar capacity each year as well as cumulative wind and solar capacity. By the end of 2018, the total installed capacity for wind and solar reached 190 GW and 170 GW respectively, and the cost of wind and solar power is still decreasing rapidly. In 2018, the levelized cost of electricity (LCOE) for wind and solar in China dropped to 0.35-0.46 yuan and 0.42-0.62 yuan respectively, close to the benchmark on-grid price set by the government for desulfurized coal power in the western and northern regions. With technology advancements and large-scale development, wind and solar power will soon achieve grid parity, which means coal power will completely lose its cost advantage.
The decreasing rate of power demand growth, the overcapacity of coal power, and the rapid development of renewables have all led to an oversupply of coal power, which in return has reduced its capacity factor. In 2018, the average utilization hours of coal power in China was 4,361 hours, far lower than the designed standard utilization hours of 5300-5500 hours, resulting in significant decreases in revenue and even losses for certain coal power plants.
2. Coal power is being squeezed by high fuel costs and low electricity prices. China’s coal mining sector cut a total of 810 million tons of coal production capacity between 2016 and 2018. The number of coal mines has been reduced from 8,100 in 2016 to 5,800 in 2018, effectively increasing the industrial concentration. Inventories of coal companies across the country have also fallen by more than half from 127.5 million tons during its peak period in 2016. Supply side structural reform of the coal mining industry has led to a significant increase in coal prices. The comprehensive price of 5500 kcal coal on the China Electricity Coal Index (CECI) has risen from 400 yuan/ton at the end of 2015 to around 600 yuan/ton in 2018. Rising coal prices have caused coal power companies to bear the brunt of high fuel costs. Meanwhile, frequent failures in the coal-electricity price linkage mechanism have meant that high fuel costs are not being reflected in electricity prices in a timely manner. As a result, fuel costs have risen but electricity prices have not been adjusted.
At present, only around 50% of coal power is traded in and is priced by the market while the rest uses the government-dictated benchmark on-grid price. According to the latest coal power pricing mechanisms introduced in 2019, coal power that has not yet achieved market-based trading will be required to implement a market-oriented “benchmark price + floating up/down adjustment” mechanism starting from 2020, while coal power that has achieved market-based trading will continue to use current market rules. The new mechanism also stipulates that for now there will be no upward adjustment of the benchmark price in 2020 to ensure that the average electricity price for industry and commerce will only decrease and not increase. The implementation of this new mechanism pushes coal power enterprises to move from planned power prices to market power prices, helping to ensure a further decline in average electricity prices. Currently, the prices for the 50% of coal power traded in the market are significantly lower than the benchmark on-grid electricity prices. In the first quarter of 2019, the coal power market price in Yunnan Province was more than 0.1 yuan/kWh lower than the local benchmark coal power electricity price. The coal power market price in Qinghai, Guangdong, Shaanxi, and Guizhou provinces was more than 0.05 yuan/kWh lower than the local benchmark coal power electricity price.
In a nutshell, China’s coal power companies are now buying fuels at a higher price but selling their electricity at a lower price.
3. Global climate risks have increased sharply and phasing out coal has become a global trend. According to the latest “Emissions Gap Report 2019” released by the United Nations Environment Programme (UNEP), even if all countries achieve their unconditional commitments in the current Paris Agreement, global temperature could still rise 3.2°C, which would bring wider and more catastrophic climate consequences. The world needs to ramp up its current emissions reduction actions by at least five times in order to have a chance of limiting global warming to 1.5°C. The United Nations has called on all countries to stop building new coal power plants by 2020. Presently, a number of countries and regions, including Germany, the United Kingdom, the Netherlands, and South Chungcheong Province in Korea have set forth coal phase-out timetables. In addition, over 100 global financial institutions, including the World Bank and the Asian Infrastructure Investment Bank, have issued policies and statements to withdraw or restrict future investment in coal and coal power in order to minimize the risk of massive stranded assets. At present, China is not the only region in which coal power plants are losing money; around 80% of the coal power plants in Europe also operating at a loss. Even in the United States, which has announced its withdrawal from the Paris Agreement and the repeal of the Clean Power Plan, coal consumption continues to decline. Coal consumption is expected to fall by 14% year-on-year in 2019, and Murray Energy, the largest private coal mining enterprise in the United States, has applied for bankruptcy protection.
According to the forecasts of many Chinese research institutions, the electricity demand growth rate in China during the 14th Five-Year Plan period is likely to further decline, with the average annual growth rate dropping to about 4%. Considering that China’s annual newly added non-coal, clean power generation capacity and demand-side resources can meet annual electricity demand growth of 3-4% and 0.5% respectively, China can meet its increasing electricity demand without having to build new coal power capacity during the 14th Five-Year Plan. Even some existing coal power is expected to be replaced by renewables and demand-side resources. Taking the above factors into consideration, the following recommendations should be implemented during the 14th Five-Year Plan period in order to alleviate the economic difficulties of coal power and to achieve a low-carbon transformation of the power system.
1. China should continuously deepen supply-side structural reform of the coal power sector to improve its operating environment. China should continue to improve coal power risk forecasting and early warning mechanisms, strictly control the scale of new coal power capacity, eliminate backward production capacity, clean up and eliminate illegal projects, and optimize and upgrade the coal power fleet to promote the healthy development of the sector. Coal-fired generation units of 300 MW and below that do not meet environmental protection, energy consumption, safety, technological and other regulatory standards and requirements should be forcibly shut down. China should also actively shut down old and small generation units that are beyond their service lifetime, have no hope of making profits, and have no resources to retrofit to meet environmental protection and safety standards.
In the northern and western regions, where outdated coal power capacity is concentrated, more efforts should be made to eliminate outdated units while promoting ultra-low emissions and other energy-saving conversions for other units in order to improve overall quality and efficiency for coal power plants in these regions. Presently, the total installed coal power capacity of the five northwestern provinces (Gansu, Shaanxi, Xinjiang, Qinghai, and Ningxia) amounts to 120 GW. Severe overcapacity has caused serious losses for the coal power companies in this region. As such, the region has been included in the first central government SOE coal power resource regional consolidation pilot, with the goal of reducing capacity by a quarter to a third by 2021. However, for some provinces in the eastern and central regions, under the principle of strictly controlling total installed coal capacity to no more than 1100-1150 GW, some provinces could be allowed to add clean and efficient coal power units in order to ensure power supply security.
2. China should accelerate the retrofitting of coal-fired power units to shift the role of coal power. According to the target laid in The 13th Five Year Plan for Power Development, 220 GW of thermal power units should be retrofitted for greater flexibility during the 13th Five-Year Plan period, of which about 215 GW should be in the “three northern regions” (northeast, north and northwest China). However, as of May 2019, the “three northern regions” had completed a total transition of 50.78 GW of flexibility retrofits, only 24% of the planned goals. During the 14th Five-Year Plan period, electricity consumption in the tertiary and residential sector will maintain a faster electricity demand growth rate than the secondary sector, causing demand side peak load characteristics to become even more notable. At the same time, greater grid integration of renewable energy will require the power system to have more adjustable power sources. Thus, both supply-side and demand-side will place higher requirements on the flexibility of the power system in the future.
In the future, considering factors such as economic and resource constraints, it will be difficult for gas power and pumped hydro to fully meet grid requirements, and coal power will have to assume substantial responsibility as a flexible source of power. The role of coal power needs to be redefined and transformed under market mechanisms. Supercritical and ultra-critical units with a capacity of 600 MW and above should provide baseload power in order to fully ensure power supply security. 300 to 600 MW subcritical units should undergo large-scale flexibility retrofits and assume the most responsibility for providing flexibility to the power system, and at the same time replace small and micro combined heat and power units and coal-fired boilers. Smaller 300 MW and below units that meet emissions standards should be retrofitted to provide heat, mainly providing heating and steam, and ancillary services like frequency control and peak load regulation.
3. China should deepen power sector reform, safeguard a fair economic return for coal power, and promote the development of renewable energy. While continuing to promote power sector reform and the establishment of a spot market, China should also expand the scope of ancillary service market pilot projects, and improve electricity market trading rules and enhance market regulation, to use market mechanisms to compensate coal power plants for providing ancillary services, ensuring a reasonable return for coal power. The compensation mechanism is essential for increasing the incentives for coal power to provide ancillary services, which in turn can facilitate the integration of renewable energy. In addition, in order to ensure the smooth transition of coal power from a power generation source to both a power generation source and flexible power source in the near-to-medium-term, and then eventually to a flexible power source in the long term, it is necessary to establish a two-part electricity price mechanism (energy price plus capacity price) on the supply side and to establish a capacity market.
4. China should implement strict environmental standards for coal power, and promote energy conservation and demand-side management. Although ultra-low emissions coal power units can achieve the emissions standards of gas turbines, the actual emissions level of natural gas power plants is still far lower than ultra-low emissions coal power plants. Additionally, coal power plants still face problems in dealing with heavy metals such as mercury, wastewater, and waste residue. In addition, given that it is difficult to promote the large-scale use of carbon capture, utilization, and storage (CCUS) technology in the near future, coal power, which has nearly twice the amount of CO2 emissions of natural gas power, imposes great negative impacts on climate change. Under the pressures of both environmental protection and climate change mitigation, more stringent environmental standards should continue to be implemented for coal production, transportation, transformation, and utilization.
The efficiency of coal power plants should also be further improved by continuing reducing the average coal consumption per unit of power generation. In addition, according to statistics from the State Grid, at present the degree of peaking of load curves at all levels of the grid is becoming more and more notable, with short peak load durations. The duration of peak loads exceeding 95% of the maximum power load is generally less than 24 hours (one day), and the corresponding power used is less than 0.5% of annual power consumption. The duration of peak loads exceeding 90% of the maximum power load are generally less than 168 hours (one week), and corresponding consumption is no more than 1% of annual power consumption. The durations of peak loads exceeding 90% of the maximum power load are even less than 48 hours for certain provinces like Hubei, Hunan, and Jiangxi. Given these situations, traditional power supply planning methods based on meeting max loads should be changed, and multiple measures such as electricity pricing policies and incentive mechanisms should be used to help demand-side resources play a larger role in improving the management of electricity load, smoothing out peak, helping ensure grid stability and reducing unnecessary coal power investments.
At present, although there are disagreements over whether coal power development goals should be more aggressive or more conservative, the need to control coal power growth has reached a consensus among industry experts. Based on the above analysis, we believe that, during the 14th Five-Year Plan period, China should take an active role in guiding the orderly withdrawal of outdated coal power capacity, strictly control the scale of new added capacity, and promote the gradual transition of coal power to a flexible power source. China should strive to limit total coal power capacity to no more than 1100-1150 GW, and peak coal consumption in the power sector at 1.33-1.35 billion tons of standard coal, in order to avoid the risk of significant stranded assets to the greatest extent possible, to achieve the safe, efficient, and green development of the electricity sector, and to promote the development of emerging industries like renewable energy and energy-saving technologies. These emerging industries have longer supply chains and higher employment rates, which can be new drivers for China’s economic growth and high-quality economic transition. In the long run, more ambitious actions are needed for China to address climate change, with the country’s coal power capacity falling to 200-400 GW, and even eventually being completely replaced by renewable energy.
Currently, coal consumption by the power sector only accounts for about 50% of China’s total coal consumption. In addition to promoting coal reduction in the power sector, coal control in other key industries (e.g. iron and steel, cement, and coal chemicals) and dispersed coal reduction are also critical for China to further reduce its coal consumption. The country’s total coal consumption has dropped from its peak value of 4.24 billion tons in 2013 to 3.9 billion tons in 2018. Although coal consumption has rebounded in 2017 and 2018, coal consumption is still on a downward trend in the long run, though there may be fluctuations as it decreases. In other words, while coal consumption may rebound in the short term, the longer-term downward trend will not be changed. The reasons for the fluctuations in coal consumption include economic cycles, government policies, the strength of environmental protection activities, technological progress, and financial investment cycles. During the 14th Five-Year Plan period, both policy and market forces will push China to further reduce its coal consumption and to peak coal consumption in the power sector as early as possible.