Hardwood timber Author of the article:

Reuters

David Stanway and Muyu Xu

Published Mar 22, 2023  •  4 minute read

SINGAPORE — China’s plans for some 100 new coal-fired power plants to back up wind and solar capacity have sparked warnings that the world’s second-biggest economy is likely to end up lumbered with even more loss-making power assets.

Analysts question the logic of policies that intend to reduce the role of the dirtiest fossil fuel but at the same time require more coal-fired power plants to be built – especially given that only a small number of older plants are typically retired each year.

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The plans also highlight how local government interests have impeded the development of an effective nationwide power market that would allow surplus power to be delivered to regions that need it, they add.

“The reality is that China has more coal power capacity than it needs,” said Zhang Shuwei, director at Draworld Energy Research Centre. “It doesn’t make sense to give more incentives for more coal-fired power investments.”

China is the world’s largest and fastest-growing producer of renewable energy, which is expected to account for a third of all power supplied to its grid by 2025, up from 28.8% in 2020.

But it was scarred by a record drought last year that slashed hydropower output, forcing factories throughout the southwest to shut down and raising concerns that power shortages could undermine its post-COVID economic recovery. The experience increased its determination not to be too reliant on the intermittent nature of wind and solar power and has made China the only major economy building new coal-powered plants.

The construction of 106 gigawatts of coal-fired power was approved last year – four times more than in 2021 and the highest amount since 2015, according to research published last month by the Centre for Research on Energy and Clean Air (CREA) and Global Energy Monitor (GEM).

That’s equivalent to about a hundred large coal-fired plants and enough to supply the whole of Britain. At least 50 GW of that capacity began construction in 2022, the report said.

China’s National Development and Reform Commission (NDRC) has also flagged that at least 200 GW of coal capacity is expected to be deployed to support renewable power.

China’s big jump in coal power approvals has sparked fears that there will be backsliding on its climate goals.

The CREA-GEM report says it won’t necessarily mean the sector’s coal use or carbon emissions will climb. But for China to make good on its goals – namely a peak in emissions before 2030 and becoming carbon neutral by 2060 – the loss-making sector’s plant utilization rates will probably have to slide further.

The NDRC’s National Energy Administration did not respond to a request for comment.

LOSS-MAKING, UNDER-UTILISED

Coal accounted for 58.4% of China’s total power generation last year, but high prices have meant many plants have suffered losses for years. More than half of the country’s large coal power firms were loss-making in the first half of 2022, according to the China Electricity Council.

And even though many plants were producing more last year to compensate for the decline in hydropower output, the average utilization rate inched down to 52.4%.

Analysts note existing coal plants could provide sufficient backup for renewables if they were plugged into a nationwide market, but China’s power sector remains fragmented.

Historically, power plants have been built to support local industry and local GDP growth rather than national power supplies, with provinces reluctant to rely on other provinces for their needs.

Power plants are also not motivated to maximize power output because prices are fixed for residential users while price hikes for business users are limited to 20% of the fixed tariff.

The NDRC has been working on capacity payment mechanisms that compensate coal power plants for the decline in earnings as they adjust to their new role as backup suppliers.

The drought-prone southwestern province of Yunnan, which depends on hydropower for most of its electricity, recently set up a capacity market in which coal plants are paid to be available to fulfill supply shortfalls. Other regions are also involved in pilot schemes.

“I think the expectation of these capacity payments is one motivation for coal power groups to pursue new projects despite the fact that power generation from coal is unprofitable at the moment,” said Lauri Myllyvirta, lead analyst at CREA.

It is also unclear who will be paying for the subsidies, said Zhang at Draworld Energy, adding it would be “terrible news” if the costs were to be shouldered by renewable power generators.

Yunnan’s provincial planning agency did not respond to a request for comment.

Instead of building expensive new plants, China could instead encourage existing plants with surplus capacity to deliver electricity to regions that need it the most, said Matt Gray, chief executive of think tank TransitionZero.

“It would be far cheaper… to incentivise provincial trading than incentivising new loss-making coal,” he said.

(Reporting by David Stanway; Additional reporting by Muyu Xu; Editing by Edwina Gibbs)

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