Cefc china energy focus 2014 towards clean coal by China Energy Fund Committee

CEFC China Energy Focus 2014: Towards Clean Coal

China Energy Fund Committee (CEFC) is a non-governmental Chinese think-tank registered in Hong Kong. It has Special Consultative Status with the United Nations Economic and Social Council (UN ECOSOC). With partners and associates in China and overseas, CEFC conducts research and related activities focusing on transnational topics such as energy security, issues relating to Chinaâ&#x20AC;&#x2122;s emerging place in the world, and Chinese culture and thought. CEFC is dedicated to promoting international dialogue and understanding via offices throughout China and the United States.

Published by China Energy Fund Committee Hong Kong Office 34/F, Convention Plaza Office Tower, 1 Harbour Road, Wanchai, Hong Kong, China Tel: +852 2655 1666 Fax: +852 2655 1616 E-mail: com@chinaenergyfund.org U.S. Office 25/F, 1100 Wilson Boulevard, Arlington, VA22209, U.S. Tel: +1-703-260-1828 Fax: +1-703-666-8081 www.cefc-ngo.co

CEFC China Energy Focus 2014: Towards Clean Coal

CEFC China Energy Focus 2014: Towards Clean Coal CEFC 中國能源焦點2014：煤炭清潔利用 Editorial Board (編輯委員會)

Chairman: YE Jianming (葉簡明) Executive Vice Chairman: HO Chi Ping, Patrick (何志平) Vice Chairman: CHAN Chau To (陳秋途) Member: LO Cheung On (路祥安)

Editor-in-Chief (主編) HO Chi Ping Patrick (何志平)

Deputy Editor (副主編) LO Cheung On (路祥安)

Guest Editor-in-Chief (客座主編) Ayaka JONES (錢文華)

Special Advisor (特別顧問) LIU Wenlong (劉文龍)

Executive Editor (執行編輯) ZHANG Ya (張雅)

Assistant Editors (助理編輯) WANG Dingli, Leo (王鼎立) Daniyal NASIR (黎庭耀)

CEFC China Energy Focus 2014: Towards Clean Coal

Table of Contents 目錄

Section One: Introduction 第一部分：簡介

Chapter 1: Prologue 第一章：前言

Chapter 2: Guest Editor’s Note 第二章：編者寄語

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Chapter 3: Executive Summary 第三章：摘要

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Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

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Chapter 1: Methodology 第一章：調查方法

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Chapter 2: List of Interlocutors and Contributors 第二章：受訪專家資料

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Chapter 3: Background 第三章：背景

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Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

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Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

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Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

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Chapter 7: Summary of Key Findings 第七章：小結

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CEFC China Energy Focus 2014: Towards Clean Coal

Section Three: Perspectives on Cleaner Utilization of Coal in China 第三部分：中國專家觀點文章 Chapter 1: An Overview of Cleaner Utilization of Coal in China 第一章：中國清潔煤炭利用宏觀展望 ZENG Xingqiu (曾興球) Chapter 2: The Trend of Clean Coal Utilization in China: Integrated Development of Coal, Electricity, Liquids, and Chemical Products 第二章：中國清潔煤炭利用趨勢：展望煤電油化一體化發展 LIU Wenlong (劉文龍) Chapter 3: Coal-fired Electricity as the Key to Mitigating Smog in China 第三章：煤電是中國治霾關鍵 WANG Zhixuan (王志軒) Chapter 4: Development of Advanced Clean Coal-fired Power Generation Technology in China 第四章：中國先進清潔煤電技術發展 ZHANG Jiansheng (張建勝), YUE Guangxi (嶽光溪) Chapter 5: Clean Coal Utilization: Coal-based Alternative Fuel in China 第五章：中國清潔煤炭利用：煤制替代燃料 ZHAO Jinli (趙金立), JIANG Jiansheng (薑建生) Chapter 6: Current Application and Development Prospects of China’s Coal Gasification Technology 第六章：中國煤氣化技術的現狀及發展趨勢 WANG Yuqing (王玉慶) Chapter 7: Improving the Competitiveness of China’s Petrochemical Industry Through Clean Coal Technologies 第七章：利用潔淨煤技術提升中國石化行業競爭力 WU Qingle (吳慶樂) Chapter 8: An Outlook for Sinopec’s Coal Chemical Development 第八章：中石化新型煤化工發展展望 XU Yi (許毅)

Table of Contents 目錄

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Table of Contents 目錄

Chapter 9: Smog Control will Change China’s Coal-Centric Energy Structure 第九章：霧霾治理將改善中國以煤為主的能源結構 LIN Boqiang (林伯強) Chapter 10: Clean Utilization of Coal-The Most Important Energy Policy in China Today 第十章：煤炭清潔利用是當下中國最重要的能源政策 ZHENG Xinye (鄭新業) Chapter 11: Rebalancing Efficiency with Environmental Consciousness: Experience of a Chinese New Coal Chemical Company 第十一章：效率與環保兼顧：一家中國新型煤化工企業的發展經驗 ZHANG Jinyong (張金勇) Chapter 12: SASOL’s Experience in Coal Conversion 第十二章：南非薩索爾公司的煤轉化經驗 MA Liqun (馬立群)

Section Four: Acknowledgment 第四部分：鳴謝

CEFC China Energy Focus 2014: Towards Clean Coal

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Chapter 1: Prologue 第一章：前言

Section One: Introduction 第一部分：簡介

Section One:

Introduction 第一部分：

簡介

Chapter 1: Prologue 第一章：前言

Section One: Introduction 第一部分：簡介

Chapter 1: Prologue 第一章：前言

Dr. HO Chi-ping, Patrick (何志平) Editor-in-Chief Deputy Chairman and Secretary General of China Energy Fund Committee

Black Coal, Green Future China is the world’s largest coal producer and consumer today. Its documented record of largescaled utilization of coal could be traced back to as early as the Tang dynasty (618-907 AD), when coal was first used to supplement the shortage of charcoal following the massive deforestation in north China caused by the surging iron and steel production at that time. But unlike the Western industrial powers whose utilization of coal fueled the first industrial revolution in the 19th century and later propelled the electrification progress in the 20th century, the early history of coal usage in China, however, has not been translated into increased industrial activities in the 1000 years following its first use for metallurgical purposes. Whereas coal was widely explored and combusted to accelerate the mechanization progress in Europe, its scope of usage in China has long been confined to civilian heating purposes. It was not until the second half of the 20th century when the Chinese government put forward its own industrialization plans under the support of the Soviet Union that the coal production in China began to surge to a comparable level to other industrial economies. In this regard, they lagged almost 150 years behind western economies. The miraculous economic growth of China following the “reform and opening up” policies made in the late 1970s drove the volumes of coal production and consumption in China to unprecedented levels. Driven by the rapid development of its labor-intensive and export-oriented industries, China’s demand for coal-derived energy rose tremendously. Record high levels of

Section One: Introduction 第一部分：簡介

Chapter 1: Prologue 第一章：前言

coal production and consumption were observed one after another amid China’s fervent march towards industrialization and urbanization. By 2013, total coal consumption in China had reached 3.6 billion tons, accounting for almost half of the total world’s consumption and 66% of China’s total primary energy consumption. Its production of coal was even more gigantic, at 3.7 billion tons in 2013, dwarfing the numbers in any other country of the world. It can be concluded that the economic development in China was powered by its extensive and vast consumption of these relatively abundant domestic coal resources. But in the carbon constrained 21st century, coal usage in China is destined to face more challenges and restrictions than the western predecessors some 200 years earlier. The change of the world economic and environmental contexts determined that the way of coal utilization in China today cannot follow the same path as what the western industrial powers had done before. Although the indigenously rich, easily exploitable and relatively cheap coal resources have fueled China’s economic growths and lifted millions of people out of poverty in the past three decades, the tremendous environmental and health costs associated with such extensive consumption of coal is becoming more and more apparent. In face of the choking air pollution and the pervasive smoggy weather that began to shroud almost all major Chinese cities since late 2012, there is little doubt that the coal-reliant economy in China must be reformed and an alternative route of energy development be found. However, given China’s gigantic economy and energy consumption size, it will be extremely difficult and costly, if not impossible, to derail the country from its current dependence on coal. For a country whose energy consumption and production are both steeply reliant on coal, no alternative technologies or resources within our current access could easily and economically replace the scale of coal consumption as s source of base load energy in China overnight or even in the very near future. Renewables are intermittent and costly given the existing technologies and policy instruments; natural gas resources are still scarce and expensive in China; nuclear energy is controversial and equally expensive, given its high upfront costs, long construction periods and public concerns about its safety. Given China’s energy endowment and the socio-economic paradigm, coal can hardly be replaced or displaced as an important energy component in China and this will not change at least in the near future. Thus, how to use coal more cleanly and responsibly in a carbon-constrained world becomes the central concern of the Chinese government and the industries. While the Chinese government has pledged to be a responsible international player in climate mitigation and that China could be

Chapter 1: Prologue 第一章：前言

Section One: Introduction 第一部分：簡介

endowed with the possibility to lead the world in low-carbon development, clean coal utilization will be both a necessary and pressing option for China’s future energy consideration. Indeed, given the necessity to rely on coal, the only energy source which China has abundance of, the fact that China needs an affordable energy for its industrialization, urbanization and development, and the international pressure to mitigate the deleterious effects of coal consumption, China might become the only place on earth to possess the room and opportunity to realize the potential of developing and experimenting with the various modes of low carbon and clean coal technologies. Currently, the Chinese government has adopted a three-tier strategy in promoting clean coal utilizations: a). capping total coal consumption, b). committing to a carbon emission target, and c). directing more investments in clean coal technologies. These policy goals have been manifested in several government documents and policy whitepapers recently. For example in the Energy Development Strategy Action Plan (2014-2020) (“Energy Plan”), the share of coal consumption in China has been mandated to be kept below 62% by 2020 and clean coal utilization technologies are encouraged to be expanded to help to meet the country’s target of reducing carbon intensity by 40-45% in 2020 on the 2005 basis. A national program aimed to upgrading the efficiencies of coal-fired power plants and coal-fired industrial furnaces in China has also been commenced to ameliorate the environmental impacts that coal consumption will generate. These measures will not only clean up China’s air but also conserve water and land resources, reduce water pollution, and alleviate transportation pressures, all of which will help secure a healthier future for China’s citizens, environment, and economic growth. Recognizing the prospects of cleaner coal utilization as an urgently needed means to balance the need for affordable fuel sources for growth and mitigating the harmful effects associated with coal consumption in China, CEFC has published this report to present readers with the latest developments, challenges as well as opportunities for developing cleaner utilization of coal in China. While recognizing the advancement of the clean coal technologies, this report also pays close attention to questions pertaining to the market prospects as well as policy factors that will affect the future direction of clean coal development in China, such as: will the industrial sectors be persuaded to adopt cleaner means of coal usage? How much additional cost will the installation of clean coal facilities incur? What policies has the government introduced to promote clean coal projects? How will the slumping international oil price affect the coal-based energy sectors in China? By conducting interviews with leading Chinese energy experts and translating their views and

Section One: Introduction 第一部分：簡介

Chapter 1: Prologue 第一章：前言

opinions into English, this report also serves as a gateway for western audiences to gain an indepth understanding of how the Chinese energy industries evaluate and anticipate the prospects of clean coal utilization. By doing so, it also wishes to create more opportunities to facilitate policy discourses as well as knowledge sharing between Chinese energy industries and their foreign counterparts.

Chapter 2: Guest Editor’s Note 第二章：編者寄語

Section One: Introduction 第一部分：簡介

Chapter 2: Guest Editor’s Note 第二章：編者寄語

Ayaka Jones (錢文華) Guest Editor-in-Chief General Engineer, U.S. Energy Information Administration (EIA)

Perspectives from China – Coal Is Not to Be Dethroned, Just More Fully and Cleanly Utilized The US-China Joint Announcement on Climate Change in November 2014 has unleashed a flurry of headlines about coal peaking in China. Immediately following the announcement, the Energy Development Strategy Action Plan (2014-2020) (“Energy Plan”) set binding caps on annual primary energy consumption and annual coal consumption until 2020 - at absolute levels for the first time. Are there any gaps between the central government’s blueprint and on-the-ground reality? How is coal perceived within China in the context of economic development, energy demand, and environmental protection? What is its role in the cleaner energy future envisioned by the country’s leadership? Will it peak, how soon, and at what level? The China Energy Fund Committee has again bridged the gap between China and the West on a hot issue. This report removes the language barrier and provides English readers with highly relevant, first-hand information and insights from well-respected Chinese thought leaders in industries, research organizations, and academia. More importantly, the summary of the expert interviews offers a comprehensive, systematic, and insightful update on China’s coal consumption: from current status to future trends, from policies to economics, from coal-based power to coal chemicals… and from environmental requirements to technology advancements. It was my honor and privilege to have participated in the review and editing of the articles and the survey report. I am pleased to share some of my observations of the experts’ views and perspectives, and hope you 11

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Chapter 2: Guest Editor’s Note 第二章：編者寄語

find it rewarding reading the entire report thoroughly. The first thing that struck me is the harmony between the views reflected in the report and the Energy Plan regarding how to use coal and how much to use. Most of the articles were written before the work for this report started. The interviews were conducted before the climate announcement. Moreover, a suite of policies, plans, and regulations regarding domestic coal supply, coal imports and exports, coal conversion efficiency, and emissions control had been issued well before the Energy Plan and are also in line with it. Combined, they demonstrate an overall consensus among the policymakers, industry stakeholders, and observers, as well as a great deal of policy consistency. The targets in the Energy Plan, therefore, seem to have been set with a high degree of confidence based on preparation. The second thing that struck me is the similarity between Chinese and international experts in terms of consensus and controversy regarding coal’s future in China. For example, most of the experts agree that coal consumption will peak sometime in the future. Yet they disagree on when and at what level coal consumption will peak: the estimates from the interviewed experts range from “around 2016-2017 at about 4 billion metric tons” to “around 2020 at 4.55 billion metric tons” (the official cap is 4.2 billion metric tons until 2020). The agreement on the relative and the disagreement on the absolute suggest that the latter may be rooted in the diverging views of how fast the total energy demand will grow (as a result of economic transition and energy intensity reduction, for example), and how rapidly alternative energy supplies can penetrate in China. This indicates that the key to capping coal is capping total energy consumption. The readiness of Chinese government and industries to adjust the focus and pace of development to address problems, overcome hurdles, and adapt to changes in both domestic and international markets is also impressive. The repeated tightening and loosening of policy control on the coalchemicals sector and the industry’s alternating enthusiasm and caution are a good example. This “crossing the river by feeling the stones” philosophy has fostered numerous political, business, and technology innovations that are vital to China’s rise in the past decades. It also adds uncertainties to China’s, and the world’s, energy future. This renders it crucial to understand whether a target set by the government is “binding” or “expected” when assessing its implications. China has a proven track record of achieving targets, especially the binding ones, and has adjusted “expected” targets when needed. Finally, consensus seems to prevail over controversy regarding coal’s use in China. The most controversial issue discussed in the report is how coal-fired power generation should be treated in 12

Chapter 2: Guest Editor’s Note 第二章：編者寄語

Section One: Introduction 第一部分：簡介

the country’s fight against pollution. Different from the United States, where coal is mostly used for electricity generation, China uses much more coal in end-use sectors in a scattered and highly polluting manner. Targeting the issue, a power industry leader has made strong arguments for what he called a “lesser of two evils” solution – expand the use of highly efficient coal-fired power generation to displace the end-use, instead of smother it with “near-zero emissions” requirements, to help fight the pollution. It remains to be seen how this voice will impact future decisionmaking. Other than this and some debate over the environmental externality costs and the impact of coal chemicals on China’s water shortage issues, most of the articles and comments by the interviewees reveal a high level of consensus. Some highlights are: 1. Coal will remain the dominant fuel in China’s energy mix in coming decades, yet coal’s golden age in China is gone and its share of total energy consumption will decrease amid the increasing penetration of gas in the near- to-medium-term and nuclear and renewables in the long run. At some point on the horizon, coal will peak. 2. Coal’s future use will be increasingly concentrated in the electricity sector. Other sectors, especially the industrial sector with hundreds of thousands small-to-medium-sized coal boilers are the lower-hanging fruit in tackling air pollution problems. The shift of coal use away from these sectors will accelerate in the next few years. 3. Clean coal technologies (CCTs, see the report for its broader meaning in China) have profound strategic importance in assuring China’s energy supply security, stability, affordability, and sustainability. They have been consistently recognized in both government polices and industry strategies as crucial to solving the severe pollution problems and mitigating carbon emissions, especially in the near-to-medium-term. 4. The development of CCTs is currently centered on the large-scale, integrated use of coal that aims to improve coal resource utilization throughout the entire coal value chain - from mining and deep processing of coal to pollution controls. In particular, ultra-supercritical and supercritical pulverized coal power generation, coal-gasification-based polygeneration (i.e., integrated coal-electricity-chemicals(including liquids)-heat production), and centralized combined heat and power generation are important components of the strategic technology base for future coal use. 5. The strategic importance of coal chemicals is an important consideration, along with its long-term economics and environmental impacts, in the related decisionmaking in China. Continued and moderate development likely will prevail in this industry. 13

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Chapter 2: Guest Editor’s Note 第二章：編者寄語

6. Carbon capture, utilization, and storage research, development and demonstration projects have gained momentum in China in recent years. Its future commercial application, though, hinges on the development of enabling policies and financial incentives as well as the success in finding economically attractive outlets for the CO2 captured. The application could start in the coal chemicals sector to leverage the advantage of coal gasification in CO2 capture, and could provide momentum for integrated coal gasification combined cycle projects. Coal is a fallback fuel in China. The trajectory of future coal use will be determined largely by the trajectories of total energy consumption and the expansion of alternative supplies of energy. How successful China will be in managing its total energy consumption and ramping up the use of alternative energy sources will have profound impact on not only China’s coal but also the world energy landscape. Amid many uncertainties, one sure thing seems to be: coal will still be the king in China’s energy mix for decades to come, and more fully and cleanly utilized.

Chapter 3: Executive Summary 第三章：摘要

Section One: Introduction 第一部分：簡介

Chapter 3: Executive Summary 第三章：摘要 Background: After more than three decades of robust economic growth, China’s coal-centered energy industries are now in dire need of a major transformation to respond to the ever increasing pressures from climate change, accelerated domestic environmental degradation and the pervasive air pollution. The traditional coal-reliant, carbon-intensive and environmentally costly energy production and consumption models in China have showed increasing signs of unsustainability. In light of the rising public demand for clean air and clean water and the government’s re-affirmed commitment to combat climate change, a comprehensive reform of China’s energy sectors is urgently needed to shift the nation’s energy industries away from the existing track. As a coal-rich nation, to promote the development of clean and efficient coal utilization methods in China will be of strategic importance to the country’s energy and economic development. As the most abundant and affordable fossil fuel source, coal has long dominated both the supply and demand ends of China’s energy mix and provided a reliable and accessible energy supply that underpinned the country’s rapid economic growth in the past three decades. In 2013, coal alone accounted for more than 65% of China’s total primary energy demand and produced more than 70% of the country’s electricity supply. Despite the surging investments in renewable energies and the increasing consumption of natural gas in recent years, coal retains its dominant share in China’s energy mix and remains an enticing energy option due to its accessibility and affordability. When alternative fuel sources like natural gas and renewables are either too expensive for the industries or still technologically premature to produce a stable energy supply around-the-clock, it is almost certain that coal will continue to be the linchpin of China’s energy supply for at least the near-term future. But while we admit the inevitability of the use of coal in China, its environmental impacts should be carefully addressed as well. Although a cheap and abundant coal supply powered China’s economic boom in the past decades, it has also led to appalling urban pollutions and resulted in wide spread water degradation. According to the IEA statistics, of the total 8 billion tons of carbon dioxide (CO2) emission in China in 2011, 82.8% or 6.6 billion tons were related to the consumption and combustion of coal. Under-regulated sulfur dioxide (SO2) and nitrogen oxides (NOx) emitted directly from the coal-fired boilers have also generated mountains of toxic matters, posing a great 15

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Chapter 3: Executive Summary 第三章：摘要

threat to the public health of all major Chinese cities. The hazardous clouds of particulate matter that began to shroud cities since late 2012 are a testament to this fact. In face of rising environmental challenges, to explore more efficient and cleaner coal utilization methods has been widely identified by scholars and policy-makers in China as one of the most feasible and efficient approaches to address the country’s most eminent environmental challenges. Besides, to develop efficient utilization of the indigenously rich coal resources was also believed to be valuable in alleviating the country’s reliance on foreign energy imports. Recognizing the prospects and the environmental gains of promoting clean and efficient coal utilization in China, the Chinese government has recently rolled out a number of policy measures to prioritize the development of clean coal technologies (CCT) in its energy development agenda. A number of government programs have also been initiated to incentivize market investments in clean coal demonstration projects. In the “Action Plan for Energy Development Strategy: 2014-2020”, a guiding document that outlined the roadmap for China’ energy development for the remaining years of the decade, “clean and efficient use of coal” was listed as the top priority in the plan to strengthen China’s energy self-sufficiency while improving its energy efficiency. The strategic importance of “clean coal utilization” was also directly addressed by Chinese President Xi Jinping in the sixth meeting of the Central Leading Group for Financial and Economic Affairs held in June 2014, where he recognized clean coal utilization as “one of the five core pillars to underpin the comprehensive reform of China’s energy production and consumption” and an indispensable factor in reducing “irrational energy use and keeping total primary energy consumption under control”. Several other important policy documents such as “The Action Plan for Upgrading and Retrofitting Coal-fired Electric Power Plants, 2014-2020” and the “The Program to Strengthen Air Pollution Control for the Energy Industries” also carried similar messages that confirmed the official recognition of the importance of clean and efficient coal utilization in China’s energy mix. Recognizing the Chinese government’s increasing commitment to clean and efficient coal utilization development and the prospective changes that clean coal projects might bring to the fundamentals of the Chinese energy market, this report attempts to summarize the latest developments in clean coal technologies in China for English readers, and also presents the potential future trends and challenges associated with this increasingly important energy industry. The volume contains two main parts. The first is a summary of the views and opinions collected from the leading energy experts in China through interviews conducted by CEFC between August and September in 2014. The second part consists of a series of articles written by Chinese scholars and experts who have provided their analyses from multiple perspectives regarding the clean coal 16

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Section One: Introduction 第一部分：簡介

utilization in China. It is important to note that, distinct from conventional discourses of clean coal technologies in developed economies that are usually focused on carbon mitigation, this report will attempt to provide the readers with broader information on technologies, economics and industries related to the clean coal utilization concept in China, covering not only carbon capture and storage, but also power plant efficiency improvement, advanced coal-conversion and coal-based chemical technologies. Taking a holistic approach, this analysis hopes to provide the readers with a panoramic perspective on China’s current plans of clean coal utilization as well as its future development trends. Summary of Key Findings: 1. Cleaner utilization of coal in China is usually comprehended in a much broader sense that it not only covers important technological aspects like carbon mitigation, but also includes a range of other technological issues including power plant efficiency improvement, coal-based chemical conversions and coal preparation. However, under the current policies, wherein the environmental costs of energy consumption have hardly been monetized, different opinions still exist in terms of the effectiveness and economic feasibility of different technological approaches of cleaner utilization of coal in China. 2. Divergent views exist regarding the peak coal timing and level. The central government has set a target to control annual coal consumption at around 4.2 billion metric tons by 2020. Yet various interviewed experts gave different projections of the timing and the physical volume of the peak coal demand, reflecting different views of the economic growth, energy demand growth, and the supply mix. Their projections range from coal peaking at 4.0 billion metric tons by as early as 2016 to coal peaking at 4.55 billion tons no earlier than 2020. 3. The coal-fired power sector should not be the primary sector to blame for the pervasive air pollution. Although most of the coal consumption in China comes from the electric power sector, their environmental performance, however, is better than that of the industrial coal boilers, thanks to the increasing adoption of pollution control technologies in the power sector. Latest data has shown that the average emissions of coal-fired power plants in China are 1.9 g/kWh for SO2, 2.6 g/kWh for NOX, and 0.4 g/kWh for fine particulates, which is impressive for a developing economy. 4. The overall efficiency of the coal-fired power plants in China is highly competitive, even compared with those in many developed economies, thanks to the increased deployment of modern coal-fired power plants. By the end of 2013, the net coal consumption per unit of 17

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Chapter 3: Executive Summary 第三章：摘要

electric power output in China was 321 grams of standard coal equivalent per kilowatt hour (gce/kWh) in low heating value (LHV), which was close to the corresponding 306 gce/kWh in Japan and well below the 359 gce/kWh level in the US in 2012. The Chinese government has set a target for the average net coal consumption of coal plants in China to be lowered further to 310 gce/kWh by 2020. 5. Considering the high-efficiency and the economic viability of supercritical (SC) and ultrasupercritical (USC) units, their deployment in China is expected to continue to increase in the near future. China is currently running the world’s largest fleet of SC and USC units and is expected to deploy more advanced power units to improve the overall efficiency and reduce the net coal consumption of its coal-reliant utility power sectors. In 2010, the total installed capacity of SC and USC units in China exceeded 120 GW and the number of 1000 MW USC units in operation alone had reached 62 by the end of 2013. 6. The integrated gasification combined cycle (IGCC) technology migh offer much better environmental performance than conventional coal power plants, but its high operating and maintenance costs governs that a wide scale commercial application of the technology is less likely in China, at least for the near future. According to the latest data, the average cost of electricity generation of an IGCC unit in China is as high as RMB 0.8-0.9 per kilowatt hour, which is about five times higher than the average cost of a pulverized coal-fired power plant. Even provided with government subsidies, the IGCC plant will still be running at a RMB 0.3 deficit for every kWh of electricity it generates. 7. Coal-based chemical projects are developing at full speed in China and are regarded as an important aspect of clean and efficient utilization of coal. However their economic viability will hinge on multiple factors including technological matureness of the coal-conversion system (in most cases referring to the gasification systems), feedstock prices, and the operating and managerial experiences of the plant proprietor. Price of alternative fuels and feedstock such as oil and natural gas are also important factors that will influence the market performance of coal-based chemical projects in China. 8. Among all the sub-sectors of the coal-based chemical industry, coal-to-synthetic-naturalgas (CSNG) production is regarded as the most controversial and least profitable one. Due to the gas price level not high enough to justify the capital and operating cost and the high delivery cost associated with the long-distance gas transmission, the coal-to-syngas projects were commonly regarded as the least profitable coal-based chemical projects in China by the interviewed experts. Although the National Energy Administration (NEA) envisioned a 50 bcm/y production capacity of coal-based syngas to be completed by 2020, whether the real 18

Chapter 3: Executive Summary 第三章：摘要

Section One: Introduction 第一部分：簡介

production capacity will reach the designated number remains uncertain. 9. Coal-to-liquids (CTL) is identified by the interviewed experts as the most profitable coalbased chemical projects in China in a high oil price scenario, considering its relatively lower production cost and its value in providing alternative supply sources to foreign imported oil. According to the data collected from the interviews, the lowest possible production cost for every ton of coal-based liquid production in China could be as low as RMB 2,850 (or about USD 64 per barrel), which is very competitive under a high oil price scenario. Through technological advancement and efficiency improvements, it is believed that the profit margin of the coal-derived liquid products could even be expanded further given persistent high oil prices. 10. As for the coal-to-olefin (CTO) projects, the low fuel costs of the stranded coal mines in Western China might be able to secure its cost advantage over the conventional naphthabased olefin production routes, but how long the cheap feedstock factor can be sustianed is uncertain. In addition, the fast-growing CTO industry in China might displace its own naphtha to olefins industry for the time being. However, it might also be displaced by the expanded olefin production capacity in North America and the Middle East underpinned by cheap natural gas feedstock. 11. Aside from the economic factors, water resource availability is another key issue for modern coal chemical projects in China. As the coal chemical projects are usually gargantuan water consumers, how to ensure sufficient water supply for the coal-based chemical projects and balance their water requirement with competing water consumers should be carefully addressed. In addition, technological matureness of the processing systems and the managerial experiences of the operator will also play a critical part in determining the plants’ efficiency in water use and waste water treatment. 12. Carbon capture and storage (CCS) systems have been operational in several demonstration projects in China. Three pilot CCUS projects have been completed and put into operation in the electric power industry in China and two advanced carbon capture projects are under construction. Three more projects have been planned but are still pending final government approval. But considering their high operating and investment costs, whether CCS projects could be commercially viable in China will largely hinge on the progress of policy instruments such as an effective carbon pricing system and a mature carbon trading market.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Section Two:

CEFC Survey on Cleaner Utilization of Coal in China 第二部分：

CEFC中國清潔煤炭利用調查報告

Chapter 1: Methodology 第一章：調查方法

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 1: Methodology 第一章：調查方法

This article is based on the interviews conducted with eight distinguished energy experts with profound experiences in coal related industries in China. The views and opinions presented in this report are based on the experts’ responses and comments to a questionnaire prepared by the China Energy Fund Committee (CEFC) obtained during the period August 1-September 23, 2014 via telephone interviews and written replies. The questionnaire contained 30 questions and also provided the experts with relevant graphs and tables. The telephone interviews lasted between 1 hour and 1.5 hours and were conducted in Chinese. Based on the transcripts of the audio records from these interviews, this report summarizes and synthesizes the opinions and views collected for the benefit of those outside of the country interested in the future of clean utilization of coal in China. This report also includes the latest market news and government-issued data, which were not available prior to the interviews, in order to provide additional context for the readers to comprehend the ongoing scenario of coal utilization in China. The biographies of the interviewed experts are listed below. Many of them are also guest contributors to this publication.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 2: List of Interlocutors and Contributors 第二章：受訪專家資料

第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 2: List of Interlocutors and Contributors 第二章：受訪專家資料 (In alphabetical order by Surname)

JIANG Jiansheng (薑建生) is the deputy general manager of the Yitai Energy Group and also the deputy chief engineer of its coalchemical division. Before joining Yitai, he served in the Shaanxi Yanchang Petroleum Group. Mr. Jiang has managed the construction of more than 100 chemical projects in China and has also served as member of the Coal-derived Fuel Standardization Committee under the National Energy Administration (NEA).

LIU Wenlong (劉文龍) served as a chief economist and assistant general manager of Sinopec, as well as a distinguished expert of the Sinopec Science and Technology Committee. He has extensive planning and leadership experience in the energy sector and is a key player in the Corporation’s Sino-foreign joint-venture negotiations. He graduated from Beijing Petroleum University with a Master’s degree in Refinery Engineering. He is also a graduate of the China University of Petroleum. He is currently a senior consultant for the China Energy Fund Committee.

Chapter 2: List of Interlocutors and Contributors 第二章：受訪專家資料

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LIN Boqiang (林伯強) is currently serving as the deputy dean of the Newhuadu Business School in China. He is also director of the China Center for Energy Economics Research (CCEER) at the Xiamen University. He was appointed by the Chinese Ministry of Education as a distinguished professor under the Changjiang Scholars Program in 2008 and is serving as a member of the Expert Advisory Committee of the National Energy Council of China. He is also a member of the Energy Advisory Board of the World Economic Forum. Professor Lin obtained his PhD from the University of California at Santa Barbara in economics. WANG Zhixuan (王志軒) is currently the secretary general of the China Electricity Council (CEC) and enjoys professorship in engineering. He is also a member of the National Expert Panel on Climate Change of China and advisor to the Anti-monopoly Bureau of the Chinese Ministry of Commerce. He is well experienced with the utility power and environmental policies in China and has been closely involved in the national policy making processes. Mr. Wang has worked with multiple key energy departments in China, including the National Energy Administration (NEA) and the Electricity Industry Department (currently known as the Electricity Division of the NEA). He has also chaired numerous policy study programs and has published more than ten books and 150 essays on the electric power development in China. WANG Yuqing (王玉慶) is the deputy director of the research and development department of Sinopec. He graduated from the Department of Chemical Engineering at the Tianjin University in 1982 and is a senior engineer in China. With more than 20 years of experience working with Sinopec, Wang has been working as the deputy director and then director of the Chemical Division of the Research and Development Department of Sinopec. In 2005, he was appointed as the deputy director of the Research and Development Department of Sinopec. Mr. Wang also served as the director-general of the Synthetic Rubber Industry Association of China between 2005 and 2013 and a member of the Patent Committee of the Intellectual Property Society of China. He has published more than twenty papers in academic journals.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 2: List of Interlocutors and Contributors 第二章：受訪專家資料

第二部分：CEFC中國清潔煤炭利用調查報告

WU Qingle (吳慶樂) is currently the general manager for downstream strategy and business development at Shell China. He joined Shell China in 2005 and has 18 years of experiences in the oil and gas industries in China. He also worked for China International Engineering Consulting Company (CIECC) as a consultant and has provided consultancy services to the central government on numerous refining and petrochemical projects. Before joining Shell, Mr. Wu was the chief representative of Unocal’s Shanghai Office, in charge of the LNG and the rare earth business in China. Wu obtained his master’s degree from Tsinghua University. XU Yi (許毅) is currently serving as the deputy director of Sinopec’s leading group office on coal chemical development and is also the deputy general manager of the Sinopec Great Wall Energy and Chemical Co. Ltd. He has rich experience in the management of coal chemical projects in China and has been deeply involved in business negotiation and engineering management. He earned a Master of Western Economics degree from the Huazhong University of Science and Technology and obtained his bachelor’s degree in chemistry from the Chengdu University of Science and Technology (known as the Sichuan University now) ZHANG Jiansheng (張建勝) is professor of thermal engineering at Tsinghua University and also the general engineer at the National Engineering Research Center of IGCC and Coal Gasification. Prof. Zhang has published about 150 papers and 4 co-authored books in China and was also responsible for multiple national science and engineering research programs funded by the National Natural Science Foundation. He is also the winner of the National Science and Technology Progress Award (2nd Class). He also presided over the development of the world’s first commercial slurry feed membrane wall gasifier. His research interests include coal gasification technologies, fluidized bed and pulverized coal combustion technologies and pollution control. He earned his Ph.D from Tsinghua University in 2001.

Chapter 2: List of Interlocutors and Contributors 第二章：受訪專家資料

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第二部分：CEFC中國清潔煤炭利用調查報告

ZHANG Jinyong (張金勇) is currently the chief engineer of Wison (Nanjing) Clean Energy Co. Ltd responsible for strategic planning, business development and technological management. He has more than twenty-two years of experience with the petrochemical and coal chemical industries in China. He joined Wison (Nanjing) Clean Energy Co. Ltd in 2004 and was fully engaged in the design and construction of the Wison’s MTO project in Nanjing. He has been working with a Sinopec subsidiary in Shandong for twelve years, responsible for plant operation and technology management. He obtained a bachelor’s degree in chemical engineering and has an Executive MBA degree. ZHENG Xinye (鄭新業) is the assistant dean of the School of Economics and the chair of the Department of Energy Economics of Renmin University of China since 2008. Professor Zheng’s research interests include energy economics and public finance. He has published peer-reviewed papers in international journals such as Environmental and Development Economics, Energy Policy, Regional Environmental Change, etc. His current research focuses on the evaluation of effects of environmental policy on emission reduction at power plants and analysis of the determinants of energy demand using household survey data. Professor Zheng is also a non-residential fellow at the Brookings Institution. He also writes columns for national newspapers. ZENG Xingqiu (曾興球) is the vice chairman of the Energy Research Center of China Investment Association and the former director general of the International Cooperation Department of China National Petroleum Corporation(CNPC). He was also the chief geologist of China Sinochem Group Co., Ltd (Sinochem Group). He has led multiple negotiations with foreign oil conglomerates on their participation in China’s on-shore and offshore oil development projects and personally schemed three rounds of international bidding work for China’s onshore oil-gas external cooperation. Graduating from the Beijing Institute of Petroleum in 1966, Professor Zeng is an honorable energy economics expert in China.

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Chapter 3: Background 第三章：背景

This report presents an overview of China’s experiences and endeavors in developing clean and efficient coal utilization technologies and summarizes the views and opinions of China’s leading scholars and industrialists on this hotly debated energy subject. As the most abundant and affordable fossil fuel source in China, coal has long dominated both the supply and demand ends of China’s energy mix and provided a reliable and accessible energy supply that underpinned the country’s rapid economic growth in the past three decades. Despite the rapidly increasing share of alternative energy sources such as gas, nuclear and renewable energies in recent years, the share of coal in China was hardly shaken. By 2013, it still accounted for 65.8% of China’s total 3.75 billion tons of standard coal equivalent (tce)1 primary energy demand and powered 73.8% of the country’s 5.35 trillion kilowatthours (kWh) of total electricity supply the same year. Domestic coal production also outweighs the production of any other energy source. In 2013, domestic coal production totaled 2.57 billion tce, which was 8.5 times higher than the output of oil and 16 times higher than that of natural gas and accounted for 75% of the total primary energy supply. Total coal-fired power capacity in China reached 790 gigawatts (GW) by the end of 2013, representing the single largest coal-fired power fleet of the world. The cheap and abundant coal supply fueled and sustained China’s double-digit economic growth for decades. But the challenges associated with the massive production and consumption of coal are serious as well. According to IEA statistics, of the total 8 billion tons of carbon dioxide (CO2) emission in China in 2011, 82.8% or 6.6 billion tons were related to the use of coal. Underregulated, large quantity of sulfur dioxide (SO2) and nitrogen oxides (NOx) emitted directly from the coal-fired boilers pose a great threat to the public health of all major Chinese cities. The hazardous clouds of particulate matter that began to shroud cities since late 2012 is testament to this fact. In the face of rapidly deteriorating air quality, to restore the clean air and improve the atmospheric environment in China has become a priority in the country’s energy development agenda and a reform of the current model of coal utilization has also gained significant attention in energy policy making. Recognizing the prospects and the environmental gains of promoting clean and efficient 1

The heating value of standard coal equivalent in China is defined as 7000kJ per kilogram (kJ/kg)

Chapter 3: Background 第三章：背景

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

coal utilization in China, the Chinese government has made a number of efforts to prioritize the development of clean coal technologies (CCT) and has initiated a number of programs to incentivize investments in clean coal demonstration projects. The importance of clean utilization of coal has been widely revealed by several important energy documents. As a latest example, in the “Action Plan for Energy Development Strategy: 2014-2020” released by the State Council in Nov 2014, “clean and efficient use of coal” has been recognized as a top priority in the task of strengthening China’s energy self-sufficiency. The strategic importance of “clean coal utilization” was also directly addressed by Chinese President Xi Jinping in the sixth meeting of the Central Leading Group for Financial and Economic Affairs held in June 2014. President Xi recognized clean coal utilization as “one of the five core pillars to underpin the comprehensive reform of China’s energy production and consumption” and an indispensable sector “to reduce irrational energy use and keep total primary energy consumption under control”. On the technological side, the roadmap for developing clean coal technologies was also manifested in the “12th Five-year Plan for Clean Coal Technology Development” issued by the Ministry of Science and Technology (MOST), which outlined four major technological aspects for technology breakthroughs in China by 2015, namely, advanced coal-fired power technologies, advanced coal conversion technologies, advanced energy saving technologies, and coal-related pollutant control and removal technologies. Recognizing the central government’s increasing commitment to clean coal utilization and the prospective changes that clean coal projects might bring to the fundamentals of the Chinese energy market, this report attempts to summarize the latest developments of clean coal technologies in China for English readers and presents them with the development trends and potential challenges associated with this increasingly important sector. It is important to note that, distinct from conventional discourses of clean coal technologies in developed economies that are usually focused on carbon mitigation, this report will attempt to provide the readers with broader information on technologies, economics and industries related to the cleaner and more efficient use of coal in China, including not only carbon capture and storage, but also power plant efficiency improvement, advanced coal-conversion and coal-based chemical technologies. Taking a holistic approach in analysis, it hopes to provide the readers with a panoramic perspective on China’s current plans of clean coal utilization as well as its future development trends.

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Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

Coal is the linchpin of China’s energy mix. Its impact on China’s energy and economic development is so profound that it is irreplaceable by any other kind of fuel source. An ample and affordable coal supply propelled the Chinese economy to grow at an exceedingly high pace and helped to contain its dependence on foreign energy imports at an acceptable level. However, given the rising awareness of the environmental costs associated with coal combustion and the national plan of reducing the size of coal-intensive industries, what will be the future trend of coal demand in China is an interesting topic to explore. Synthesizing different opinions held by the interviewed experts, this chapter hopes to provide the readers with the latest analysis and estimations on future coal demand in China, providing detailed explanation of important policy aspects that may influence the future trajectory of the coal industry. 1. Coal consumption in China by 2020 The absolute volume of coal consumption and its growth in China are both staggering. Between 2000 and 2013, annual coal consumption in China rose by 156% from 1.4 billion metric tons to 3.61 billion metric tons, equivalent to the total consumption of the rest of the world combined and far exceeded the number of either the United States or India – the world’s second and third largest coal consumers. Considering the severe environmental impacts of China’s coal-reliant energy consumption pattern and its inefficiency, the Chinese government has taken a number of policy measures to curb both the future growth rate and total consumption volume of coal. According to “The 12th Five-year Plan for Energy Development” and “The 12th Five-year Plan for Coal Industry Development” issued by the State Council and the National Development and Reform Commission (NDRC) respectively, total coal consumption in China was slated to be kept below 3.9 billion metric tons (mt) by 2015 and its share in China’s total primary energy demand was targeted to be kept below 65%. According to the “Program to Strengthen Air Pollution Control for the Energy 28

Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

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Industries” jointly issued by the National Development and Reform Commission (NDRC), the National Energy Administration (NEA) and the Ministry of Environmental Protection (MEP) in May 2014, the goal of keeping the share of coal in China’s energy mix under 65% was extended to 2017. However, given the persisting air pollution, there has been a more pressing need to cap the share of coal in China’s energy mix. In the latest published “Action Plan for Energy Development Strategy: 2014-2020” that set the tone for China’s energy development roadmap over the next six years, the share of coal in China’s energy mix was strictly constrained to below 62% by 2020, whilst the total primary energy consumption will be capped at 4.8 billion tons of standard coal equivalent (SCE). Both of the two objectives are set as legally binding targets. In physical units, total coal consumption in China in 2020 will likely total 4.2 billion metric tons (Figure 1.1). Figure 1.1: Coal consumption in China, 2000-2020 (billion metric tonnes) Source: China Energy Statistical Yearbook 2013

Note: *: Targets set in “The 12th Five-year Plan for Energy Development”, “The 12th Five-year Plan for Coal Industry Development”, and “The Action Plan for Energy Development Strategy: 20142020” by the State Council and the National Development and Reform Commission (NDRC) 29

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Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

2. Divergent views toward peak coal demand However, referring to the national policies for coal consumption abatement and market information, interviewed experts for this report gave divergent estimates of the timing and the volume of peak coal demand in China. Some argued that, driven by the continued economic growth and the increased energy demand from rural China under the renewed urbanization plan, coal demand in China will likely remain strong and the peak consumption will not arrive in the short-term. Viewing coal as the only available fuel source to provide affordable and reliable electric power for the newly urbanized population, these experts estimate that coal demand in China might peak at 4.55 billion metric tons in 2020, almost 10% higher than stated in the latest government plan, to meet the official target of raising the national urbanization rate from 53.7% in 2013 to 60% in 2020. In contrast to this perspective, some other interviewed experts believed that coal consumption in China could have neared its peak given the slack market performance in the coal trade since 2013 and the government’s determination to curb the development of coal-intensive industries. Their views were mainly based on the anticipation of a number of factors including a slowed GDP growth, cooled heavy industrial output growth, a continued expansion of the share of the renewable energies, as well as the tightening government policies that mandate total coal consumption cut. For example, “The Program to Strengthen Air Pollution Control for the Energy Industries” has stipulated the four regions of Beijing, Tianjin, Hebei and Shandong to reduce total coal consumption by 83 million metric tons in 2017 from the 2012 levels. Influenced by the above factors, the peak coal consumption in China was estimated to arrive as early as 2016-2017 with the total volume plateauing at around 4.0 billion metric tons, lower than the official estimate of 4.2 billion tons. These experts also believed that, if taking further into consideration the government’s commitment to mitigating climate change, coal consumption in China could decline further from the 4.0 billion tons projection. Despite the differing views toward the peak coal volume and timing, the policy goal of keeping the share of coal in total primary energy demand under 65% by 2017 was unanimously agreed upon by the interviewed experts as a workable target. Given the slowed overall GDP growth, the rapid increase of alternative fuels such as natural gas and renewables and also the improved efficiency in coal combustion and utilization, the share of coal in China’s primary energy consumption has already dropped significantly from a high of over 70% between 2005 and 2007 to 65.8% in 2013 (Figure 1.2). Given that more potential policy measures might be introduced to constrain the size of coal use in China, especially outside the power sector, the 65% goal seems to be a feasible target 30

Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

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to realize. Figure 1.2: Change of the share of coal in China’s total primary energy consumption (2000-2020) Source: China Energy Statistical Yearbook 2013 and data from the National Development and Reform Commission

Note: *: Targets set by National Development and Reform Commission 3. Industrial coal consumption: a key area for imposing further regulation Though more than half of the coal consumption in China was for the electricity sector, as much as one-third of it is for industrial end-use. The total amount of industrial coal consumption, although much smaller than that used for power generation, is widely deemed to be more critical to the environment and more detrimental to public health due to the lack of effective environmental regulations. It was frequently mentioned during the interviews that this particular sector of coal consumption deserves more attention and an overhaul in regulation and monitoring is urgently needed. In 2012, while 51% of coal consumption in China went to power generation, 25% of it went towards direct industrial end-use, while the remaining 25% went for coking, heating, gas production or were lost in coal washing and dressing (Figure 1.3). The share of industrial coal consumption in China has resulted in exceedingly higher levels of air pollutant emissions than any other sector. According to the Ministry of Environmental Protection, outdated technologies used by the industrial coal boilers, coupled with the poor management and the lack of use of pollution 31

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Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

control systems, the 700 million tons of coal consumed by the 620,000 industrial boilers in China generated about 4.1 million tons of particulate matter (PM) emissions, 5.7 million tons of SO2 emissions and 2 million tons of NOX emissions in 2012, which accounted for 32%, 26% and 15% of the total volume respectively. While the installation of de-sulfurization, de-NOX and ash reduction equipment have been commonly applied in the power sector, similar pollutant removal systems are still rarely employed or operated at the industrial coal-fired boilers due to concerns about increased installation and operating costs. Compared to the average SO2 removal rate of 75.4% and an average 10.2% NOX removal rate in the utility power sectors, the SO2 and NOX removal rates in the metallurgical industry (e.g. steel production) and the non-metallic mineral industry in China (the two most representative coal intensive industries) were only 26.1% and 12.6% for SO2 and as low as 1.1% and 1.8% for NOX , which are only one-tenth of the rate seen in the utility sectors (Table 1.1). This directly led to the poor performance of the industrial sectors in pollution control. Figure 1.3: Coal consumption in China by sectors, 2012 Source: China Energy Statistical Yearbook, 2013

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Chapter 4: The Pattern of Coal Consumption in China and its Near-term trend 第四章：中國煤炭消費概況及近期趨勢分析

第二部分：CEFC中國清潔煤炭利用調查報告

Table 1.1: Flue gas emission statistics in China by industrial sectors Source: “Annual Statistical Report of Environment in China, 2012”, Ministry of

Electricity

Environmental Protection, 2012 Net SO2 SO2 SO2 Net NOX emission reduction reduction emission (Ten (Ten rate (Ten thousand thousand thousand tones) tones) tones) 75.4% 797 2439.4 1018.7

Smelting and 240 pressing of ferrous metals Manufacturing 199.8 of non-metallic mineral products

NOX reduction (Ten thousand tones) 115

NOX reduction rate 10.2%

84.9

26.1%

97.2

1.1

1.1%

28.9

12.6%

274.2

1.8%

Enhanced legal and policy framework to contain industrial coal-usage pollution Most of the interviewed experts attributed the current poor environmental performance of industrial coal usage in China to the difficulty of law enforcement and the impracticality of conducting incessant on-site monitoring of the industrial plants. Unlike the electric power sector where effective regulations and monitoring are imposed directly by government agencies and industrial associations, the industrial end-usage of coal in China is much more scattered and was thought to be more difficult to monitor. In addition, given the diverse technical features of different types of coal boilers, it is difficult for the government to implement a clear-cut national emission standard governing all industrial plants without considering the potential economic losses caused. In addition, the reluctance of certain local government authorities in enforcing the national environmental standard in fear of damaging local economic growth was cited as another influence that hampered effective oversight to the intensive and environmentally unfriendly industrial use of coal. To revamp the current under-regulation and the loose management of the industrial coal-fired boilers, the Chinese government is taking numerous measures to strengthen both the legal basis and the administrative power of the government in environmental regulation. This trend has been clearly manifested in the introduction of the third revision of the “Emission Standard of Air Pollutants for Boilers” (GB 13271-2014) in May 2014, which drastically lowered the legal emission ceilings for air pollutants such as SO2, NOX and mercury for both new and existing industrial boilers compared with the 2001 level (Table 1.3). According to the latest standard, legally permitted 33

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SO2 emission will be significantly reduced from 1200 mg/m3 to 400 mg/m3 for existing boilers and from 900 mg/m3 to 300 mg/m3 for newly built boilers. The emission ceiling for NOX was set at 400 mg/m3 for existing boilers and 300 mg/m3 for newly built boilers. It was also hoped that with the first major revision of the Environmental Law of China coming into effect in 2015, industrial air pollution from small coal boilers in China could be significantly deterred by the enhanced administrative power granted by the latest amendment, under which environmental agencies will be allowed to impose penalties and take legal actions against activities that are harmful and disruptive to environment. For example, daily penalties and enforced closures of factories will be within the scope of enforcement of local government agencies. Table 1.2: Comparison of the emission standard of air pollutants for coal-fired industrial boilers in China (2014 and 2001) Source: Ministry of Environmental Protection, “Emission Standard of Air Pollutants for Boilers” (GB 13271-2014), 2014 2001 standard

2014 standard

SO2 (mg/m )

1200 (existing boilers) 900 (newly built boilers after January 1, 2001)

400 (existing boilers) 300 (newly built boilers after July 1, 2014)

NOx (mg/m3)

No regulation

400 (existing boilers) 300 (newly built boilers after July 1, 2014)

Mercury (mg/m3)

No regulation

0.05 (both existing and new boilers)

Using coal-derived syngas to curb industrial pollution To replace industrial coal consumption with natural gas and electricity was proposed by many interviewed experts as a potentially workable method in curbing air pollution from the coal intensive industries. As mentioned by the interviewed experts, the economic and efficiency gains of using electricity to replace direct coal combustion have been proved sound by the operating experiences of several manufacturing hubs in Northern China. But given the current high price of natural gas in China, to “substitute coal with gas” on a large scale was still believed to be too costly and economically unviable for most of the industrial entities in China. The interviewed experts proposed a potentially affordable and clean solution to curb industrial coal consumption in China – syngas. Industrial experiences showed that burning syngas produced 34

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from a central coal-gasification plant is far cleaner than burning coal directly at individual plants, thanks to the efficiency gains derived from scaled up production. For example, in a ceramic manufacturing hub located in Shenyang, Liaoning province, where each ceramic factory used to keep their own fixed-bed gasification system to produce syngas as feedstock for ceramic production, the ceramic producers are now purchasing syngas collectively produced by a central gasification plant with a capacity of 200,000 cubic meters per hour at an affordable cost. This centralized syngas provision system is also currently the largest commercial coal gasification program in operation in China. According to the data provided by the interviewed experts, in terms of equivalent heating value, the average cost of the centrally produced syngas for the ceramic producers could stay as low as RMB 2 per cubic meter, which is only half of the market price of natural gas but with similar environmental performance. Though the gasification process may still generate pollution, the incremental cost of employing pollution control measures in the central gasification plant is much lower than the combined spending of individual plants to install and operate pollution control systems at their own sites. Encouraged by the economics and environmental performance demonstrated by the commercial coal gasification system, many interviewed experts believed that the demonstration project in Shenyang could provide meaningful experiences for industrial players in China to develop alternative production routes and resolve the emission problems associated with their coal-based energy consumption.

The largest commercial coal gasification plant at Shenyang Faku with a designed production capacity of 200,000 cubic meters per hour. 35

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

As the dominant fuel source used for power generation in China, coal, by the end of 2013, accounted for 63% of the nation’s 1,250 GW total installed power capacity and provided 74% of the nation’s total 5.32 trillion kWh electricity supply in the same year. Given coal’s vast capacity and the dominant share, efficient and environmentally friendly usage of coal in China’s electric power sector will be critically important for the country’s sustainable development. Through technological breakthroughs and optimized management, coal-fired electricity in China has recorded tremendous efficiency improvements over the last decade and is widely expected to continue this trajectory into the near future. However, many regard coal-fired electricity as a major cause for the rapidly deteriorating air quality simply because it is the single largest coal consuming source in China. In this section, while introducing the latest developments of coal-fired power plants in China, different views and opinions toward the correlation between coal-fired electricity and air pollution in China will also be presented so as to reflect the diverging perspectives on this highly controversial subject. 1. Coal-fired power plants in China: striving to serve as a world-class fleet In the past decade, the growth of power demand in China easily outpaced that of any other country. At an average annual growth rate of 10%, total electric power consumption in China more than doubled from 2.49 trillion kWh in 2005 to 5.32 trillion kWh in 2013. Despite the robust growth of renewable energies and the rapid advancement in nuclear power technologies, coal still dominates China’s electric power generation and accounts for 63% of the total power capacity and 74% of the country’s total power output. Though the proportion of coal-fired power has already dropped from its peak in 2007 (70% of total nameplate capacity and 80% of total electric power output), it is still widely seen as the cornerstone of China’s power mix for the near future. In the past decade, driven by the steady technological progress in electric power generation and efficiency improvements, the overall efficiency of the coal-fired power plants in China has been tremendously improved. In 2013, the average net coal consumption of the coal power plants in China reached a historically low level of 321grams of standard coal equivalent per kilowatt-hour 36

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

(gce/kWh), which is very close to the average level of 306 gce/kWh in Japan and stayed well below the 359 gce/kWh level of the US in 20122 . Driven by the government’s determination to improve energy efficiency in China, net coal consumption in electricity generation is widely expected to be lowered further. According to the latest policy goal of further improving the average efficiency of coal-fired power plants outlined in the “Action Plan for Energy Conservation and Emission Reduction for the Coal-fired Power Plants (2014-2020)”, the average net coal consumption for power generation is targeted to be reduced further to as low as 310 gce/kWh by 2020 (Figure 2.1), as proclaimed by the National Energy Administration. If this target could be successfully realized, at least 43.5 million tons of standard coal equivalent energy consumption could be reduced from the current level (based on the 3.9 trillion kWh coal-fired power output in 2013). Given the future power demand growth, the total amount of energy to be saved from improved power efficiency will still be there. Figure 2.1: Average net coal consumption per unit of electricity generation in China, 2002-2020 (gcoe/kWh) Source: China Electricity Council and the National Energy Bureau, “Action Plan for Energy Conservation and Emission Reduction for the Coal-fired Power Plants (2014-2020)”, 2014.

Note: *: Target set in the “Action Plan for Energy Conservation and Emission Reduction for the Coal-fired Power Plants (2014-2020)”, by National Development and Reform Commission 2

EIA report for 2012 coal plant average efficiency is 10,498 Btu/kwh (HHV). This translates into 378 gce/kwh

(HHV) and 359 gce/kwh (LHV) assuming a 5% difference between HHV and LHV. 37

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Rapid development of supercritical (SC) and ultra-supercritical (USC) power units: a cost-effective way to improve the future efficiency of the coal-fired power fleet in China In the past decade, the deployment of power units using supercritical (SC) and ultra-supercritical (USC) technologies has been greatly increased, underpinned by the industry’s interest in its high efficiency and the consequential economic benefits. Since the commencement of the Huanenng Yuhuan project in 2006, the total installed capacity of SC and USC units in China combined has exceeded 120 GW in 2010. By the end of 2012, the number of completed 1000 MW USC units in China reached 54 and climbed further to 62 units by the end of 2013, according to the data released by the Electric Power Planning and Engineering Institute (EPPEI). (Figure 2.2) Figure 2.2: Number of 1000MW ultra-supercritical plants in China (GW) Source: China Electric Power Press, “China Electric Power Year Book, 2013”, Sun Yue and Long Hui, “Introduction of the Coal-fired Power Plant Technologies in China.”, 2012 and data from the Electric Power Planning and Engineering Institute (EPPEI).

In light of the previous operating and construction experiences of USC and SC units in China, they have been widely recognized as reliable, efficient and economically viable power sources to meet both the country’s rising demand for energy efficiency and the tightened emission standards for air pollutants. With an affordable investment cost (the average overnight capital cost of USC units was about RMB 3300 or USD 540 per kilowatt in 2012), some large USC units in China 38

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

were even able to demonstrate extremely high levels of efficiency and world-class environmental performances that were comparable to those of natural gas combined cycle plants. One of the most prominent examples was the Waigaoqiao No.3 USC plant located in northern Shanghai. Adopting twin 1000MW USC units manufactured by Siemens, this plant in Shanghai was able to operate with a net plant efficiency as high as 44.5% (including desulfurization and denitration) at an overall capacity factor of 75%. Its yearly average emission of SO2, NOX and ash per kWh in 2013 were recorded as low as 35mg, 27.25mg and 11.1 mg per cubic meter respectively, which were not only well below the national emission standards, but even outperformed many gas-fired power units in China. Considering future power demand growth and limited alternative power supply sources, to further promote the efficiency of the coal-fired power fleet in China appears to be a most feasible and promising solution to increase China’s power supply capacity whilst minimizing the environmental cost. Thanks to the usage of advanced materials that can withstand high steam temperature and pressure in the SC and USC units, their deployment will also help to meet the policy goal of reducing total coal consumption in the power sector. With more SC and USC plants entering into service to replace the aging and less efficient small-sized subcritical units, their deployment will generate significant environmental gains with little alterations needed to the existing electric power infrastructure. Recently, the importance of developing more SC and USC power units in China was reiterated in a latest policy document: “The Action Plan for Energy Conservation and Emission Reduction for the Coal-fired Power Plants (2014-2020)”, which requires newly built coal-fired power plants in China to adopt USC technologies with individual unit capacity no smaller than 600 MW. It was also articulated by the interviewed experts that if some of the leading technologies applied to the USC and SC projects (such as the Waigaoqiao No.3 Plant in Shanghai) could be transferred to the conventional subcritical thermal power units, the average performance of the coal-fired power fleet in China could be significantly improved as well.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

The 1000 MW Ultra-supercritical Unit at the Shanghai Waigaoqiao Power Plant, 2013. Source: Shanghai Waigaoqiao No.3 Power Generation Co. via cornerstonemag.net Besides the rapid development of the ultra-supercritical power units with 600°C steam temperatures, China has also launched plans to develop advanced ultra-supercritical (A-USC) power plants with steam temperatures above 700°C. On July 23, 2010, the National Energy Administration announced the establishment of a “National Innovation Union of 700°C Ultrasupercritical Coal-fired Power Generation Technology,” formally launching China’s 700°C ultrasupercritical technology development plan. This plan is mainly focused on research related to the optimal design of unit systems and major equipment as well as the development of the necessary thermally resistant alloys. Construction of the 700°C steam temperature demonstration project is expected to begin in 2018 and the demonstration project is expected to be completed by 2020, approximately. If successfully developed, the A-USC power unit is likely to reduce the net coal consumption further to 265g/kWh and achieve an overall thermal efficiency close to 50%. Challenges facing advanced pulverized coal combustion in China Despite the rapid advancement in commercial operation and construction of USC plants, domestic firms in China still have not fully mastered the core technologies needed to manufacture the core components of a USC unit. As pointed out by multiple interviewed experts, the materials 40

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

needed for high-temperature combustion in the USC and SC units, for example, are now beyond the research and manufacturing abilities of most domestic manufacturers in China. The technological gap between Chinese firms and the leading global players still remains huge. But admitting the current technological barriers, it was also believed that a major technological breakthrough in power equipment building in China is imminent, thanks to the massive power market in China that provides ample opportunities to enable industrial players to nourish and perfect their technologies from laboratory demonstration to commercial application. The continually growing power market in China will also provide sufficient employment opportunities to maintain a fleet of qualified personnel experienced in modern power plant operating, construction and maintenance. In addition, the profits accrued by the power operators and the electric power equipment manufacturers during the power boom of the past decade should be able to sustain their spending on company research and development activities, according to the interviewed experts. Increasing the full load hours for large, efficient coal-fired units: another cost-effective way to improve the overall efficiency of China’s coal plant fleet Given the design parameters of the large and highly efficient SC and USC coal-fired power units, increasing their average full load hours was cited by the interviewed experts as another important and cost-effective aspect for efficiency improvement. Influenced by slowed economic growth and the government’s decision to curb excessive industrial production capacities, many advanced coal plants in China were frequently forced to run at load significantly lower than designed load so as to maintain the grid balance. Though the average number of operating hours of these advanced coal plants still remained higher than the national average, their low load factors, however, greatly compromised their designed performance and resulted in higher than usual net coal consumption and additional efficiency losses. Latest data released from the power sectors indicate that the average load factor for the 1000 MW USC units was only 71.66% in 2012 and some USC plants in Zhejiang province were recorded running with load factors as low as 50%. In addition, influenced by the lack of installed gas-fired power capacities and the tight natural gas supply in China, many advanced coal plants originally designed for base-load power generation were actually running frequently on cycling modes. This, according to the interviewed experts, was another important factor that compromised their output efficiency. Besides, running on cycling mode also brought additional damage and wear to the valuable equipment and could significantly shorten the designed lifetime cycle of the entire power system. As the interviewed experts proposed, in light of the current situation in China, more alternative power stations should 41

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

be employed to free the advanced coal plants from duties of cycling that they are not adaptable to. Increasing the share of gas-fired power plants might be a feasible solution. 2. Divergent views toward the correlation between coal-fired power plants and air pollution in China under tightening environmental policies Since the outbreak of widespread smoggy weather in most of the major urban regions in China, coal-fired power plants have been attributed as one of the primary sources that caused the formation of the smog. However, this view has been questioned by numerous interviewees. Complexity of the smog composition in China In contrast to the common belief that takes the coal-fired power plants as the foremost factor in causing the smog in China, the interviewed experts were however more cautious about giving conclusive statements about the linkage between the two factors. Coal-fired electricity, though commonly regarded as one of the most important sources that led to the formation of smog in China, has not been proved by any sound scientific evidence to have a weighted impact on the causation of the smog. Due to the complexity of the smog’s composition, it is still unclear which factors (vehicles, coal-fired power plants or industrial production) exerted an overwhelming effect on the formation of smog in China. As implied by some interviewed experts, there is more evidence to indicate that it was the effect of a combination of air pollutants (e.g. SO2, NOX, mercury, and ashes), which, through reaction and oxidation, condensed and stifled in the atmosphere, thus forming the fine particles that ultimately form smog. It is a complex procedure in which no one single pollutant source can overwhelm the impacts of others. Some interviewed experts also indicated that in terms of size and molecular structure, the observed smog particles in China’s atmosphere differ greatly from that of the flue gas normally seen from the coal-fired electricity plants. This further undermines the argument of linking coal-fired power plants directly to the cause of the smoggy weather. In addition, some recent studies conducted by environmental groups indicated a stronger linkage between vehicle tailpipe exhaust and the smog in Beijing. Performance of China’s coal-fired power fleet After years of development of anti-pollution measures, most of the coal power plants in China are running competitively in terms of their environmental performance. Thanks to the rapidly increased application of flue gas de-sulfurization (FGD) and de-NOX facilities, the SO2 and NOX emissions from coal-fired power plants have dropped significantly. In 2012, total SO2 emissions 42

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

from coal-fired generation have dropped by 39% from the previous level of 13 million tons in 2005; total NOX emissions have dropped to 9.8 million tons in 2012. By the end of 2013, of the coal-fired power plants in China, totaling 790 gigawatts (GW), more than 99% have been equipped with ash reduction systems; 91% have been equipped with flue-gas desulfurization (FGD) systems and 55% have been equipped with de-NOX systems. Driven by tightening government regulations targeting NOX emissions issued recently, more coal plants (with a combined capacity of 120 GW) have been installed with de-NOX systems in the first six months of 2014, making the percentage of de-NOX installation in China’s coal plants rising further to 62.5%. Currently, average emissions at coalfired power plants in China are 1.9 g/kWh for SO2, 2.6 g/kWh for NOX, and 0.4 g/kWh for fine particulates. These are comparable to developed countries’ numbers for an electric power sector within a developing economy, as pointed out by the interviewed experts. With more advanced coal-fired power units entering into service in the coming decade, it is possible that the average environmental performance of China’s coal-fired fleet will progress further, especially under the context of tightening policy regulation Coal-fired power plants under tightening policy regulation Apart from technological improvements, policy is another important matter that will strongly influence the future trajectory of China’s coal-centered power fleet development. Pressured by wide-spread air pollution and rising public discontent with frequent smoggy days, the Chinese government has introduced numerous policy documents, primarily targeting the coal-fired power sector. First of these was “The Emission Standard of Air Pollutants for Thermal Power Plants (GB 13223-2011)”, issued in 2011, which mandated all coal-fired plants in China to comply with a strict national emission standard for air pollutants such as PM, SO2, NOX, mercury and mercury compounds. This policy was originally applicable only to newly built coal plants. But since July 1, 2014, the date of its full implementation, its scope of governance has been extended to both existing and newly built coal-fired power plants. In addition, it also stipulated that coal-fired boilers located in 47 major provincial and autonomous cities in China (specified by the State Council) must comply with a special emission standard that is stricter than the national average standard, according to the “Notice on the Implementation of Special Emission Limits of Air Pollutants” issued by the MEP in early 2013 (Table 2.1).

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

Table 2.1: Coal-fired power boiler pollutant emission concentration limits (mg/m3) Source: Ministry of Environmental Protection, “Emission Standard of Air Pollutants for Thermal Power Plants.” 2011, and “Notice on the Implementation of Special Emission Limits of Pollutant PM Sulfur Dioxide (SO2) Nitrogen Oxides (NOX) Mercury and mercury compounds

Air Pollutants”, 2013 Conditions National limits All 30 New Boiler 100 200(1) Existing Boiler 200 400(1) All 100 200(2) All

0.03

Special regions 20 50

100 0.03

Notes: (1) For coal-fired boilers located in Guangxi Zhuang Autonomous Region, Chongqing Municipality, Sichuan Province and Guizhou Province. (2) Implementing limits on W-type thermal power generation boilers or furnace chamber flame boilers, circulating fluidized bed (CFB) boilers, and boilers put into operation as of December 31, 2003 or through the construction project’s environmental impact report’s approval of coal-fired power boilers. In 2014, policy regulations regarding coal-fired power plants emissions tightened further. According to the “Action Plan for Energy Conservation and Emission Reduction for Coal-fired Power Plants (2014-2020)”, net coal consumption of newly built coal-fired power plants in China will be mandated to be kept lower than 300 gce/kWh and those newly built coal plants located in 11 provinces of eastern China (including Beijing, Liaoning, Tianjin, Hebei, Shandong, Shanghai, Jiangsu, Zhejiang, Fujian, Guangdong, Hainan) will have to comply with the same standard as gas-fired power plants (which is to say that the emission ceiling for PM, SO2 and NOX of coal plants in those regions should not exceed 10 mg, 35 mg and 50 mg per cubic meter, respectively). Newly built coal-fired power plants located in Western China were also encouraged to reach the emission standard applicable to the gas-fired plants. Furthermore, to improve the overall efficiency of the coal fleet, conventional coal-firing power units with capacity smaller than 50 MW, on-grid conventional coal-fired power units with capacity smaller than 100 MW, and units smaller than 200 MW that have reached their designed lifespan and have not been retrofitted with efficiency 44

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

improvement measures, will all be encouraged to be phased out at an accelerated pace. It was expected that by 2020, a total of 10 GW of outdated coal-fired power capacity will need to be retired for environmental reasons. Interviewed experts expect the retirements of older and smaller plants and the retrofits of the rest the existing plants to result in the national average power plant coal consumption leveling off around 310 gce/kWh by 2020. Under the much tightened government regulation targeting the coal-fired power industry, many of the interviewed experts were cautious in their view of the real cost-effectiveness of the policy in containing air pollution in China. According to the data provided above, the coal-fired plants in China have already demonstrated competitive efficiency and environmental performance over many other industries in China. Many of the power companies have also spent significant amounts of resources in emission control and efficiency improvement. Considering the vast number of smallsized industrial coal boilers that are scattered across many key Chinese cities, whether coal-fired power plants should be selected as the primary target to impose these stringent emission standards was regarded as arguable by most of the experts interviewed. In their view, the environmental gains from the tightened emission control of power plants appear to be disproportionate to the gigantic amount of investment and resources needed for a massive retrofitting of existing plants, especially for those that are already operating at a competitive level of environmental performance. To unilaterally lift the emission standard to a level that is hardly affordable for the power plants under the current on-grid tariff standard is also regarded as against the principle of “best available technology” in international pollution abatement practices. In addition, whether the power generators would be able to sustain a profit margin to offset the capital and operating costs generated by the additional pollution control systems is another major concern expressed by the interviewed experts, especially when power demand in China has already begun to show signs of slowing, compounding concerns over the power companies’ profitability. Also, if the existing on-grid tariff mechanism cannot be reformed to truly reflect retrofitting costs, how the power operators could remain incentivized in complying with emission target is questionable. 3. Integrated gasification combined cycle (IGCC) technology: A potential solution for clean coal power in China Integrated Gasification Combined Cycle technology (IGCC) is an advanced coal utilization technology that is being demonstrated at commercial scale in China. Using coal as the feedstock for gasification, IGCC technology generates electricity through two parallel lines: one is through the gas turbine generator by combusting syngas from the gasification process; the other is using 45

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

the steam generated in the syngas cooler in the gasification section and in the heat recovery steam generator in the combined cycle section to produce additional electricity from the steam turbine. Considering its higher thermal efficiency, lower pollutant emission and its easier adaption for carbon capture and storage (CCS), IGCC technology has been widely agreed as a potential nearzero emission technology. Moreover, it can also be combined with coal-derived hydrogen and fuel cell power generation technologies to form a more advanced and diversified energy production system. For these reasons, development of IGCC technologies is regarded as an important direction for the future of coal-based clean energy power generation in China. The GreenGen Project in Tianjin Driven by the rapid advancement of Chinese industries in gasification equipment building and the experiences gained in gas turbine operation, IGCC development in China has witnessed an accelerated development in the past decade. In 2012, the completion of the 250MW IGCC unit of the Huaneng GreenGen Phase 1 project located in Tianjin marked the first commercially operational IGCC plant in China. Integrating the gasification technologies developed by the Xian Thermal Power Research Institute and the syngas turbine designed by Siemens, the GreenGen Phase 1 project successfully passed the 72 hours continuous operation standard test and another 24 hours of full load operation test in November 2012, and formally went into commercial operation in the ensuing month. According to the latest data released by Cornerstone, the GreenGen IGCC unit has realized steady operation at high capacity (maximum 92% of design) for 29 consecutive days in 2014.Through the engineering and operating experiences of the GreenGen project, China has also developed a number of its own proprietary technologies , such as the 2000-t/d two-stage dry pulverized coal pressurized gasification system, for the future development of IGCC projects. Advantages of developing IGCC Technology in China According to the views of the experts interviewed, the advantages of developing IGCC units in China can be summarized into several aspects: First of all, the IGCC units can greatly reduce the amount of coal consumption per unit of electric power output, and will also be able to keep its air pollutant emissions (e.g. SO2 and NOX) at a minimum level, when compared to a conventional pulverized coal plant. This advantage has been proved by the latest data released from the Huaneng IGCC unit in Tianjin. According to official reports, the average emission of SO2, NOX and particulate matter at the Huangneng IGCC unit could be as low as 0.9 gm, 47.87 mg, and 0.6 mg per Nm3 respectively. This is not only far 46

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

below the average national emission ceiling, but even lower than the special emission standard for key urban areas. Secondly, the average water consumption for IGCC units is significantly lower than that of existing coal plants because IGCC uses less steam to generate the same amount of electricity. According to data provided by the interlocutors, water consumption can be as low as half to one-third of a conventional pulverized coal power plant. Latest data from the Huanenng IGCC unit echoed this view. In 2012, its average water consumption was as low as 1kg/ kWh, less than half of the national average of 2.15 kg/kWh achieved by pulverized coal plants in the same year. Furthermore, the carbon dioxide emissions from an IGCC unit are much easier to capture because of the higher concentration of CO2, which is why the IGCC units are also touted as a carbon capture ready technology. In addition, the high calorific value syngas derived from the coal gasification process, combined with a high-efficiency gas turbine generator and heat recovery steam generator, means that the overall efficiency of IGCC units can reach 45%, much higher than existing pulverized coal plants. Some interviewed experts also mentioned that given the tightening government regulation for conventional coal-fired boiler construction in the densely populated eastern regions, many of the petroleum refineries that used to rely on coal-fired boilers for heat and electricity supply, will have a greater incentive to incorporate IGCC technology to conduct coal-based co-generation with their chemical production line. By integrating coal or other hydrocarbon materials like residual oil and oil coke with the refinery production is a highly efficient approach in energy usage. The raw syngas, once purified, can be used for electricity, petrochemical, heat and hydrogen gas cogeneration. In parallel to electricity generation, the co-generation process can produce multiple high value-added petrochemical products such as ethanol (a raw material for producing olefins), acetic acid and methanol, dimethyl ether and synthetic ammonia as well as town gas and hydrogen for fuel cells. In contrast to conventional production, the co-generation process enjoys significant advantages in energy efficiency and can harness great benefits from the sales of multiple by-products. High capital and operating costs: a hurdle for further development of IGCC technology in China Currently, the major barrier to the widespread deployment of the IGCC technology in China can be ascribed more to its high investment and operating costs, rather than technological maturity. According to the latest estimates, the overnight capital cost of the demonstration IGCC plant in Tianjin stayed as high as RMB 13,000 (or USD 2100) per kilowatt, which is about more than three times higher than that of a typical USC unit in China (Table 2.2). Even though the overnight capital cost of the Tianjin project is already much lower than similar projects overseas due to China’s 47

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

lower labor and equipment procurement costs, its profitability under the existing on-grid tariff system in China remains poor, due to its higher operating and maintenance costs compared with conventional pulverized coal plants. The life-time profitability is also influenced by the higher equipment depreciation costs. If the existing on-grid tariff system remains intact, the long-term profitability of IGCC units in China will remain uncertain. On the other hand, as the interviewed experts indicated, given the high capital cost of the IGCC units and the rapidly improving efficiency of USC units (e.g. the net plant efficiency of the Waigaoqiao No.3 Plant could reach as high as 44.5%, higher than the estimated net efficiencies for most of IGCC designs), the efficiency and environmental advantages of IGCC units are diminishing. In fact, IGCC’s higher operating, and maintenance costs and lower reliability determine that its profitability can in no way compete with the pulverized coal plants under the current on-grid tariff system in China. According to data provided by the interviewed experts, the current average power generating cost of the IGCC unit in China is as high as RMB 0.8-0.9 per kilowatt hour, which is about five times higher than the average cost of a pulverized coal-fired power plant. Even when provided with government subsidies, the IGCC plant will still be running at a RMB 0.3 deficit for every kWh of electricity it generates. If taking further into consideration the equipment depreciation costs, an IGCC unit running with 70% capacity factor in China could be losing about RMB 100 million (or USD 16 million) per month. Deterred by such a high cost in operation, construction and maintenance, both the Chinese government and the power utility industry have been cautious about developing new IGCC projects following the demonstration plant in Tianjin. Table 2.2: Comparison of the capital cost of different types of power generation units in China Source: China Electric Power Press, “China Electric Power Yearbook”, 2013 Type of Electric Power Unit Overnight Capital Cost (2012) 2×600MW SC Coal Plant RMB 3,554 per kW 2×1000MW USC Coal Plant RMB 3,534 per kW 1×250MW IGCC Plant RMB 13,000 per kW 2×300 MW CCGT Plant RMB 2,830 per kW Nonetheless, despite the high capital and O&M cost of the IGCC technology, the advantage of IGCC technology in carbon capture and storage (CCS) was commonly agreed. If employed with a water-gas-shift reactor that converts carbon monoxide (CO) to carbon dioxide (CO2) and an acid gas removal unit that separates the hydrogen sulfide and CO2, IGCC units can generate 48

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

high-purity CO2 ready for compression and storage at a much lower cost than the post-combustion capture process commonly seen in conventional pulverized coal plants. Referring to some recently available data, the average cost increment of IGCC units with CCS was 12% lower than that of pulverized coal plants (Table 2.3). If this advantage of IGCC could be reflected under a new policy scenario in which carbon costs were internalized in the utility prices, its economic viability will be greatly improved, especially against the conventional coal plants. Table 2.3: Comparison of the overnight capital cost increase of single unit pulverized coal plant and single unit IGCC plant with CCS in the US Source: EIA, “Updated Capital Cost Estimates for Utility Scale Electricity

Single Unit Advanced Pulverized Coal Plant Single Unit IGCC

Generating Plants”, 2013. Capital cost without CCS Capital cost with CCS Increment USD 3,249 per kW USD 5,227 per kW 61% USD 3,784 per kW

USD 6,599 per kW

49%

Gas turbine technology: another impediment for IGCC development in China Another important factor that may determine the pace of IGCC development in China was the maturity of domestic gas turbine technologies. Advanced gas turbine technology, due to its complexity and high standards for the quality of its components and materials, has been often touted as the cream of the crop of modern industrial equipment manufacturing. According to the interviewed experts, the design and engineering capabilities of Chinese firms in modern gas turbine manufacturing still lags far behind the world’s leading industrial players. According to the interviewed experts, the only gas turbine technology that China has currently fully mastered is the type 6001B technology produced by the Nanjing Gas Turbine Plant, whose key parameters were designed almost 40 years ago. However, even this outdated technology was not independently developed by domestic engineers but assisted with the technology transfer from General Electric (GE). The gas turbine system currently being used by the IGCC project in China was designed by Siemens, which, although technologically mature, still encountered numerous difficulties in aligning and integrating with the domestically designed two-stage pulverized coal gasification system. It is expected that given China’s lack of design and manufacturing experience in gas turbine technology, the difficulty of integrating imported gas turbine systems with domestic gasification systems will persist for a certain period of time.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

The gasification system of the Huaneng GreenGen IGCC project in Tianjin. Source: China Huaneng Clean Energy Research Institute via cornerstonemag.net 4. Carbon capture and storage: an emerging sector for clean coal utilization in China In recent years, with growing public attention to the need for mitigating climate change and reducing greenhouse gas (GHG) emissions, the development of carbon capture, utilization and storage (CCUS) technologies has become increasingly important in China. Due to its carbon abatement and mitigation effects, CCUS technologies have been incorporated as part of the national plan in meeting climate change objectives and to ameliorate the challenges associated with China’s coal-intensive energy industries. Despite a relatively late start, China has made considerable progress in the development and application of CCUS technologies and its pace has been particularly accelerated in recent years. Numerous research programs on the key technologies for efficient carbon absorbent and capture have been carried out, including the commercial 50

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

application of an amine absorber and the industrial-scale operation of CO2 capture demonstration projects, with the largest capture capacity of 100,000 tons per annum seen in the electric power sector. If endowed with further policy and fiscal support from the government, and an enlarged carbon trading scheme on a national scale, it is believed that the CCUS technologies will likely enjoy stronger growth in the near future in China. Policies guiding CCUS development in China Currently, there are several policy documents guiding the development of CCUS technology in China, including “The National Medium- and Long-term Program for Science and Technology Development (2006-2020)”, “The National Climate Change Program”, the “12th Five-year Plan for Science and Technology Development” and the “12th Five-year Plan for Clean Coal Technology Development”. All these documents recognized the urgency of developing CCUS technology and identified it as a key solution to mitigate climate change. The necessity to increase research and development of CCUS projects in China was also stressed in these documents. In “The National Medium- and Long-term Program for Science and Technology Development (2006-2020)” issued by the state council in 2006, CCUS technology was identified as one of the frontier technologies for prior development. “The 12th Five-year Plan for Science and Technology Development” released by the Ministry of Science and Technology (MOST) articulately proposed the need to strengthen CCUS technology research and development, and defined CCUS technology as one of the most effective technical measures for sustainable development and climate change mitigation. In the “12th Five-year Plan for Clean Coal Technology Development”, released by the MOST in 2012, CCUS technology was once again claimed to be one of the four primary sectors for technological breakthroughs in clean coal utilization. Besides the official recognition of the importance of CCUS technology manifested in the abovementioned policy documents, the Chinese government has also continually increased their research and development funding for CCUS projects. According to a document released by the Administrative Center for China’s Agenda 21, a policy research subsidiary under MOST, CCUS projects in China have received generous funding from top science and technology research programs in China, including the prominent National Basic Research Program (also known as the 973 program) and the National High Technology Development Program (also known as the 863 program). Data revealed that the total funding for fundamental researches and technology experiments regarding CCUS projects in China has exceeded RMB 1 billion between 2006 and 2010, out of which over RMB 200 million was directly granted by the government. In 2011 alone, 51

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

ten more CCUS-related research projects have been inked in the national science and technology programs with total funding of RMB 2 billion, including a RMB 400 million financing package provided by the government. Summary of the CCUS projects in China’s electric power industry Currently, there are three pilot CCUS projects that have been completed and put into operation in the electric power industry in China, namely: the Huaneng Group’s 3,000 tons per year (t/yr) capture pilot project at its Gaobeidian plant in Beijing (China’s first capture pilot, launched in 2008); China Power Investment Corporation’s 10,000 t/yr capture pilot in Chongqing; and Huaneng Group’s 100,000 t/yr Shidongkou plant in Shanghai (China’s largest capture pilot). There are also two advanced carbon capture projects under construction, namely Huaneng Group’s near-zero emission power plant in Tianjin (phase two and three of the GreenGen project) and an oxy-fuel pilot being developed by Huazhong University of Science and Technology (HUST) in Hubei Province. Three other plants have been planned but are pending final government approval, which are: the China Guodian’s 20,000 t/yr capture pilot project; an IGCC clean energy technology demonstration project located in Lianyungang City (Jiangsu Province); and an IGCC project in Guangdong, led by the Dongguan Taiyangzhou Power Corporation. Details of the above projects can be found in table 2.4. Table 2.4: Summary of the operating and under-construction carbon capture projects in power generation in China Source: IEA, “Facing China’s Coal Future Prospects and Challenges for Carbon Capture and Storage”, 2012. In operation 1. China Huaneng Group’s Project capacity: 3 000 t/yr flue gas carbon capture pilot Gaobeidian Thermal Power Plant Status: Operating current demonstration since July 2008 w/carbon capture Location: Gaobeidian, Chaoyang District, Beijing Technology: Post-combustion capture + reuse in beverage industry Capture specifications: Rate > 85%; CO2 purity > 99.9% 2. China Power Investment Project capacity: Industrial pilot capture of 10,000 t/yr of Corporation (CPIC), Chongqing CO2 Hechuan Shuanghuai Power Plant Status: Operating demonstration since January 2010 Pilot Location: Hechuan, Chongqing Technology: Post-combustion capture Capture specifications: Rate > 95%; CO2 purity > 99.5% 52

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Project objective: 120,000 t/yr flue gas carbon capture, demonstration carbon capture Status: Operating demonstration since 2009 Location: Baoshan District, Shanghai Technology: Post-combustion capture + reuse in the beverage industry Capture specifications: CO2 purity > 99.5% Under-construction 1. Huaneng Tianjin GreenGen Project objective: two 400 MW near-zero emission power Project (phase two & three) plants in Phase 2 & 3 of the GreenGen project Status: under construction and Location: Binhai New Area, Tianjin Technology: IGCC, pre-combustion capture, EOR 2. Huazhong University of Project Objective: 35 MW oxy-fuel combustion boiler Science and Technology 35 MW with plans for full demonstration plant with 100 000 t/yr Oxyfuel industrial pilot CO2 storage Location: Yingcheng, Hubei Province Technology: Oxy-fuel combustion plus storage in salt mines Status: Small pilot built/planning next Capture specifications: Capture rate > 90% Projects under development 1. China Guodian carbon capture Project Objective: 10 000 t/yr carbon capture; 20 000 tons and utilization project, Tianjin per year Beitang Power Plant Location: Tianjin Technology: Post-combustion capture for utilization in the food industry Status: Planned Capture specifications: Rate > 95%; CO2 purity > 99.5% 2. Clean energy technology Project Objective: Capture and future storage demonstration system in demonstration of 1 million tons of CO2 per year Lianyungang Status: Planned for 2012-15; seeking approval Location: Lianyungang, Jiangsu Province Technology: IGCC + aquifer storage Capture specifications: Future Plans: Planning and approval by end 2011; construction planned to begin in 2012 3. Dongguan Taiyangzhou Power Project objective: Capture of 1 million tonnes of CO2 per Corporation, Xinxing Group, year Nanjing Harbin Turbine Co Ltd. Location: Dongguan, Guangdong Technology: IGCC with CCS Status: Planned for 2012-15; awaiting for final approval 3. China Huaneng Group’s Shanghai Shidongkou No. 2 Power Plant

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Challenges to CCS application in China’s electric power sectors According to the interviewed experts, the major difficulties for the future development of CCUS projects in China’s electric power sectors can be summarized as the following: First of all, the higher cost of CCS projects has always been the primary concern for both policymakers and the industrial players. According to the interviewed experts, the installation of CCS technologies for a 600 MW pulverized coal-fired power plant could add to the overnight capital cost by around RMB 1,000 per kilowatt, though much lower than the average level seen in developed economies like the US, is still a large amount of extra investment equivalent to almost one-fourth of the total capital cost of the plant in China. Given the limited carbon utilization projects currently in operation and the limited government subsidies for de-carbonized electricity prices, further development of CCS technologies at power plants seems less likely as the operators do not have economic incentives under the current on-grid tariff mechanism. Secondly, compared to pre-combustion capture, the post-combustion capture of carbon dioxide is more complex and costly. Flue-gas carbon capture in the power sectors is not only technologically challenging but also uneconomic, due to the compromise of the overall thermal efficiency of the plant. By the estimation of the interviewed experts, if employed with CCS facilities, the efficiency of the power plants could be compromised by more than 16%, which is almost equivalent to the total thermal efficiency gains accrued by the power plants in the past ten years combined. With regard to the economics and the efficiency, it was the view of the interviewed experts that the power sector might not be the most ideal choice for installing CCS systems in China. On the contrary, the interviewed experts suggested that CCS projects in China be implemented first at industrial sectors with large point sources of concentrated and high-purity CO2, such as at ammonia and methanol plants, coal-to-liquids facilities and hydrogen production processes. Due to their large production capacity in China today, especially in terms of the large annual output of ammonia (as fertilizers) and the rapidly growing coal-based chemical production capacities, retrofitting these plants with CCS systems might be a more economic and energy efficient choice in mitigating GHG emissions. Besides the abovementioned issues, even when installed with the CCS facilities, how to process the captured CO2 is another thorny issue for the power plants to solve. Given the current best achievable technologies for flue gas de-carbonization, most of the captured carbon from China’s power plants is delivered to the beverage and food industries, which are small in quantity and whose long-term effects in reducing net CO2 emission are limited. Building up underground carbon sequestration sites may provide a long-term solution to reduce net CO2 emissions. However, the 54

Chapter 5: Development of Clean Coal-fired Electricity in China 第五章：中國清潔煤電發展概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

capacity of the only underground carbon sequestration project in China is miniscule in contrast to the nation’s surging CO2 emissions. In addition, this carbon sequestration project was sited at Shenhua Group’s coal-to-liquids plant in Ordos, Inner Mongolia, instead of a power plant. This in some ways reaffirms the interviewed experts’ thoughts that the coal-based chemical industry might be better suited for CCS than the power plants, mainly due its relative technological simplicity and less impact on efficiencies. It was also widely mentioned that given China’s competitive advantages in engineering capabilities and low labor costs, if granted with appropriate technology transfer and further policy and fiscal support, both the technical and financial barriers to CCS development in China will be overcome at a rapid pace.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Recognizing the economics of using coal as a feedstock to produce multiple chemical products such as liquids, syngas and olefins under a high oil price scenario, the energy industrial investors in China have shown extremely high interest in the development of coal-based chemical projects. Taking further into consideration the potential effects of coal-based chemical projects replacing imported crude or natural gas as the feedstock, the development of coal-based chemical industries was also identified by the Chinese government as an important means of strengthening national energy security. In addition, given the scale of coal-based chemical projects and their potential in improving overall coal conversion efficiency, the coal-based chemical industry is commonly regarded as a clean way of utilizing coal in China, particularly in comparison with the existing scattered and small-scale industrial coal usage. Driven by the cost advantage of coal-based chemical production over conventional oil-based routes and its benefits to the local economy, a new wave of expansion of coal-based chemical production in China is emerging at an impressive scale. If the currently approved and pre-approved projects are put into production, China will ascend to be the world’s single largest producer using coal to produce chemical products. However, the booming industry also triggered common criticism and suspicions about its long-term economics and environmental costs, especially in terms of water demand and carbon emissions, which can be devastating for the arid regions in western China, further accelerating climate change. In this section, besides introducing the current status and a near-future development plan for the coal-to-chemical industry in China, diverging views toward the economics and environmental performance of coal-to-chemical plants in China will be presented to provide a well-rounded analysis of this rapidly developing yet controversial industry in China. As most of the heated debates on China’s coal chemical industry are themed on three subsectors, namely coal-to-liquids (CTL), coal-to-synthetic-natural-gas (CSNG) and coal-to-olefins, this chapter will focus on these three most representative coal-based chemical production routes as primary targets of analysis. 56

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

1. Current development of coal-to-chemical projects in China and their near-future plan Encouraged by the downward trend of coal prices (particularly stranded coal mines in western China where there is little access to the major consumption market) and the rising domestic demand for liquid, gaseous and chemical products (e.g. olefin, ethylene, propylene and methanol and monoehylene glycol (MEG)), coal-based chemical production plants have been built and planned on a massive scale in China. Though the development of coal-based chemical projects in China was almost frozen after the issuance of the “Notice on Regulating the Orderly Development of Coal-based Chemical Industry in China” by the NDRC in 2011, another boom occurred in 2013. In 2013 alone, the NDRC pre-approved 5 CSNG projects with a total capacity of 22 bcm/y; 4 coalto-olefin projects (CTO) with total capacity of 2.4 mt/y; and one coal-to-liquids (CTL) facility with 1.5 mt/y capacity. In terms of total capacity, these projects were several times larger than the previously approved projects combined. According to market analysis, given the current trajectory, the total CTL capacity in China might reach 30 mt/y, total CSNG capacity may reach 50 bcm/y and CTO capacity is on track to exceed 20 mt/y by 2020, assuming that the currently approved projects will go on stream. The following sections will introduce the latest development status of these three major subsectors of the coal-based chemical industry in China, as well as details of their future development plan. Coal-to-synthetic-natural-gas (CSNG) Coal-to-synthetic-natural-gas or coal gasification is the process of producing synthetic natural gas from coal. Rather than burning coal directly, gasification (a thermo-chemical process) breaks down coal – or virtually any carbon-based feedstock – into its basic chemical constituents, initiating chemical reactions that typically produce a mixture of carbon monoxide, hydrogen and other gaseous compounds. Referring to the latest statistics and the information provided by the interlocutors, there are more than 20 coal-gasification projects being constructed, planned or under preliminary preparation in China. Between August 2013 and February 2014 alone, there were 11 additional coal gasification contracts signed between enterprises and government departments. By June 2014, the total operating coal gasification capacity in China had reached 2.705 billion cubic meters per year (bcm/y) with another 14.39 bcm/y capacity under construction. An additional capacity of 66.2 bcm/y has been preliminarily approved by the NDRC and the project is now undergoing preparatory work (Table 3.1). According to the National Energy Administration (NEA), the annual output of coal-based syngas is planned to reach 50 bcm/y by 2020 to supplement the soaring domestic gas demand. 57

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

Some optimistic estimates even projected that the total number of coal gasification projects could exceed 40 and the total annual output could exceed 200 bcm/y by 2020, if all the preliminarily approved projects went on stream. Table 3.1: Summary of the CSNG projects in China Source: Anychem China, “Analytical Report of the Coal Gasification Industry in China”, 2014. Company Location Capacity Status (bcm/y) Datang Heshigten Banner, Inner Mongolia 1.33 Operating (Phase One) Xinjiang Qinghua Yili, Xinjiang (Phase One) 1.37 Operating Datang Heshigten Banner, Inner Mongolia 2.67 Under construction (Phase Two) Xinjiang Qinghua Yili, Xinjiang (Phase Two) 4.12 Under construction Datang Fuxin, Liaoning (Phase One) 4 Under construction Huineng Ordos, Inner Mongolia 1.6 Under construction (Phase One) Yili Xintian Yining, Xinjiang (Phase One) 2 Under construction China Guodian Xinganmeng, Inner Mongolia 4 Preliminary work Xinmeng Ordos, Inner Mongolia 4 Preliminary work Beijing Enterprise Ordos, Inner Mongolia 4 Preliminary work Group CNOOC Ordos, Inner Mongolia 4 Preliminary work Hebei Construction Ordos, Inner Mongolia 4 Preliminary work and Investment Huaxing Ordos, Inner Mongolia 4 Preliminary work China Power Khorgos, Xinjiang 6 Preliminary work Investment Suxin Xinjiang 4 Preliminary work Xinjiang Guanghui Xinjiang 4 Preliminary work China Huaneng Xinjiang 4 Preliminary work Group SINOPEC Xinjiang 8 Preliminary work Henan Energy and Xinjiang 4 Preliminary work Chemical Industry Zhejiang Provincial Xinjiang 2 Preliminary work Energy Group Tianye Group Xinjiang 4 Preliminary work CNOOC Datong, Shanxi 4 Preliminary work Anhui Province Fengtai, Anhui 2.2 Preliminary work Energy Group 58

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Though the total planned/projected capacity of the coal gasification industry in China appears to be staggeringly high, exactly how many projects will be finally put into operation, however, still remains uncertain. According to the interviewed experts, the eventual commercial output of the CSNG industry in China will depend on multiple factors including investor enthusiasm, the commercial operation efficiency of the plant, and also the government’s attitude to the industry. Looking at some of the latest signals regarding the current pace of development of the industry, the near future trend of CSNG projects is deemed less promising. For example, some of the preapproved gasification projects have not been initiated at all after gaining government approval. According to the interviewed experts, they appear to be more of an attempt of the project proprietor to secure access to cheap coal mines under the guise of coal-based chemical development. Many more projects are still hesitant to commit further investment due to concerns over profitability and the technological risks associated with the capital intensive CSNG projects, especially in face of a potential gas supply increase in China and Asia due to the expanded LNG exporting capacity of Australia and North America. Worries about the technological maturity of the coal gasification projects were further intensified by a recent production accident in Datang Group’s project in Heshigten Banner in December 2013, less than a month after trial production commenced. The accident was said to be caused by the incompatibility between the coal feedstock and the imported Lurgi gasifier. As the first demonstration project for commercial syngas production in China, the production disruption at Datang’s project has cast shadows to the development of the industry as a whole . Coal-to-liquids industry in China The coal to liquid industry has experienced robust growth since the early 2000s. Since the commercial operation of the coal-to-liquids demonstration projects, the total production capacity of coal-to-liquids projects combined had reached 1.58 mt/y by 2013. Leading projects include the Shenhua Group’s 1.08 mt/y direct coal liquefaction (DCL) project, Yitai Group’s 160,000 t/ y indirect coal liquefaction (ICL) project, Shenhua Groups’s 180,000 t/y ICL project and Lu’an Group’s 160,000 ICL project in Shanxi province. Four more coal-to-liquids projects are currently under construction with a total capacity of 8.8 mt/y, including Shenhua Ningmei’s 4 mt/y project in Ningxia province, Yitai Group’s 2 mt/y project in Inner Mongolia, Yankuang Group’s 1 mt/ y project in Shannxi Province and Luan Group’s 1.8 mt/y project in Changzhi, Shanxi (Table 3.2). According to the estimation of the National Energy Administration, given that more coal-toliquids projects might be approved, the total output of CTL projects may likely reach 10.8 mt/y by 59

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

2017 and further to 30 mt/y by 2020, overtaking South Africa as the world’s largest coal-based oil producer. Table 3.2: A summary of the coal-to-liquids projects in China Source: Anychem China, “Analytical Report of the Coal-to-liquids Industry in China”, 2014 Company Location Capacity Status Shenhua Ordos, Inner Mongolia 1.08 mt/y In operation Lu’an Tongzhi, Shanxi 160,000t/y In operation Yitai Ordos, Inner Mongolia 160,000 t/y In operation Shenhua Ningmei Ningdong, Ningxia 4 mt/y Under construction Luan Changzhi, Shanxi 1.8 mt/y Under construction Yankuang Yulin, Shann’xi 1 mt/y Under construction Yitai Zhungeer Banner, Inner Mongolia 2 mt/y Under construction Yufu Energy Bijie, Guizhou 6 mt/y Approved Yitai & Huadian Urumqi, Xinjiang 2 mt/y Approved Yitai Yili, Xinjiang 1 mt/y Approved While recognizing the potential benefits of CTL projects in alleviating China’s reliance on foreign crude imports, the government has also been cautious about the environmental impacts of this extremely coal-intensive industry. To prevent overheated investment in the CTL industry, the NDRC indicated in its latest “Notice on Regulating the Scientific and Orderly Development of Coal-to-oil and Coal-to-gas Industries” that the CTL projects in China must comply with a strict environmental standard and must be built in accordance to the available water resources. In addition, CTO projects with less than 1 mt/y capacity will absolutely not be allowed. Coal-to-olefins (CTO) in China Driven by China’s double-digit demand growth for olefins and, in particular, propylene to support its economic boom, more than three dozen coal-to-olefins and methanol-to-olefins projects in China are likely to come on stream by 2020 and add more than 10 million metric tons of ethylene production and 14 million tons of polyethylene production to the Chinese market. According to the contemplation of the interviewed experts, given the scale of the existing and future projects, the total coal-to-olefin production capacity in China is likely to climb to 20 mt/y by 2020, if the approved projects are put into operation The current production capacity of CTO projects in China should have exceeded 1.5 million t/y after the completion of the three demonstration projects of Shenhua Group’s 600,000 t/y project 60

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

in Baotou, Shenhua Ningmei’s 500,000 t/y project in Ningxia, and Datang Group’s 460,000 t/y project in Duolun, Inner mongolia. By 2019, if half of the planned production capacities can be put into commercial operation, the total CTO/MTO production capacity in China will likely reach 28 million tons per year and lift the production capacity of PE and PP to 9.2 mt/y and 13 mt/y respectively. Details of the CTO projects in operation and under construction in China can be found in table 3.3. Table 3.3: Coal-to-olefin projects in China Source: Anychem China, “Analytical Report of the Coal-to-olefin Industry in China”, 2014 Company Location Capacity Status Shenhua Baotou, Inner Mongolia 600,000 t/y In operation Shenhua Ningmei Ningxia 500,000 t/y In operation Datang Group Duolun, Inner Mongolia 460,000 t/y In operation Zhongtian Hechuang Ordos, Inner Mongolia 1,300,000 t/y Under Construction China Coal Yili, Xinjiang 600,000 t/y Under Construction Huayi Chemical Wuwei, Anhui 500,000 t/y Under Construction Huijin Pingliang, Gansu 700,000 t/y Under Construction Qinghai Mining Co. Qinghai 1,200,000 t/y Under Construction Qinghai Yanhu Qinghai 1,000,000 t/y Under Construction Shenhua & Dows Yulin, Shannxi 1,200,000 t/y Under Construction Tongmei Group Datong, Shanxi 600,000 t/y Under Construction Shanxi Coking Coal Linfen, Shanxi 600,000 t/y Under Construction Group Sinopec Bijie, Guizhou 600,000 t/y Under Construction Yankuang Ordos, Inner Mongolia 600,000 t/y Under Construction Zhongan United Coal Huainan, Anhui 700,000 t/y Under Construction Chemical Using coal as the feedstock, CTO projects have been widely considered as a potential alternative to reducing the country’s reliance on naphtha-based chemical production and thus reduce the overall demand for crude oil. Identified in the “12th Five-year Plan for the Olefin Industry Development in China”, coal-based olefins were identified as an important source to diversify olefin production in China and essential in meeting the projected demand of 38 million tons of ethylene and 28 million tons of propylene by 2015 (Table 3.4). However, recognizing the environmental risks associated with CTO projects in China, the expanded shale-based production capacity in North America that is likely to go on stream between 2017 and 2020, and considering the cost advantage of the

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

forthcoming Middle East olefin outputs, the interviewed experts believed that the current round of CTO capacity expansion in China, if unrestricted, could potentially become another industrial sector suffering from excessive supply. Table 3.4: Projection of ethylene and propylene production and consumption in China in 2015 (million tons) Source: Ministry of Industry and Information Technology, “The Twelfth Five-year Plan for the

Ethylene Propylene

Olefin Industry Development in China”, 2012 Production Consumption 24.3 38 21.6 28

Self-sufficiency rate 64% 77%

2. Economics and controversy regarding coal-chemical projects in China China is currently in the midst of a surge in coal-to-chemical project investment. Although only a handful of projects are currently in production and the economic prospect of some operational plants still remains gloomy, many leading energy groups and institutional investors are still committing high investments in this emerging industry, despite its high capital investment cost, long payback period and high technological risks involved. Synthesizing the views and data collected from the interviews, this section will attempt to analyze the economic performance of the coal-based chemical projects in China as well as some controversial aspects that may hamper its further development. Economics of the coal-to-chemical industry in China According to the views collected through the interviews, the economics of coal-to-chemical projects vary significantly from one project to another, depending largely on the technological routes adopted and the management experience of the enterprise. The major advantage of coalbased chemical industries in China, particularly for the stranded coal mines in western China, currently lies in its low fuel cost, which is much lower than oil and gas of an equivalent heating value. While the wholesale price of coal in the coastal markets of China stays at around RMB 500 per ton, the price could be as low as RMB 150 per ton in western regions such as Xinjiang or Inner Mongolia. Driven by the cost advantage of coal over oil and gaseous fuels and underpinned by the sales revenue from the selling of accompanied chemical products, coal-based chemical projects in China have demonstrated considerable profitability under a high oil price scenario over the past

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

few years. However, when the global oil price began to show a downward trend which recently fell to about USD 70 per barrel, whether coal-based chemical projects can still remain profitable against conventional oil-derived products is questionable. In the following parts, a brief analysis of the economics of the three major subsectors of the coal-based chemical industry in China will be conducted.

Coal-to-liquids The coal-to-liquids industry was identified by the interviewed experts as the most profitable coal-

based chemical projects in China. Under a high oil price scenario, coal-derived liquids could maintain a significant profit margin against competing oil-derived products. Assuming that every 5.5 tons of coal could generate 1 ton of oil in average, as suggested by the interviewed experts, the fuel cost per ton of coal-based liquid production could be as low as RMB 850, provided that the cost of coal can be kept at RMB 150 per ton (which has been suggested by various interviewed experts as possible in the western provinces). Coupled with an average operating cost of RMB 2,000 per ton, the lowest possible production cost for every ton of coal-based liquid produced in China could be as low as RMB 2850 (or about USD 64 per barrel), which is significantly lower than the average Brent crude price of USD 97 per barrel in September 2014. It was believed that, based on the current average conversion efficiency, even when coal costs rise to RMB 400 per ton, coal-to-liquids projects should still be able to profit if the crude oil price remains flat at USD 100 per barrel (Figure 3.1). If the coal-toliquid conversion efficiency could be further improved through technological advancement, the profit margin of coal-to-liquids projects could be expanded further. Some interviewed experts mentioned that Shenhua Group’s coal-to-liquids business has already been able to keep its liquid costs as low as USD 60 per barrel equivalent, due to its extremely low cost of coal sources, its optimized operating efficiency and plant management experience.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Figure 3.1: Estimation of coal liquefaction cost3 in China vs Brent crude price (USD per barrel) Source: Data collected from interviews and EIA

Coal-to-olefins Taking advantage of the low fuel costs of coal, coal-to-olefins projects in China are especially

competitive against conventional naphtha-based olefin production in the eastern regions. But their economics, however, are not competitive relative to the growing North American and Middle Eastern natural gas-to-olefins industry. It was estimated that from a cost perspective, a fast-growing China CTO industry might displace its own naphtha to olefins industry, but then be displaced itself by a lower-cost North American and Middle Eastern natural gas-to-olefins industry. Assuming an average conversion efficiency of 4.2 tons coal to 1 ton of olefins and 3.47 tons naphtha to 1 ton of olefins, the cost advantage of coal-based olefin production against the naphthabased route is prominent. At USD 34/ton of coal as feedstock, the total production cost of coalto-olefins in China was estimated to be USD 640/ton. In comparison, the total cost of olefin production based on the naphtha route was estimated at USD 1185 /ton, almost twice as high as that of the coal-based route. But this profit margin will soon diminish in face of the competition from plants using North American natural gas liquids as feedstock, in which case, total costs could be as low as USD 338/ton mainly thanks to the much simpler gas-to-olefin production process. (Table 3.5) 3

At a general conversion efficiency of 5.5 t of coal to 1 ton of liquid

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Table 3.5: Comparison of Olefin Production by Sources in China Source: Duetsche Bank, “China’s Coal to Olefins Industry”, July, 2014 Feedstock cost Total cost USD 640/ton Inner Mongolia Self-owned coal mines USD 144/ton USD 1545 Eastern China imported methanol USD 1240/ton USD 1185/ton Eastern China naphtha USD 936/ton USD 338/ton North America natural gas liquids USD 227/ton Given the current composition of the olefins market in China, most of the interviewed experts agreed that the CTO projects in China are still profitable. For example, the Shenhua Group’s 600,000 t/y CTO project in Baotou recorded an RMB 986 million net profit in 2013 and was estimated to be able to expand its net profit further in 2014, due largely to the rising polyethylene (PE) and propylene (PP) prices in China and lower operating costs thanks to technical advancement and improved internal management. But given the long life span of CTO projects, their future profitability is not assured, especially under a low crude price scenario. In addition, their competitiveness over lowcost olefins projects in North America and the Middle East that utilize cheaper gaseous sources will also be doubtful. Figure 3.2: Olefin Cost Curve, 2013 Source: Duetsche Bank, “China’s Coal to Olefins Industry”, July, 2014

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

Coal-to-synthetic-natural-gas (CSNG) Compared to the other two major coal-based chemical production routes, the CSNG route was

deemed as the least attractive option by the interviewed experts. Though under ideal conditions (at designed production load capacity) the average production cost of syngas from coal could stay in the range of RMB 1.6-1.8/cm, which is RMB 0.7-0.8 lower than the current average retail gas price in China, high environmental costs associated with water consumption, wastewater and other pollutant discharges, however, will likely compromise the cost advantage derived from a cheap feedstock. If the costs of delayed commercial operation, depreciation costs, and the costs of longdistance pipeline transmission are internalized, it is estimated that the final average cost of coalbased syngas could reach as high as RMB 2.4-2.6/cm (or USD 14-15/MMBtu), even higher than the gas imported from Central Asia (which averaged at RMB 2.1/cm in 2013). To some extent, this price may be still competitive against the imported LNG if the tight supply situation in Asia remains unchanged. Its environmental costs and the huge water demand, however, will impose significant challenges to China’s western regions where water is scarce and ecological systems are fragile. Table 3.6: Estimated coal-based syngas costs vs imported gas Source: Data from the CNPC Economic and Technology Research Institute, the General Administration of Customs of China and Greenpeace China. Estimated average production cost of coal-based RMB 1.6-1.8 per cubic meter syngas (exclusive of external costs) Estimated final cost of coal-based syngas RMB 2.4-2.6 per cubic meter Imported pipeline gas price (yearly average 2013) RMB 2.1 per cubic meter LNG import price (half year average, 2014) RMB 2.8 per cubic meter (USD 637 per ton) In addition, the profitability of the CSNG projects depends heavily on the stability of the gasification systems. However, from the early operation experiences of the first CSNG demonstration project developed by Datang group in Inner Mongolia, it seems that the technological feasibility of the gasification systems and their adaptability to the local coal types still remain untested and it might take more time than expected to reach their designed production capacity. This will add additional pressure to the control of production. Views from the interviewed experts also pointed out that the technological barriers to entry for coal-gasification projects are high enough to deter potential market players to enter this field. Companies with less technological background and insufficient operating experiences with gasification will soon find it difficult to reign in production 66

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

costs. This was echoed by the president of the Datang group who openly admitted in a recent conference that, “though promising results could be derived from laboratory experiments in coal gasification, we still encountered numerous problems in scaled-up commercial application. A lot more work will need to be done with patience, through practical tests.” Besides, given the potential expansion of domestic gas production that will likely reach 185 billion cubic meters, and given the diversification of foreign gas import sources, whether coalbased syngas projects can compete effectively in a less-tightened gas supply market in China remains questionable. Coupled with the pressure from increased exports from North America and Australia, where gas supply capacity to Asia might come on stream by 2018, whether the gas retail price by then will be in favor of the syngas producers is another major concern. Considering the average life span of a CSNG project of usually more than 40 years, how to guarantee long-term profitability for these plants in a transitioning gas market in China should be carefully studied. Controversies around the development of coal-based chemical projects Despite short-term economic gains in coal-based chemical projects, the long-term sustainability of these projects remains uncertain, especially in light of the falling global crude prices and the potential gas supply increase in Asia. The following factors were identified by the interviewed experts as most critical to the future development of the coal-based chemical projects in China.

An uncertain oil price and the impact on the coal-chemical industry Though some coal-to-chemical projects in China have been proved economically viable in

short-term operation, whether the long term market supply and demand balance will be in favor of coal-based chemical industries, however, remains uncertain, especially given the expanded exports of gas and gas-based chemical products from the Middle East and the likely increase in North American exports underpinned by the shale boom. In addition, as oil is in the midst of one of its steepest selloffs since the financial crisis, with Brent crude prices falling 18 percent since midJune to USD 70 per barrel in November 2014, whether coal-based chemical projects can remain competitive over conventional oil based products in the longer-term remains skeptical. Taking further into account the shale boom in North America and the expanded LNG supply capacity in Australia, how the CSNG projects in China can remain profitable remains to be seen. Furthermore, the relatively high value-added tax and consumption tax for coal-derived liquids and chemical products in China are imposing further risks to the profitability of coal-based chemical projects. For example, the existing value-added tax and consumption tax for synthetic oil products in China 67

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

could easily account for over 30% of their production cost, according to the interviewed experts.

Water consumption Water requirement of coal-based chemical projects in China was cited as another significant

challenge, particularly for the arid and ecologically fragile western regions. Take the coal-to-olefins projects for example, they consume in average 15-20 tons of water for every ton of olefin output, which is more than ten times greater than the average 0.8-2.1 tons of water consumption for every ton of oil-based olefin production. For coal-to-synthetic-natural (CSNG) gas projects, latest data indicated that every one thousand cubic meter of gas output normally requires about 7 tons of water consumption. For indirect coal liquefaction project, it averagely consumes 11-13 tons of water for every ton of liquid output. Data from the interviewed experts for this report indicate that most of the water is consumed to generate electricity and steam at a typical coal chemical plant. Figure 3.3 shows an example of a 8 bcm/y CSNG plant. The plant consumes about 5,500 tons of water per hour (and requiring 26,000 tons per hour of cooling water), about 75% of which is used as makeup for cooling water and boiler feedwater (Figure 3.3). Figure 3.3: Breakdown of the water consumption of a typical 8 bcm/y CSNG plant Source: Data collected from the interviews

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Besides the huge amount of water withdrawal needed, waste water treatment process could also impose great challenges to the financial viability and environmental performance of the coalchemical plants. As told by the interviewed experts, many Chinese firms have been committing substantial investments in water-treatment processes to recover the effluents. But their costs associated with water treatment are still high and can greatly comprise the finance of the overall plant. Referring to the data provided from existing coal gasification plants, the consumption of every kilogram of coal feedstock is likely to generate about 0.8 liters of waste water in average. With an estimated waste water treatment cost of RMB 50 per ton, the water treatment cost alone has constituted a significant portion of the total production cost of coal-based syngas. However, some interviewed experts held a different perspective regarding the water consumption and treatment issues of the coal chemical projects. As they mentioned, coal-based chemical plants were in no way more intensive in water consumption than the conventional coal-fired power sector. Currently, a coal-to-methanol plant of 600,000 t/y capacity in China adopting no water conservation measures (such as the air cooling systems), requires about 7 million tons of fresh water withdrawal per year, which might seem like a huge number on its own, but is actually only a fraction of the average of 25 to 30 million tons per annum water withdrawal of a 600MW coal-fired power plant. Given that many of the leading coal-to-chemical project operators in China are already proactively adopting and exploring water conservation measures to comply with tightening environmental standards, it is believed that water consumption and treatment of the coal-based chemical projects should not be a major barrier for the further development of the industry. For example, the Yi’tai Group, an industry leader in coal-to-liquid projects in China, is currently making efforts to keep water withdrawal per ton of liquid production under 6 tons, and is exploring ways to further reduce the number to 4 tons in the future. The energy authority has also set an industrial standard to regulate the water withdrawal of the coal chemical projects as to minimize their impacts to the water resources. According to the “Energy Efficiency and Resource Consumption Indicators for Deep Coal Processing Demonstration Projects in China during the “12th Five-Year Plan” Period”, by 2015, the average water withdrawal for coal liquefaction, CSNG and coal-to-olefins demonstration projects are expected to be kept below 2.75 tons, 3 tons and 4 tons respectively per ton of standard coal equivalent consumed as the basic requirement and below 2 tons, 2.5 tons and 3 tons per ton of standard coal equivalent consumed as the optimal level (Table 3.7).

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

第二部分：CEFC中國清潔煤炭利用調查報告

Table 3.7: Energy efficiency and resource consumption indicators for deep coal processing demonstration projects in China during the “12th Five-Year Plan” period Source: the National Energy Administration and the National Development and Energy Efficiency Project

Basic Optimal Requirement Level

Reform Commission Standard Coal Equivalent (ton)

Basic Optimal Requirement Level

Fresh Water Consumption

Basic Optimal Requirement Level

Indirect >= 42% coal liquefaction

>= 47%

<=3.6 ton/ton <= 3.4 ton/ of fuel ton of fuel

<= 2.75 ton/ton of standard coal

<= 2 ton/ton of standard coal

Coal-tosyngas

>= 56%

>= 60%

Coal-toolefin

>= 40%

>= 44%

<=2.3 <=2.0 3 ton/1,000 m ton/1,000 natural gas m3 natural gas <= 5.3 ton/ <= 5.0 ton/ ton of olefin ton of olefin

<= 3.0 ton/ton of standard coal <= 4 ton/ton of standard coal

<= 2.5 ton/ton of standard coal <= 3 ton/ton of standard coal

In addition, some interviewed experts indicated that the environmental costs of coal-based chemical projects should be better evaluated under a more macro perspective, particularly against the backdrop of China’s increasing reliance on fuel imports from overseas markets. Considering the limited domestic supply capacity of oil, gas and chemical products (e.g. ethylene and propylene), an important benefit of coal-based chemical industry development will be to complement the tight domestic market supply and ameliorate the dependence on foreign oil and gas imports for chemical productions. However, it was agreed that constrained by factors such as the extremely high capital investment threshold, the environmental impacts and the technological complexity, only a few coalbased chemical projects can be afforded by China’s environmental carrying capacity, particularly in western China. This may also partly explain why the National Energy Administration has banned any new construction of coal gasification projects with a capacity smaller than 2 billion cubic meters per year or coal-to-liquids projects with capacities smaller than 1 million tons per year.

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Carbon emission Carbon capture from the gasification process is a mature technology which has been

commercially utilized for decades in chemical plants, according to the interviewed experts. Compared to the post-combustion carbon capture technologies usually deployed at conventional coal-fired power plants, the coal-gasification process is more suitable and economically viable for carbon capture and storage (CCS) systems in the pre-combustion process. Compared to the normal post-combustion carbon capture technologies designed for the coalfired power plants, the pre-combustion route in the coal-to-chemicals projects was regarded as a more energy efficient approach to mitigate carbon emissions in China. It begins with a water shift reaction through which carbon monoxide and water react to form CO2 and H2. The shifted synthesis gas stream will be rich in CO2 at high purity and higher pressure, which allows for easier removal before the H2 is combusted. According to the interviewed experts, through pre-combustion capture, plants can reduce their carbon dioxide emissions by about 90% with affordable investment costs. The first pre-combustion CCS system in China was Shenhua Group’s 100,000 tons/y CCS demonstration project as part of its direct coal liquefaction plant located in Ordos, Inner Mongolia. Through desulfurization, de-oiling, freezing, liquefaction and distillation, the system compresses and channels the captured CO2 to a deep saline aquifer storage site located 11 km away from the liquefaction plant. As of October 2013, this system has successfully captured and injected 154,000 tons of CO2 since the beginning of 2012. According to publicly released data, the economic viability of the Shenhua CCS project in Ordos has also been proved sound. The full cost of capturing and storing each ton of CO2 was reported to be RMB 273/ton of CO2 (USD 45/t), inclusive of the construction cost of RMB 88/ ton (USD 14/ton) and the operating cost of RMB 185/ton (USD 30/ton). This is close to the U.S. Department of Energy (DOE)’s plan of keeping the captured cost of CO2 less than $40/tonne by adopting 2nd generation technologies within the 2020-2025 timeframe.

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 6: The Booming Coal-based Chemical Industry in China 第六章：迅速發展的中國煤化工工業概況及分析

The Shenhua CCS project storage site Source: Shenhua Group via cornerstonemag.net Summary of the coal-based chemical industry development in China: Recognizing coal-based chemical projects’ massive requirement for capital and its dramatic impact on the environment, both the Chinese government and the industrial players have begun to adopt a more cautious attitude to the prospect of this currently booming yet controversial industry, especially in light of an emerging downward trend in global oil prices and the increased supply of gas-based chemicals in Asia, underpinned by expanded gas-based output from the Middle East and North America. However, considering its potential in reducing the nation’s reliance on the import of oil and gas, the significance of coal-based chemical development in China should not be addressed only through an economic perspective, as suggested by multiple interviewed experts. Using domestically abundant coal resources to replace imported crude and naphtha as feedstock can effectively counterbalance supply security issues with oil imports, even though it will lead to a higher production cost and impose threat to the environment. Quoting an internal comment from the National Energy Administration, the coal-based chemical industry in China cannot develop excessively, but cannot be halted either. Extending the usage of coal from purely a fuel source to an important chemical feedstock should mark an important step in China’s aspirations of efficient and clean utilization of coal, which has been recently recognized as one of the top strategic priorities of the country’s energy reform for the near future.

Chapter 7: Summary of Key Findings 第七章：小結

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 7: Summary of Key Findings 第七章：小結

1. Cleaner utilization of coal in China is usually comprehended in a much broader sense that not only covers important technological aspects like carbon mitigation, but also includes a range of other technological issues including power plant efficiency improvement, coalbased chemical conversions and coal preparation. However, under the current environmental policies, wherein the external costs of energy consumption have hardly been monetized, different opinions co-exist in terms of the effectiveness and economic feasibility of different technological approaches of cleaner utilization of coal in China. 2. Divergent views exist regarding the peak coal timing and level. The central government has set a target to control annual coal consumption at around 4.2 billion metric tons by 2020. Yet various interviewed experts gave different projections of the timing and the physical volume of the peak coal demand, reflecting different views of the economic growth, energy demand growth, and the supply mix. Their projections range from coal peaking at 4.0 billion metric tons by as early as 2016 to coal peaking at 4.55 billion tons no earlier than 2020. 3. The coal-fired power sector should not be the primary sector to blame for the pervasive air pollution. Although most of the coal consumption in China comes from the electric power sector, their environmental performance, however, is better than that of the industrial coal boilers, thanks to the increasing adoption of pollution control technologies in the power sector. Latest data has shown that the average emissions of coal-fired power plants in China are 1.9 g/kWh for SO2, 2.6 g/kWh for NOX, and 0.4 g/kWh for fine particulates, which is impressive for a developing economy. 4. The overall efficiency of the coal-fired power plants in China is highly competitive, even compared with those in many developed economies, thanks to the increased deployment of modern coal-fired power plants. By the end of 2013, the net coal consumption per unit of electric power output in China was 321 grams of standard coal equivalent per kilowatt hour (gce/kWh) in low heating value (LHV), which was close to the corresponding 306 gce/kWh in Japan and well below the 359 gce/kWh level in the US in 2012. The Chinese government has set a target for the average net coal consumption of coal plants in China to be lowered further 73

Section Two: CEFC Survey on Cleaner Utilization of Coal in China 第二部分：CEFC中國清潔煤炭利用調查報告

Chapter 7: Summary of Key Findings 第七章：小結

to 310 gce/kWh by 2020. 5. Considering the high-efficiency and the economic viability of supercritical (SC) and ultrasupercritical (USC) units, their deployment in China is expected to continue to increase in the near future. China is currently running the world’s largest fleet of SC and USC units and is expected to deploy more advanced power units to improve the overall efficiency and reduce the net coal consumption of its coal-reliant utility power sectors. In 2010, the total installed capacity of SC and USC units in China exceeded 120 GW and the number of 1000 MW USC units in operation alone had reached 62 by the end of 2013. 6. The integrated gasification combined cycle (IGCC) technology might be able to offer much better environmental performance than conventional coal power plants, but its high operating and maintenance costs determined that a wide scale commercial application of the technology is less likely in China, at least for the near future. According to the latest data, the average cost of electricity generation of an IGCC unit in China is as high as RMB 0.8-0.9 per kilowatt hour, which is about five times higher than the average cost of a pulverized coal-fired power plant. Even when provided with government subsidies, the IGCC plant will still be running at a RMB 0.3 deficit for every kWh of electricity it generates. 7. Coal-based chemical projects are developing at full speed in China and are regarded as an important aspect of clean and efficient utilization of coal. But their economic viability will hinge on multiple factors including technological matureness of the coal-conversion system (in most cases referring to the gasification systems), feedstock prices, and the operating and managerial experiences of the plant proprietor. Prices of alternative fuels and feedstock such as oil and natural gas are also important factors that will influence the market performance of coal-based chemical projects in China. 8. Among all the sub-sectors of the coal-based chemical industry, coal-to-synthetic-naturalgas (CSNG) production was regarded as the most controversial and least profitable one. Due to the gas price level not high enough to justify the capital and operating cost and the high delivery cost associated with the long-distance gas transmission, the coal-to-syngas projects were commonly regarded as the least profitable coal-based chemical projects in China by the interviewed experts. Although the National Energy Administration (NEA) envisioned a 50 bcm/y production capacity of coal-based syngas to be completed by 2020, whether the real production capacity will reach the designated number remains uncertain. 9. Coal-to-liquids (CTL) was identified by the interviewed experts as the most profitable coal-based chemical projects in China in a high oil price scenario, considering its 74

Chapter 7: Summary of Key Findings 第七章：小結

Section Two: CEFC Survey on Cleaner Utilization of Coal in China

第二部分：CEFC中國清潔煤炭利用調查報告

relatively lower production cost and its value in providing alternative supply sources to foreign imported oil. According to the data collected from the interviews, the lowest possible production cost for every ton of coal-based liquid production in China could be as low as RMB 2,850 (or about USD 64 per barrel), which is very competitive under a high oil price scenario. Through technological advancement and efficiency improvements, it was believed that the profit margin of the coal-derived liquid products could even be expanded further given persistent high oil prices. 10. For the coal-to-olefin (CTO) projects, the low fuel costs of the stranded coal mines in Western China might be able to secure its cost advantage over the conventional naphthabased olefin production routes, but how long the cheap feedstock factor can be sustianed is uncertain. In addition, the fast-growing CTO industry in China might displace its own naphtha to olefins industry for the time being. However, it might also be displaced by the expanded olefin production capacity in North America and the Middle East underpinned by cheap natural gas feedstock. 11. Aside from the economic factors, water resource availability is another key issue for modern coal chemical projects in China. As the coal chemical projects are usually gargantuan water consumers, how to ensure sufficient water supply for the coal-based chemical projects and balance their water requirement with competing water consumers should be carefully addressed. In addition, technological matureness of the processing systems and the managerial experiences of the operator will also play a critical part in determining the plants’ efficiency in water use and waste water treatment. 12. Carbon capture and storage (CCS) systems have been operational in several demonstration projects in China. Three pilot CCUS projects have been completed and put into operation in the electric power industry in China and two advanced carbon capture projects are under construction. Three more projects have been planned but are still pending final government approval. But considering their high operating and investment costs, whether CCS projects could be commercially viable in China will largely hinge on the progress of policy instruments such as an effective carbon pricing system and a mature carbon trading market.

Section Three: Perspectives on Cleaner Utilization of Coal in China 第三部分：中國專家觀點文章

Section Three:

Perspectives on Cleaner Utilization of Coal in China 第三部分：

中國專家觀點文章

Chapter 1: An Overview of Cleaner Utilization of Coal in China 第一章：中國清潔煤炭利用宏觀展望

Section Three: Perspectives on Cleaner Utilization of Coal in China 第三部分：中國專家觀點文章

Chapter 1: An Overview of Cleaner Utilization of Coal in China 第一章：中國清潔煤炭利用宏觀展望 ZENG Xingqiu (曾興球) 曾興球教授現任中國投資協會能源研究中心副理事長 Professor Zeng Xingqiu is the vice chairman of the Energy Research Center of China Investment Association and the former director general of the International Cooperation Department of China National Petroleum Corporation(CNPC). He was also the chief geologist of China Sinochem Group Co., Ltd (Sinochem Group). He has led multiple negotiations with major foreign oil companies on their participation in China’s on-shore and offshore oil development projects and personally schemed three rounds of international bidding work for China’s onshore oil-gas external cooperation. Graduating from the Beijing Institute of Petroleum in 1966, Professor Zeng is an honorable energy economics expert in China.

Coal is the predominant source in China’s energy mix. This fundamental coal-centered framework is unlikely to be reverted in the next twenty to thirty years. In 2013, coal consumption accounted for 67.5% of China’s total primary energy consumption. Although its share has kept declining in recent years to a new low of 62% in 2014, it still constitutes the mainstay of China’s total energy consumption. By the estimation of authoritative research institutes in China, by 2035, the share of coal in China’s total energy consumption will not likely drop below 45% and is estimated to hover around 48%. Even by 2050, the share of coal consumption in China will still likely stay above 35%. China’s guiding principle for energy development strategy has long been touted as “coal-centered and energy conservation first”. In recent years, this has been modified to “energy conservation first and based on domestic supply”. But given the dominance of coal in domestic energy production, 77

Section Three: Perspectives on Cleaner Utilization of Coal in China 第三部分：中國專家觀點文章

Chapter 1: An Overview of Cleaner Utilization of Coal in China 第一章：中國清潔煤炭利用宏觀展望

“based on domestic supply” is basically equivalent to “coal-centered”, as current domestic oil and gas productions struggles to meet the rising market demands, let alone substitute oil and gas for coal consumption. Recognizing the importance of coal for China’s energy development, an impending issue, thus, can hardly be circumvented: the “cleaner utilization of coal”. This is an important and interesting topic that requires cross-boundary studies from technological, economic and policy perspectives. Although I am not an expert directly involved in this particular field of study, I still would like to share some of my preliminary thoughts and opinions to contribute to the heated discussions regarding realizing cleaner utilization of coal in China: First of all, it is my view that the direct conversion of coal to electricity should be prioritized so that long-distance electricity transmission can effectively displace the requirement for long-haul coal transportation and minimize the environmental impacts associated. In 2014, China produced 3.8 billion metric tons of coal, of which 2.29 billion tons were transported by the country’s railway system. Railroad transportation of coal not only imposed additional pressures to the already constrained railway freight transportation capacity in China, but also led to the increase of environmental degradation and end-use consumption costs. Such a situation can be attributed to the mismatch between the distribution of the industries and energy reserves. The logistics chain between the power generating units and the coal mines should also be shortened and optimized and more power plants at pitheads should be constructed. Secondly, higher thermal efficiencies and lower carbon emissions of cleaner coal utilization methods can be achieved through technological breakthroughs. Advanced experiences from Western countries in promoting thermal efficiencies should also be learned from. For example, while the bulk of coal combustion in China is still based on granular combustion technologies, western counterparts have already adopted efficient pulverized coal combustion technologies. If the technological know-how of pulverized coal combustion could be fully mastered by the Chinese industries, pollution associated with straw burning may also be effectively mitigated. In addition, large coal production bases should also be established to agglomerate coal production and reduce the total number of coal mines in China. Currently, the total production capacity for coal in China has exceeded 4 billion metric tons per year. Thirdly, the development of modern coal-based chemical projects in China should be strictly controlled. In 2014, the development of coal-based chemical projects in China has already slowed down. Projects using coal as the raw material for producing chemical products such as liquids, syngas, olefins, ethanol, and dimethyl ether (DME) have already been removed from the list 78

Chapter 1: An Overview of Cleaner Utilization of Coal in China 第一章：中國清潔煤炭利用宏觀展望

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of encouraged industries. The technological pathways of the above mentioned technologies are extensively long and have high energy losses, which could also be detrimental to the environment. Coal-based chemical projects such as coal-to-liquids (CTL) and coal-to-syngas (CSNG) are also large water and electricity consumers. Coal-based chemical projects in China consume about 6 tons of fresh water on average for the treatment of every ton of standard coal equivalent input. This is a critical challenge for water scarce regions. Compared to conventional coal-fired electricity, these coal-based chemical conversion processes are not only economically costly but also technologically complex. Even after the conversion process, the coal-derived liquids and syngas will have to go through a second phase of combustion. It is my view that except for a few “must-do” projects, the overall coal-based chemical industry should not be further expanded. Judging by the development of international markets, a country’s conversion ratio for coal to electricity largely represents the country’s level of industrialization. For example, coal still accounted for 20.1% of total primary energy demand in the United States in 2014 and the bulk of it went to electricity generation. Fourthly, reducing the scattered sales and consumption of coal is another important step in realizing cleaner utilization of coal in China. A large portion of air pollution matters is attributed to scattered coal combustion. The government should leverage policy measures to strengthen the regulation of scattered coal combustion, particularly in limiting the scale of combustion and setting the prerequisites for scattered coal combustion. For the economically developed eastern provinces, the utilization of natural gas as a substitute for coal and the development of gas-fired electricity and LNG utilization should also be encouraged. Development of infrastructure such as gas pipelines, a distributed grid network and LNG stations should also be accelerated to create an amicable environment for the development of clean coal technologies. The development of storage facilities for scattered coal in China is equally important. Many coal mines in the US transport coal in packages that can effectively insulate coal from interaction with air during transportation to the power plants. Many coal mines in the US also make use of a thin coating membrane that is resistant to force 7-8 winds. These technologies will be helpful for environmental protection. Fifthly, the “energy revolution” proclaimed by President Xi Jinping must be firmly implemented. Presiding over a meeting of the Central Leading Group on Financial and Economic Affairs in June 2014, President Xi Jinping stressed efforts to revolutionize the sectors of energy consumption, energy supply, energy technology and energy administration in China. These four aspects are all interconnected. The essence of energy revolution is technology revolution; the essence of technology revolution is mechanism revolution. The revolution of mechanism should be based on a revolution of ideals. Given the current international environment, low-carbon development has 79

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Chapter 1: An Overview of Cleaner Utilization of Coal in China 第一章：中國清潔煤炭利用宏觀展望

become a common consensus. China and the US signed the joint announcement on climate change in November 2014, embodying the commitment of the two nations in reducing carbon emissions is support of this year’s climate negotiation in Paris. If China is to make a difference in global energy governance, it must adhere to President Xi’s instructions to revolutionize the energy sectors and shift to sustainable and low-carbon energy development. The above are some of my preliminary thoughts on realizing cleaner utilization of coal in China.

Chapter 2: The Trend of Clean Coal Utilization in China:Integrated Development of Coal, Electricity, Liquids, and Chemical Products 第二章：中國清潔煤炭利用趨勢：展望煤電油化一體化發展

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Chapter 2: The Trend of Clean Coal Utilization in China: Integrated Development of Coal, Electricity, Liquids, and Chemical Products 第二章：中國清潔煤炭利用趨勢：展望煤電油化一體化發展 LIU Wenlong (劉文龍) 劉文龍，中華能源基金委員會高級顧問，曾任中石化總經濟師 LIU Wenlong served as a chief economist/assistant general manager of Sinopec, as well as a distinguished expert of the Sinopec Science and Technology Committee. He has extensive planning and leadership experience in the energy sector and is a key player in the corporation’s Sino-foreign joint-venture negotiations. He graduated from Beijing Petroleum University with a master’s degree in refinery engineering. He is also a graduate of the China University of Petroleum. He is currently a senior consultant for the China Energy Fund Committee.

I. Coal as the Leading Primary Energy Source for China China’s fossil fuel reserves account for about 10-11% of the world’s total, in which coal has the highest share as the most abundant domestic fossil fuel resource, followed by oil and natural gas. Other energy resources such as hydropower, nuclear, biomass, solar and wind currently constitute only a fraction of the country’s total energy supply. According to the “China Mineral Resources Report (2013)” released by the Chinese Ministry of Land and Resources, newly identified resources and reserves of coal in China were estimated to be 61.6 billion tons in 2012, among which were four 5-billion-ton-class coalfields. As of the end of 2012, total coal resources to a depth of 2,000 meters or less were estimated to be 5.9 trillion 81

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metric tons, of which 1.42 trillion tons were identified resources and reserves, accounting for 94% of the country’s total primary energy resources. Meanwhile, the remaining technically recoverable reserves of oil and gas in China were 3.33 billion tons and 4.4 trillion cubic meters, respectively. Given the current resources and reserves and annual production, the domestic coal resources will be able to sustain the country for at least another one hundred years, whereas oil and gas will last for less than 20 years. Such resource endowment dictates that coal will remain the dominant energy source for China for a fairly long time. Despite the rapid development of alternative energy such as hydro, nuclear and wind over the past 30 years, coal has maintained its leading position in China’s total primary energy consumption. Projections indicate that coal will still account for about 50% of the total primary energy consumption in 2030. (Figure 1) Figure 1: Primary energy consumption by source in China (2008-2030) Historical data source: China Statistical Yearbook 2013 *Estimates: LIU Wenlong

In 2013, China imported 282 million tons of oil and 23.54 million tons of heavy oil, which means that dependence on foreign oil imports exceeded 60%. It also imported 53 billion cubic meters of natural gas, which accounted for 31.7% of its total gas supply. The import of primary petroleum products such as benzene, toluene and dimethyl-benzene was 11.04 million tons and the volume of ethylene and propylene imports was equally significant at 4.34 million tons. For the next 20 years, with the total energy consumption growing at a projected average annual 82

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rate of 4.5%, the cumulative coal consumption in China is estimated to reach 85 billion tons; oil to 12 billion tons; and natural gas to 6 trillion cubic meters. Given its economic and energy consumption pattern, there is no doubt that coal will continue to be the dominant fossil fuel in China. Although increasing imports of oil and gas into China can mitigate its consumption of coal, there is a limitation to this approach. As a major economic power, China’s consumption of oil will continue growing. Relying solely on imports for the nation’s energy supply poses a concern for the security and stability of its economic development. II. China’s Coal Consumption Structure and Major Concerns in Utilization 2.1 China’s coal consumption pattern Coal is primarily used for electricity generation in China, and is also used in the metallurgy and building material industries. (Figure 2) The use of coal as a feedstock in the chemical industries has steadily increased, while its usage in the residential sector has steadily decreased. In the building material sector, cement manufacturers are currently the largest consumers of coal, followed by glass, brick and tile manufacturers. Since 2008, the share of coal in power generation has remained over 50% of total coal consumption in China. (Figure 3) Figure 2: Comparison of coal consumption in China by sector, 2008 and 2013 Source: China Energy Statistical Year Book 2013 and China Peak Coal Projection and Analysis, by China Energy Research Society

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Figure 3: The future plan for power generation in China by source (2010-2020) Source: China coal resources network

2.2 Major problems with the current pattern of coal utilization in China a. Excess production capacity and environmental pollution According to the statistics released by the Coal Industry Association, in 2013, China produced 3.68 billion tons of coal and imported another 320 million tons. Its total consumption in that year was 3.61 billion tons, a 2.4% increase from 2012. In 2012 and 2013, China accounted for nearly half of the global total raw steel production. According to the National Bureau of Statistics (NBS), in 2013 China produced 1.067 billion tons of steel, 2.4 billion tons of cement, 44.37 million tons of aluminum oxide, and 40.54 million tons of ten major non-ferrous metals, Of the total of 5,245.1 terawatt-hours (TWh) of electricity generated in 2013, 4,235.8 TWh (or 78.4%) was from thermal (mainly coal-fired) power plants, whereas 911.6 TWh (16.8%) was from hydropower power plants and 110.6 TWh (2%), from nuclear power plants. The excessive conventional use of coal in the electricity, iron and steel, and cement industries has resulted in large amounts of SO2, NOX, CO2 and particulates emissions. These emissions are the main cause of the current environmental pollution and smog in the more developed eastern China. As China going through economic transition and industrial restructuring, its traditional heavy industries are facing the problem of overcapacity. It is among the nation’s top priorities to make the hard decision and shut down highly polluting industrial plants. b. High energy consumption of per unit GDP production Energy efficiency in China now lags far behind developed economies. According to the news 84

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released by the NBS in February 2014, China’s total GDP output reached RMB 56.88 trillion in 2013, with a total energy consumption of 3.75 billion tons of standard coal equivalent (SCE). These translate into an energy intensity of 0.6592 tons of SCE per RMB 10, 000 of GDP output (or 0.402 tons of SCE per USD 1,000 of GDP output). This is about 2.5 times of the world average, 2.3 times of that of the U.S., 3.8 times of that of Japan, and also higher than that of developing economies such as Brazil and Mexico. In the process of its industrial restructuring, China has been making efforts to shed excess capacities in its heavy industries such as iron and steel, cement and non-ferrous industries. According to the “Guidelines to Tackle Serious Production Overcapacity” issued by the State Council on October 15, 2013, the steel industry in China must trim down its annual production capacity by over 80 million tons. The electrolytic aluminum industry must decommission all plants with prebaked anode cells under 160,000 amp by the end of 2015. For smelters that consume more than 13,700 kWh of AC power per ton of aluminum liquid produced and do not meet the requirements by the end of 2015, the electricity prices will be charged 10% higher than the benchmark prices. The plain glass industry will be required to lift deep processing rates to over 50%. The cement industry will be required to promote the production of high-quality cement and concrete. The State Council not only requires industries to meet the target outlined in the 12th FiveYear-Plan (FYP) one year ahead in reducing excess and outdated production capacities, but also sets additional targets of shedding another 15 million tons of iron-making capacity, 15 million tons of steelmaking capacity, 100 million tons of cement, and 20 million standard boxes of plain glass production capacity by the end of 2015. Planned measures for achieving these targets include financial incentives and detailed policies on equal or discounted replacement of existing capacities, as well as encouraging local governments and enterprises to raise the targets for closing excess capacities. Compared to the year 2010, both energy and carbon intensity per unit of GDP in China have been reduced by 9.03% and 10.68%, respectively in 2013. The first three years of the 12th FYP also witnessed an accumulative energy savings of 350 million tons of SCE, equivalent to 840 million tons of carbon dioxide emission. In 2013, the total chemical oxygen demand (COD, a standard method for pollution measurement) in China stayed at 23.5 million tons, 7.8% less than the previous year. The emissions of sulfur dioxide, ammonia nitrogen and nitrogen oxides were recorded at 20.4 million, 2.46 million and 22.3 million tons, respectively, which were all lower than their respective levels in 2010 by 9.9%, 7.1% and 2.0%.

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III. Clean Coal Utilization Technologies China’s energy resource endowment is usually described as “an abundance of coal, a lack of oil and a shortage in gas”. Its dependence on foreign oil and gas imports in recent years has been increasing rapidly. Curbing oil imports and strengthening national energy security has thus became an urgent task. To safeguard its energy supply, China needs to address the following issues. Firstly, it needs to adjust its industrial structure and reduce the overall energy consumption. Secondly, it needs to proactively expand overseas oil exploration and production. Thirdly, China needs to speed up exploration activities in its offshore territories such as the South China Sea and the East China Sea to supplement domestic onshore oil output. Furthermore, substituting oil with coal as the feedstock for liquids and chemicals (such as olefins) production is another feasible approach in the present. Mr. Fredrick D. Palmer, the former Chairman of the World Coal Association, once applauded China for “having overtaken the United States in developing low-carbon clean coal technologies.” He believed that the Xinjiang Autonomous Region of China had the potential to become the next Middle East, given its 390 billion tons of measured coal reserves and a total of 2.19 trillion tons of predicted reserves. Such a rich coal endowment, in his view, would provide a sound basis for China to develop clean coal technologies. Through over a decade of effort, China has made significant breakthroughs in developing coal-to-olefin and coal-to-liquids technologies. By 2013, total coal-to-methanol and coal-to-olefin production capacities have reached 2.65 million tons per year. The deployment of the technology is still rapidly expanding. Sinopec alone has planned four coal-to-olefin projects with 3.1 million tons of annual total capacity. Other companies are pushing forward with construction plans for nine projects totaling 8.5 million tons of annual production capacity. Plus ten more projects currently under government review, the total coal-to-olefin production capacity in China could reach over 15 million tons a year by 2017. China’s coal-to-liquids capacity is also expanding. In 2013, total installed annual capacity was 1.75 million tons. An additional 10 million tons of capacity is currently under construction by coal companies such as Shenhua, Yitai and Lu’an. Added by the potential capacity of the pre-approved projects, the total coal-to-oil production capacity in China could reach to 20 million tons per year by 2017. The developments of these projects will have significant implications for the reduction of China’s reliance on crude oil imports. The economic benefits of substituting oil with coal are evident as well. Based on the current market prices of coal, liquids, and polyolefin, profits of coal-to-olefin and coal-to-liquids plants located near coal mines could reach RMB 2,000 per ton of product. For example, Shenhua’s 86

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600,000 tons per year coal-to-olefin project in Baotou recorded a profit of RMB 1.3 billion in 2013. In contrast, traditional petrochemical companies that use oil as the feedstock to produce olefins (ethylene or propylene) recorded less profits or even losses, despite a larger output of 21 million tons in 2013. It is therefore evident that using coal as the feedstock to produce chemical products in China yields higher profit margin than using oil. 3.1 An outline of clean coal technologies (CCT) Clean coal technology refers to a suite of coal processing, combustion, conversion, and pollution control technologies that are intended to reduce pollution and increase the resource utilization efficiency. Used throughout the coal value chain, CCTs can be grouped in two categories: (1) Clean coal combustion technologies, including: (1) Pre-combustion purification and upgrading, such as washing, briquetting and coal water slurry technologies; (2) Clean combustion, such as fluidized bed combustion and advanced burner technologies; and, (3) Post-combustion pollutants removal, including smoke-elimination, dust-removal, desulfurization and denitrification technologies. (2) Clean coal conversion technologies, mainly coal gasification and liquefaction and integrated coal gasification combined cycle (IGCC) power generation technologies. These are among the mainstream technologies considered currently for tackling the world’s environmental problems. They also represent an important field for international competition in advanced technologies. For years China has invested a significant amount of resources in the research, development, and deployment of clean coal technologies for more efficient and more environmentally friendly use of coal. The Chinese government has also listed clean coal as one of the strategic technologies for achieving sustainable development and the two fundamental transformations (from the traditional planned economy to socialist market economy and from extensive economic growth to intensive economic growth). (Figure 4)

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Figure 4: The technological framework for clean coal development in China

IV. IGCC – The General Trend in Future Power Generation Technology The power sector consumes the largest amount of coal in China, and urgently needs to adopt CCTs to revamp its existing electricity generation system and restructure the traditional coal-fired electricity generation industry. 4.1 An Overview of IGCC Worldwide, IGCC is regarded as the key trend for future highly efficient and clean coal power generation. It consists of two parts: coal gasification and syngas cleaning, and gas-steam combined cycle power generation. Syngas production includes mainly coal gasification, air separation and syngas cleaning. Gassteam combined cycle involves major sub-systems such as gas turbine generators, heat recovery steam generators and steam turbine generators. Of the entire IGCC system, air separation, syngas cleaning, gas turbine, steam turbine, and the heat recovery steam generator are all commercially mature technologies. 4.2 Advantages of IGCC (1) IGCC units can effectively control and reduce coal consumption and can significantly reduce sulfur dioxide emissions, largely eliminate particulates emissions. Furthermore, the carbon dioxide emissions from an IGCC unit are easier to recycle and reuse, which has profound implications for CO2 capture, utilization, and reduction in the future. 88

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(2) The high heat quality syngas from the coal gasification process, combined with the highefficiency gas turbine generator and the heat recovery steam generator, enables the gross efficiency of IGCC units to reach 45% or above. Its desulfurization rates typically are over 99% and its NOX emissions are typically 15% to 20% of a conventional coal power plant. IGCC units can keep their total emission down to one tenth the amounts generated by a conventional coal-fired power plant. In addition, its water consumption is typically half or one-third of a conventional coal power plant. 4.3 Issues in IGCC development (1) The development and commercialization of IGCC are still at early stage with limited operating experience at installed plants. Currently, the availability1 of IGCC demonstration plants worldwide stays at 70%-85%. (2) The overnight capital cost of IGCC is usually higher than that of conventional coal-fired power plants. Industry insiders typically estimate that the average capital cost of an IGCC plant stays between USD 1,400 to 1,700 per kilowatt (kW) in China. The estimated capital cost of the Huaneng’s project in Tianjing reached RMB 13,000 to 14,000/kW. (Table 1) (3) IGCC plants typically have a higher parasitic load of 10-20%, mainly because it consumes a large amount of electricity to produce oxygen for the gasification process. (4) Because the electricity tariff is currently regulated in China, the investment return for IGCC projects is relatively low. However, compared with the gas-fired power plants that use imported LNG, IGCC plants are still more competitive (the prices of imported LNG delivered to Chinese terminals are about USD 15/MMBtu at the moment).

Editor’s note: availability is a measure of the percentage of time in a period during which a plant was actually

running at full capacity or, if not running, fully available to run. It is used to describe the reliability if a power plant and its component systems. 89

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Table 1: IGCC Demonstration Projects in China and Overseas Source: “Current Status and the Prospects of IGCC Development in China”, by Xi’an Thermal Power Research Institute Project name (country) Tampa (USA) Wabash River (USA) Pinon Pine (USA) Ruggenum (Netherlands) Puertollano (Spain) Huaneng (China)

Installed capacity 250 MW 260 MW

Capital cost (USD/kW) 1,500 1,490

Notes

100 MW 253 MW

3,374 1,806

Built in 1996 Built in 1995, began operation in 2000 1996 Began operation in 1993

300 MW 250 MW

2,303 RMB 14,000/kW

Began operation in 1998 Began production in 2013

Dongguan (China)

120 MW

RMB 8,000/kW

Datang Ningdong (China)

2 x 400 MW

RMB 10,000/kW (est)

Commenced operation in August, 2013 Memorandum signed on June 7, 2012

V. Integrated Development of Coal, Electricity, Liquids, and Chemical Products as the General Future Trend IGCC technology is one of the most important clean coal technologies considering its high efficiency, low pollution and potential for poly-generation. The purified syngas can have multiple functions: (1) Firstly, products like CO and H2 generated from the gasification process in an IGCC unit can produce a variety of chemical products such as methanol and olefins. For example, in the case of Sinopec’s RMB 4.4 billion joint venture IGCC project with ExxonMobil and Aramco (Saudi Arabia) in Quanzhou, Fujian Province, besides the designed output of 270 MW of electricity generating capacity, it is also able to produce heat at a rate of 400t/h, high-pressure steam at 100kg/m2 and H2 at 42,000 ton/year. Since beginning operation in 2008, it has been running steadily and safely. However, its operating costs have remained high because it uses expensive asphalt (75%) and heavy oil (25%) as the fuel, resulting in low overall return on capital. Replacing the asphalt and heavy oil with coal can substantially lower the cost. (2) Secondly, when the syngas enters the petroleum refining and processing line, it can produce a wide range of petrochemical products including naphtha, gasoline, kerosene, diesel, light 90

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distillate oil, wax, and etc. Furthermore, the CO2 generated in this process is free of impurities and dust, and is easy to collect for reuse. In addition to coal-to-oil and coal-to-olefins production, China is also substituting coal-based ethylene glycol production for oil-based ethylene production, and deploying technologies to convert coal to acetic acid, then to alcohol, and then to ethanol. Celanese Company in the Nanjing Chemical Industrial Park, for example, has commenced operation of a 275,000-ton acetic acidto-ethanol project in August 2013. Preliminary estimates have shown that every 2.6 tons of coal can produce one ton of alcohol, which becomes ethanol gasoline when blended with gasoline. The blending ratio of ethanol in ethanol gasoline is 10% in China, 15% in the U.S., and 25% in Brazil. Coal-to-aromatics also play a significant role in replacing crude oil with coal. It is expected that in the near future, many of the coal-based chemical projects under construction or currently being planned will be gradually put into operation. It is estimated that by 2020, nearly 100 million tons of crude oil consumption can be replaced with 300 million tons of coal as a resource fuel in liquid production in China. This has the potential to reduce China’s dependence on imported crude oil to below the current level.

Section Three: Perspectives on Cleaner Utilization of Coal in China

Chapter 3: Coal-fired Electricity as the Key to Mitigating Smog in China 第三章：煤電是中國治霾關鍵

第三部分：中國專家觀點文章

Chapter 3: Coal-fired Electricity as the Key to Mitigating Smog in China 第三章：煤電是中國治霾關鍵 WANG Zhixuan (王志軒) 王志軒，中國電力企業聯合會(CEC)秘書長，國家氣候變化專家委員會委員 WANG Zhixuan is currently the secretary general of the China Electricity Council (CEC) and enjoys professorship in engineering. He is also member of the National Expert Panel on Climate Change of China and advisor to the Anti-monopoly Bureau of the Chinese Ministry of Commerce. He is well experienced with the utility power and environmental policies in China and has been closely involved in the national policy making processes. Mr. Wang has worked with multiple key energy departments in China, including the National Energy Administration (NEA) and the Electricity Industry Department (currently known as the Electricity Division of the NEA). He has also chaired numerous policy study programs and has published more than ten books and 150 essays on the electric power development in China.

Editor’s Note: Recently, coal-fired power plants have become a primary target for control under the context of stricter environmental regulations in China. When a number of tougher environmental policies were introduced by the central government to curb coal-fired power plant emissions, some local governments in China introduced even more stringent measures targeting coal-fired power plant emissions. Now, almost all the major power generation groups in China are busy either promoting or planning to promote “near-zero emission” practices. Given that tougher environmental standards for coal-fired power plants are becoming a national fad, this paper attempts to apply basic environmental economic theories in analyzing 92

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the trade-offs between the costs and benefits of pollution-induced environmental damage and anti-pollution measures. In doing so, the author hopes to provide an alternative perspective for interested readers. Whether coal-fired power generation is the primary factor causing air pollution or a potential force to abate air pollution in China should be made clear. Coal-fired power generation does account for over 50% of the total coal consumption in China. However, considering the ever-advancing pollution control measures adopted at coal-fired power plants, the widespread geographical distribution of the plants, and the greater height of the power plant smokestack, the pollution from coal-fired power plants should, at most, be considered as a secondary contributor to the formation of the smog in China today. In addition, the installation of combined heat-and-power (CHP) plants in many major cities has indirectly yet significantly reduced the total municipal emissions, because these plants have replaced a large number of small coal boilers without or with little pollution controls. Thus, it is my opinion that if China could accelerate the replacement of small coal boilers with larger coal-fired base-load power plants and the substitution of electricity for end-use of coal and oil, coal-based power would play an even greater positive role rather than a negative one in the nation’s pollution abatement effort. I. Minimum Social Cost as the Guiding Principle for Pollution Abatement Our environment is capable of self-purification through physical, chemical or biological dilution, absorption or degradation processes that prevent a good amount of pollutants from being released into the environment and causing public health issues. The limit of this purification power is called environmental carrying capacity. The concept of environmental carrying capacity tells us two important things. First, limited pollutant emissions will not necessarily cause irreversible impacts to the ecological system and human health. Second, pollution beyond the environmental carrying capacity will likely cause harm to both public health and the environment, and its impact will be proportional to the level of pollution. As it is difficult to force modern industrial society to stop emitting pollutants overnight, figuring out the upper limit of pollution that our environment is capable of carrying becomes a critical task. Principles of environmental economics show that the optimal level of pollution should be at the point where minimum social spending or cost is required. Social cost here refers to the sum of pollution abatement costs and external (environmental damage) costs, which is a function of variables such as total and marginal pollution abatement costs as well as total and marginal external 93

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costs. Generally speaking, the marginal pollution abatement cost (MAC) tends to increase as antipollution requirements become more stringent (e.g. A 99% PM removal requirement will have a far higher per unit removal cost than a 90% PM removal requirement). If we were to achieve zero emissions, the marginal abatement cost would increase exponentially. The closer we approach zero emissions, the higher the abatement cost. In contrast, the marginal external cost (MEC) tends to decrease as anti-pollution requirements become more stringent and total emissions are lower. The total social cost is minimized when the MAC curve and the MEC curve intersect. Although environmental economic theories offer various general methods to monetize environmental damages, it can be a difficult task to monetize some special environmentally damaging behaviors. In determining the optimal emission limit, we usually need to take a basket of factors into consideration such as the characteristics of the pollutants, the total social costs, the environmental carrying capacity and the development status of the pollution control technologies. Should the emission ceiling be set too high or too low, the abatement costs will be either too high to afford, or too low to tackle the pollution sufficiently. The brief introduction above indicates that an optimal emission level with the minimum social cost always exists, whether it is for a single source of pollution or for a polluted region and regardless of the complexity of the pollution sources. It also suggests that the total emission volume should not be the only factor to be concerned with, and that ever stricter emission standards do not always bring good to society. Therefore, the 2014 revisions of China’s Environmental Protection Law have sustained a principle set in the previous versions: the national emission standards should be established “in accordance with the national standards for environment quality and the country’s economic and technological conditions.” In developed countries or regions like the United States or the European Union, the emission limits for coal-fired power plants are set based on the performance of “Best Available Technology Economically Achievable” (BAT). For power plants fueled by common-quality coal under common operating conditions, the BATs generally enable PM matter (PM) removal rates of 99.5% or higher, SO2 removal rates of 95% or higher, and NOx removal rates of 80% or higher. Any targets that require greater reduction of emissions will likely incur significantly higher abatement costs with diminished marginal environmental benefits. The energy and material consumption of the emission control equipment will also be much higher. Thus, except for a few special regions (such as the Emission Restricted Zones in China) confirmed by sufficient studies, it is not cost-effective for China to adopt overly stringent emission standards at its current phase of development. Given 94

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Section Three: Perspectives on Cleaner Utilization of Coal in China 第三部分：中國專家觀點文章

that the major cause of the current air pollution in China lies in its economic development model and that a large portion of its coal is burned inefficiently in uncontrolled small boilers, excessively tightening emissions standards for easy-to-monitor-and-manage power plants and even requiring them to achieve “near zero emission” standards alone would push the total social cost way above the optimum level. In the current public debate on how to improve the air quality in China, it is not rare to encounter the following misleading argument: as coal-combustion is the primary cause of smog in China and the coal-fired power plants are the leading consumers of coal, responsible for over 50% of China’s total coal consumption, the key to mitigate smog is curbing emissions from coal-fired power plants. This logic may sound inexorable, but is, in my view, a fallacy. Take Beijing’s latest plan of substituting coal-fired power plants with gas-fired power plants as an example. Since the onset of the foggy weather in Beijing, the municipal government of Beijing decided to convert its four large coal-fired plants, namely, the Datang Gaojing Power Plant, the Huaneng Beijing (Gaobeidian) Cogeneration Plant, Guohua First Co-generation Power Plant, and the Beijing Jingneng Thermal Power Plant (“Four Plants” hereafter), to gas-fired power plants. These four coal-fired plants combined consumed 9.13 million metric tons of coal, or 40% of Beijing’s total coal consumption in 2012. Yet their annual total emissions of SO2, NOx, and PM accounted for only 2.5% of the city’s total. Furthermore, the cost of converting these four plants to gas-fired plants will far exceed the potential direct environmental benefits. The cost of electricity from gas-fired power plants is currently RMB 0.2 per kilowatt-hour higher than that from coalfired plants, which means that the annual operating cost after the conversion could increase RMB 1.02 billion. This translates into a marginal abatement cost of RMB 700 per kilogram of emissions, hundreds of times higher than China’s average marginal abatement costs. In addition, the supply of natural gas is riskier than the supply of coal in Beijing, in terms of both reliability and availability. Finally, the conversion will subject most workers at the Four Plants to job changes and settlements: currently the Four Plants employ several thousand workers, whereas the new gas-fired power plants will provide only 200-300 positions. Let’s also review the effectiveness of the emission fees charged to on power plants. Since January 1, 2014, the Environmental Protection Bureau of Beijing has increased the cost of SO2 and NOx emissions from power plants from RMB 0.63 per kilogram to RMB 10 per kilogram – a roughly 15 times increase. Under the new standard, total emission charges for the Four Plants climbed sharply to RMB 18.48 million in the first quarter, accounting for 21% of the city’s total emission charges (RMB 88 million). Many praised the fee increase in the media, but largely ignored 95

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the fact that the Four Plants had been in compliance with the most stringent emission standards in the world, responsible for only 2.5% of the total major air emissions in Beijing, and yet have to pay for over 20% of the city’s emission charges. Ironically, the current penalty of RMB 10 per kilogram of emissions is far below the potential cost to reduce the emissions further. In other words, the current level of emission fee in Beijing provides no economic incentive for the Four Plants to reduce emissions. It is puzzling that such a regulation still received compliments. II. Coal-fired Electricity as the Key to Pollution Abatement in China Whether coal-fired electricity will be the key to saving China’s deteriorating environment depends on a number of factors including the current energy structure, development phase, energy resource distribution, economics, and so on. In the near-term, the role of the coal-fired power plant will be unquestionable both in terms of its economics and potential in speedy and effective pollution mitigation. This argument is supported by the following judgments: 1. The widespread smog in China is a result of emissions from vehicle tail pipes, coal combustion, industrial production, mass construction programs as part of the country’s urbanization and rapid expansion of megacities, and agricultural production, as well as pollutions from rural and urban sources. In the grand scheme of things, emissions from vehicles and coal combustion are the primary contributors to the formation of smog. 2. Smog formation and characteristics vary with regions and seasons, so it is not advisable to draw hasty conclusions based on some samples from one-time or short-time testing as to which sources cause how much of the pollution and what should be done to tackle it. The complexity of the cause of smog formation, combined with the insufficient number of testing samples and the limitations in monitoring and analytical methods, has led to diverging and sometimes contradictory research outcomes. It is not rare to see different results from smog research conducted at different times by the same research institutes or same researchers, or different results from research conducted at the same time but by different institutes or different researchers. Research conducted in different regions also reveals different results. These differences demonstrate the complexity of identifying the causes of smog formation through scientific studies. But recently, some conclusive arguments in China based on onesided studies are misleading the general public and decision-makers. 3. The amount of emissions from coal combustion should not be judged by its sheer consumption volume, nor should a source’s contribution to smog be measured by its amount of emissions. The larger share of coal-fired power generation in total emissions is not necessarily a proof of 96

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its higher impact on the environment, and the impact need to be assessed through a holistic approach that integrates the analyses of pollution source distributions, control technologies, and economic structure. Though 50% of the four billion tons of annual coal usage in China went to the electricity sector, the impact of the emissions from the coal-fired generation is actually decreasing year by year resulting from the steadily declines in the emissions, changes in the geographic distributions of the coal power plants, and the way emissions are discharged (i.e. collectible). The real environmental impact of coal in China should come from the 800 million tons burned in small coal boilers and used by the industrial end-users who usually adopt little or no emission control measures. Their threat to the atmospheric environment is significantly higher than the electricity sector. 4. Coal-fired CHP can ensure heat supply while improving the environmental quality and, therefore, is the best option for cities with insufficient natural gas supply. Over the past few decades, the share of coal-fired CHP has been steadily increasing, having replaced tens of thousands small coal boilers previously used for heat generation. Misplacing blame for air pollution on coal-fired CHP could put the important decision-making on pollution control on a wrong path. 5. Replacing conventional fossil fuels with wind, solar, and other renewable energy sources is a long-term strategy and a general trend. Yet it would be unrealistic to expect renewables to be able to ramp up at a scale and a speed that would solve the smog problem in the near-term. 6. Replacing coal with natural gas would be an effective way to tackle smog. But the supply of gaseous sources (including natural gas, synthetic gas, tight gas, coal-bed-methane, and shale gas) in China will likely remain limited for the next ten years or even longer. Gas prices will likely remain much higher than coal prices. It is highly uncertain whether a similar shale gas revolution could happen in China and have profound impact on its energy mix and energy economics, as was the case in the United States. Even if a similar shale gas revolution could be replicated in China, one should not ignore the fact that coal-fired plants today are still the leading source of electricity in the United States, and provided the country with 39% of the total power consumed in 2013. 7. China should continue to adhere to the principle of balanced development and strive to achieve the lowest energy cost with uncompromised levels of economic development and environmental protection. Reducing coal consumption at all costs will not help to achieve this goal. If the above judgments are reasonable, coal-fired electricity generation will be the key to tacking air pollution through replacing coal burns in industrial boilers and residential sector, increasing 97

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the share of power sector consumption of coal, and increasing the share of electricity in total end-use energy consumption. III. Unscientific Environmental Management Mechanisms Are Major Obstacles to Tacking Air Pollution Through Coal-fired Power Generation With the smog pervading major Chinese cities since 2012, popular discontent has grown against coal consumption and this has influenced almost all coal-related industries. The coalfired electricity sector, as the single largest consumer of coal in China, found itself posited at the center of the storm. Prompted by mass media reports and suggested by experts and other so-called “experts”, a number of radical movements were soon initiated in China to create an ever stringent emission standard for all the coal-fired power plants in China. The increasing stringency is manifested in the following aspects: 1. The emission performance standards have been repeatedly tightened. The Emission Standard of Air Pollutants for Thermal Power Plants (GB13223-2011) issued in 2011 is largely the world’s most stringent of its kind. To comply with this standard, the majority of the coal-fired power plants in China will need some degree of emission control equipment upgrades or retrofits. 2. The total allowed amount of emissions has been decreasing. Following the 28.8% of reduction of SO2 emissions the 11th Five-Year-Plan (FYP), the “12th Five-Year-Plan for Energy Saving and Emission Reduction” requires further reductions of SO2 and NOx emissions from power plants by 16.3% and 29%, respectively. 3. The deadlines for achieving the total emissions targets have been advanced in some regions, as part of the local governments’ plan to improve their political achievements. 4. The designation of “special emission restricted zones” to be covered by stricter-than-average emission standards has been extended from the central districts of the key cities in the key regions to the entire key regions. Also, the effective date of the special emission standards has also been advanced. For example, environmental protection authorities recently ordered coalfired power plants in the Beijing-Tianjin-Hebei (Jing-Jin-Ji) region to complete the upgrades/ retrofits required for compliance with the special standards from the beginning of the 13th FYP (2016) to the end of 2014. 5. Environmental impact assessment is increasingly strict with coal-fired power projects. Some coal projects are required to meet emission standards for gas-fired power plants, or “near-zero” emissions. 6. In some cases local authorities demand more emission reductions than the central government 98

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does. For example, Zhejiang province requires all existing thermal power generating units of 600 MW or larger to achieve the emission standards for gas-fired power plants by the end of 2017. 7. Beijing has led a wave of decisions to replace coal-fired CHP with gas-fired and, as mentioned earlier, the Four Plants in Beijing must be converted to gas-fired CHP plants by 2017. 8. The 2014 revisions of China’s “Environmental Protection Law” tightens the overall environmental quality standards and raises fines and penalties for noncompliance. The revised Law grants local governments the power of discretion in setting local environmental quality standards more stringent than the national standards, whereas in the previous version of the Law, such power applied to emission-standard-setting only. Moreover, the revised Law establishes cumulative daily fines for illegal discharge of pollutants and lowers the thresholds for ordering enterprises with unauthorized discharges to cut or halt operations or completely shut down. Environmental protocols must be well thought, which is to say that as soon as a new requirement is added, other existing requirements should be alleviated or revised accordingly. For example, if an emission ceiling is tightened, the charge for emissions within the legally permitted range should be at least reduced or removed. In reality, the implementation of the Environmental Protection Law has resulted in the accumulation and ever tightening of regulations for coal power plants, repeated bundling of electricity from coal plants, and waste of huge amounts of administrative resources in dealing with multi-layer, duplicated enforcement. The way the Law caps the total amount of pollutants is also debatable. Instead of setting pollutant concentration limits or hourly emission rates based on atmospheric dispersion modeling (e.g. Japanese power plants use a P-value test to monitor total emission volume) as in many other countries, China sets caps for total emissions of PM, SO2, and NOx, which, to some extent, appears to be more of a policy tool to strengthen the power of the administration. Decisions regarding a single industry’s efficiency and emission performance improvements need to be informed by careful considerations of a series of issues. How much more room is left for power plants to reduce their emissions? How does this amount of reduction compare with the required total industrial emission reduction and with the required national emission reduction? How big of an impact these reductions would be on environmental quality improvement and on smog formation? How much would the reduction cost? How much benefits could the money generate if it is instead used to reduce emissions from other sectors? How would replacing coal with gas impact the overall environmental, economic and social benefits as well as energy security? Finally, why has the smog become worse after the power sector total emissions were reduced during the 11th 99

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FYP? Could significant increase of emission charge really help emissions reduction? Tackling smog is an extremely complicated task in which studies of nature and humanity, production and consumption, pollution and atmospheric dispersion, as well as the optimization of overall energy consumption and supply mix are all needed. It requires a systematic solution that integrates research in energy, environment, economy and society as a whole, rather than simply raising emission standards and charges or replacing coal with gas in CHP. For example, it would be both rational and helpful to promoting lawful operation if power plants are charged cumulatively only for the amount of emissions that exceed the standards, not for the amount that allowed by the standards. IV. Tackle Smog with Coal-fired Power on the Principle of Regulated and Green Development Some may worry about the environmental sustainability, if we continue to rely on coal for electricity. Here is my view. First of all, China’s coal power plants have achieved world-class air emission control performance. Back in 1980, annual PM emissions in China was around 4 million tons. In 2012, the number dropped by 62% to about 1.5 million tons. SO2 emission decreased significantly since the 11th FYP, from 13 million tons in 2005 to 8.8 million tons in 2012. NOx emissions now hover at just over 9 million tons annually and have begun to show a downward trend as well. Per kilowatthour electricity emission of PM, SO2 and NOx in China is now 0.39 grams, 2.26 grams, and 2.4 grams, respectively, comparable to world-class performance. Secondly, if total coal consumption in the power sector in China reaches 4 billion tons, a potential peak currently estimated, the annual total emissions of PM, SO2 and NOx will likely be around 0.5, 2, and 2 million tons, respectively, assuming reasonable time period to get to this peak, development of emission control technologies, and evolvement of emissions standards. The levels of emissions could be lower if there is an environmental need and if it would be affordable. If supplemented with an optimized plan for the distribution of power plants, the amount of conventional emissions can most likely be accommodated by China’s environmental carrying capacity. More importantly, if the electricity industry is able to provide enough power to replace the end-use of steam coal in the industrial and residential sectors, and part of the vehicle liquid fuel use, the environmental quality of the densely populated areas could be significantly improved. Some could view tackling smog with coal-fired power as backward in an era of switching away from fossil energy, especially coal. They may wonder how China could control carbon 100

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dioxide emissions and how to avert coal lock-in in the future. Without doubt, these are also the huge challenges facing China. However, given China’s resource endowment, current phase of development, pollution characteristics, and the urgency of pollution control, as well as the global energy landscape, choosing coal-fired power is simply following the “lesser of two evils principle.” Statistics released by the International Energy Agency (IEA) largely underpin my argument. From 2009 to 2012, after the global financial crisis, the share of coal-fired electricity dropped from 45.44% to 38.31% in the United States, but increased from 24.82% to 26.61% in OECD Europe, from 28.0% to 39.87% in the United Kingdom, and from 44.27% to 46.88% in Germany. The share of gas-fired electricity increased from 22.80% to 29.83% in the United States, but dropped from 23.57% to 18.63% in OECD Europe, from 44.63% to 27.69% in the United Kingdom, and from 13.50% to 11.46% in Germany. What dictated the different trends are changes in energy prices. Between 2009 and 2012, while gas price dropped from $3.89 to $2.76 per Million British Thermal Unit (MMBtu) in the United States, it rose from $8.52 to $11.03 per MMBtu in the European Union and from $4.85 to $9.46 per MMBtu in the United Kingdom. According to a study by Daniel Gros of the European Policy Research Institute, given that the generation cost was EUR 26/MWh for gas-fired power plants with an efficiency of 58% and EUR 10.5/MWh for coal-fired power plants with an efficiency of 42% in early 2013, gas-fired power plants will not be able to compete with coal-fired ones economically if carbon prices are kept below EUR 38 per ton. This analysis proves that an energy transformation will not be sustainable unless economic factors are duly taken into consideration. It also demonstrates the level of difficulty and complexity of energy transformation. Only by devising a comprehensive plan and promoting scientific innovation and management can China maximize benefits and minimize damage. While using coal-fired power to tackle smog, China must maintain green development of coal-fired power generation. “Green” is relative and, in this regard, coal-fired power should be measured not only against alternative energy sources, but also against its own past. Therefore, green development of coal-fired power should not be simply equated with constantly tightening environmental standards. Rather, it calls for comprehensive planning and an optimization of the system under the constraints of safety, efficiency, environmental impact, economic feasibility, convenience and harmony. Single-mindedly focusing on low emissions or even “zero emissions” from coal power plants, with little consideration of the overall efficiency of the energy system, pollution status in other sectors of the economy, and the total social cost, will not lead to the best outcome in addressing pollution problems. For the time being, cutting structural pollution is the 101

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top priority. In the long run, exploring green technologies for coal-fired power generation will become its lifeline. Greening of coal-fired power can be achieved in the following ways. First, improve energy conversion efficiency and emission control equipment performance through advances of science and technology. Develop and deploy site-specific carbon capture, utilization, and storage technologies. Second, improve operational and maintenance performance. Third, use CHP and similar technologies to enhance cascade use of energy and comprehensive utilization of resources. Fourth, modernize the electricity grid through integrated energy system dispatch optimization. Fifth, use ultra-high-voltage transmission technology to promote extensive optimization of geographic distribution of power plants based on the distribution of energy sources and regional environmental carrying capacity. Some are concerned that large coal power plants to be built in the west would result in transboundary pollution as well as local pollution. The concerns are understandable but unnecessary for the following reasons. First, China’s environmental laws and regulations, especially the Environmental Impact Assessment scheme, will not allow these to happen. Second, currently available pollution control technologies can well satisfy environmental protection requirements. Third, the environmental carrying capacity of western China is relatively large, especially for acid gases. Finally, the west has low population density and is less sensitive to environmental pollutions. To conclude, just like that learning from the success of other countries means leveraging their principles and methods as opposed to copying their energy structure, solving China’s environmental problems must be based on China’s energy, environmental, and economic realities. The choice needs to be the most economic based on careful balancing of costs against benefits. If we deliberately exclude coal-fired power from our basket of solutions to combat deteriorating air quality, the anti-pollution battle in China will only cost more and last longer.

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Chapter 4: Development of Advanced Clean Coal-fired Power Generation Technology in China 第四章：中國先進清潔煤電技術發展

ZHANG Jiansheng (張建勝), YUE Guangxi (嶽光溪) 張建勝，清華大學熱能工程系教授，燃氣輪機與煤氣化聯合循環國家工程研究中心煤氣化中心主任工程師 ZHANG Jiansheng is professor of thermal engineering at Tsinghua University and also the general engineer at the National Engineering Research Center of IGCC and coal gasification. Prof. Zhang has published about 150 papers and 4 co-authored books in China and has won the National Science and Technology Progress Award (2nd Class). He also presided over the development of the world’s first commercial slurry feed membrane wall gasifier. His research interests include coal gasification technologies, fluidized bed and pulverized coal combustion technologies and pollution control. He was also responsible for multiple national science and engineering research programs funded by the National Natural Science Foundation. He earned his Ph.D from Tsinghua University in 2001.

The main task of the power industry is to provide a stable and reliable power source, and coal is the main source of energy for the power industry. The amount of coal used for power generation was 1.756 billion tons in 2011, which accounted for 51.2% of total coal consumption that year. Though coal resources in China are rich, the resource distribution of coal is uneven and is usually distant from the economic centers, and such an uneven distribution has caused some difficulties to the economic and environmentally friendly operation of coal-fired power generation units. By the end of 2013, total installed power generation capacity reached 1247.38 GW, an increase of 9.3% over the previous year. Among them, the thermal power installed capacity was 862.38 GW, accounting for 69.14% of total installed capacity. In recent years, along with the rapid increase of 103

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the installation of large power equipment and the policy of “replacing small with big”, the overall reliability and efficiency of thermal power fleet increased significantly. In 2012, the average operation time of thermal power plants in China was 4982 hours (equivalent to an average capacity factor of 56.8%) with the average availability of 92.93%; the annual average coal consumption for power supply was 333 gram of standard coal equivalent per kilowatt-hour (gce/kWh), 50gce/kWh lower compared with 2002. Total particulate emissions from thermal power generation decreased from 3.6 million tons in 2005 to 1.6 million tons in 2010. Denitrification equipment was installed in about 20% of the thermal power capacity and desulphurization equipment was installed in over 86% of total thermal power capacity. Total SO2 emissions decreased from 13 million tons in 2005 to 9.26 million tons in 2010. At the same time, with the application of water-saving technology and improved water management along with the application of large number of air cooling units, the water consumption of thermal power plants dropped to 2.45kg/kWh in 2010, a 41% decrease from the 2000 level. 1. Development of Pulverized Coal-fired Power Plants Improving the steam parameters of thermal power plants is an effective way to improve power supply efficiency. Taking the 600MW capacity unit as an example, the average coal consumption per unit of power generation in a supercritical unit will be 14gce/kWh lower than a subcritical unit, and in ultra-supercritical units the number can drop 11gce/kWh further from the level of a supercritical unit. In recent years, the ratio of power plants with a capacity of 600MW and above increased rapidly, and the proportion has now reached 36.84%. In the future, the share of high parameter thermal power plants in China should be further expanded to further improve the overall efficiency of the coal-fired power plant fleet in China. Meanwhile, research and development of advanced heat-resistant metal materials should be also strengthened to underpin the development of advanced ultra-supercritical units (A-USC) with the inlet steam temperature at 700℃. Key technologies related to ultra-supercritical units (USC) with the inlet steam temperature of 600℃ to 700℃ should also be indigenized with China’s own intellectual property rights. As the demand for centralized heating increases, the proportion of power and heat cogeneration units can be increased accordingly, and the design optimization of thermal power systems should be strengthened and more retrofitting measures to improve operation efficiency should be conducted. Under the premise of meeting the new national emission standards and the emission ceilings, multiple flue gas purification technologies should be adopted and it is our view that special attention should be paid to the application of fuel-saving technologies to avoid emissions in the first place. A more 104

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reasonable electricity price mechanism should also be established to reflect the real cost of coalbased power generation. At the same time, more technological measures need to be carried out in the management of thermal power plants such as making more detailed energy saving schedules, introducing advanced water saving technologies and exploring ways to integrate coal-fired power with intermittent renewable energy sources such as solar and wind by making the conventional coal-fired power plants more flexible to cycling and multi-shift duties. 2. Development of Circulating Fluidized Bed Boiler Power Plants The power generation technology using circulating fluidized bed (CFB) boiler has many advantages, such as clean and high efficiency, low pollutant emission, fuel flexibility, large load adjustment range and ash and slag re-cycling capacity and can be called one of the most important technologies of clean coal combustion power generation. This technology had developed rapidly in the past twenty years, from an experimental utility boiler with small capacity to a mature power generation technology that has been operational in large capacity. At present, China has already mastered several core CFB technologies and has successfully put them in industrial production with world leading parameters with independent intellectual property rights. One more notable feature of CFB technology in China is that they can take low rank coals, which provides a feasible path that China’s rich low quality coal can be utilized in large scale and in an environmentalfriendly way. In order to meet the new environmental standards, research and development of ultra-low emission technologies for CFB boilers should be conducted further to improve the unit reliability and the combustion efficiency of the CFB boilers which can further reduce SO2 and NOx emissions due to the improved parameters. 3. Development of Integrated Gasification Combined Cycle Power Plants Integrated Gasification Combined Cycle (IGCC) is a clean coal power generation technology which has been tested successfully in 1987. In the coming five to fifteen years, the thermal efficiency of IGCC is expected to reach 50% to 52%, and pollutant emissions are expected to be only 1/3 of that of supercritical coal-fired power plants with the same capacity. The coal gasification and purification system has wide adaptability, which is helpful to the implementation of Integrated Gasification Fuel Cells (IGFU), Integrated Gasification Humid Air Turbines (IGHAT), Integrated Gasification Steam Turbines (IGST) and other state-of-art clean coal energy systems. However, due to the short history of IGCC technology, the research and development experiences around it are rather scarce, which resulted in that this complex technology by far still has not gained sufficient 105

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industrial operation experiences. In addition, obscured by its much higher per unit capital cost and power generation cost than the pulverized coal power plants or the CFB power plants, development of this technology is not smooth. In recent years, due to soaring natural gas prices, IGCC technology has shown its economic competitiveness and environmental benefits in its application not only in power generation, but in the coal chemical industries, petrochemical industries, and in coal to synthesis natural gas (SNG) production as well. In China, benefited from the rising public recognition of the advantage of IGCC technology in terms of its cleanness, higher efficiency and lower CO2 emissions, a boom in IGCC development is impending. The completion and commercial operation of the Tianjin Green Generation demonstration plant developed by Huaneng Group, marked the first IGCC project in China running primarily for electricity generation. In the future trajectory of IGCC development, it is necessary to solve the problem of high unit capital costs and high power generation costs. The running of the Tianjin Green Generation demonstration project should be able to provide invaluable design, engineering, procurement, operation and maintenance experiences for future IGCC projects in China to learn which ultimately will result to matured engineering experiences and lowered building and operation costs. 4. Development of Pollutant Control in Coal-fired Power Plants At present, flue gas desulfurization mainly uses calcium-based materials as the absorbent for desulfurization. The problem with this process is the resource recovery of desulfurization byproducts and the high level of water consumption. For NOX reduction, different denitrification technologies have been adopted with varying technique features. The selective catalytic reduction (SCR) technology has the highest removal efficiency but is also the most costly one. The selective non-catalytic reduction (SNCR) technology is more affordable than SCR, but has lower removal efficiency. Also, the application of SCR, SNCR and the low NOX combustion technology should be considered comprehensively with other pollutant reduction measures and pay full attention to the features of the specific site for installation. The development trend of emission control technology for coal-fired power plants is to integrate the desulfurization, de-NOX and mercury reduction equipment and target both respirable suspended particle emissions (particulate matter with diameter of 10 micrometers or less, also known as PM 10) and fine particle emissions (particulate matter with diameter of 2.5 micrometers or less, also known as PM 2.5). In addition, we should also reduce the use of wet desulfurization technology considering its high volume of water consumption.

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5. Development of Carbon Capture, Utilization and Storage The major problem with the current development of Carbon Capture, Utilization and Storage (CCUS) technology in China lies in the tremendous increase in energy consumption and the longterm safety of carbon storage. At present, only a limited number of demonstration projects of carbon capture have been built at coal-fired power plants as to verify technological feasibilities and to evaluate the real cost of carbon capture and storage. Oxygen enriched combustion technology is an effective measure to decrease CO2 emission during combustion, but leads to the decrease of power supply efficiency. Another technology called the chemical looping combustion has been proved with higher efficiency in reducing carbon emission and its demonstration should be carried out. Pre-combustion capture of CO2 is suitable for the IGCC and some chemical plants. In addition to the transportation and storage costs, the energy consumption of the system will also increase if CCS is applied. As CCS has a negative effect on the economy of coal-fired power plants, more comprehensive studies of the cost effectiveness of the CCS systems will be critically needed. In addition, a clear roadmap for CCUS development must be outlined by the central government in China as to guide the future industrial practices and provide economic incentives that can balance the cost of carbon reduction and the benefits of reduced carbon emission. Details of such a policy can include appropriately raising the on-grid tariff for coal-fired power plants that were installed with CCUS, providing appropriate subsidies, adopting preferential tax policies, and establishing tightened carbon emission regulations such as setting up a carbon emission quota for the industries, or considering to introduce carbon tax. Fundamental researches and technological demonstrations of CCUS systems should also be strengthened. 6. Development of Supply of Coal for Power Plant Ensuring the quantity and quality of the coal used in coal-fired power plants has a huge effect on the clean and efficient use of coal. Considering the status quo of China’s coal market, it needs to learn from the mechanisms of international energy markets to ensure a stable supply of coal based on market conditions, such as utilizing long-term forward coal contracts, coal price adjustment mechanisms, optimizing the coal and electricity price linkage mechanisms. Through a combination of long-term contract, short-term contract and temporary contract systems of purchase and sale of coal for coal-fired power plant, a scientific, impartial and authoritative price index system, which can be extended to the entire coal industry and the transportation and the utility industries needs to be established. By reforming the coal pricing mechanism, on-grid electricity prices and retail electricity prices which have strong linkage to coal will have to be reformed gradually as 107

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Chapter 4: Development of Advanced Clean Coal-fired Power Generation Technology in China 第四章：中國先進清潔煤電技術發展

well, which ultimately will prompt a coordinated, orderly and competitive electricity market to be formed and a unified, sound system of coal management for power generation industry to be built. To mitigate the environmental impacts in China caused by domestic coal mining, increasing coal imports from overseas may be helpful to supplement China’s limited domestic coal supply capacity. Also, to transmit coal-derived electricity in a long-haul will also be proved more environmental friendly than transporting coal for long distance. To reduce the levelized cost of coal-fired electricity, we need to utilize the advantages of scientific management systems and mechanisms in power plants. 7. Policy Recommendations for Coal-fired Power Generation The dominance of coal-fired power generation will continue well into the future. To develop high efficiency, clean, and low carbon coal-fired power generation technology will be of great strategic significance in this century. Clean, high efficiency and low carbon coal-fired power generation technology should be a national development priority to provide stable and affordable energy sources to underpin China’s economic growth. Pollutant emission standards for coal-fired power plants should be made on a flexible basis, depending on the location of the power plant, and other factors. The standards should be set in accordance with environmental quality requirements, with due regards to safety, efficiency, cleanness and economics, using best available technologies. At the same time, a broader air pollutant control standard covering all industries should be introduced, to realize scientific and sustainable development and reform the previous one-sided, rigidly uniform environmental management system, provided with the support of fiscal incentives, taxation policies, government subsidies or other economic measures. To promote the research and demonstration of CCUS technology, studies of the cost-effectiveness of CCUS performance in China should be sped up. Financial incentives should also be adopted to support the long-term deployment and operation of the CCUS units. Detailed measures can include the introduction of on-grid tariff subsidies for power plants equipped with CCUS units or reducing the resource tax policy.

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ZHAO Jinli (趙金立), JIANG Jiansheng (薑建生) 姜建生，內蒙古伊泰集團煤化工事業部副總經理 JIANG Jiansheng is the deputy general manager of the Yitai Energy Group and also the deputy chief engineer of its coal-chemical division. Before joining Yitai, he served in the Shaanxi Yanchang Petroleum Group. Mr. Jiang has managed the construction of more than 100 chemical projects in China and has also served as member of the Coalderived Fuel Standardization Committee under the National Energy Administration (NEA).

I. China’s Coal Utilization Principles Given its huge coal consumption, China is in urgent need to adopt forceful measures to increase coal utilization efficiencies and reduce total coal consumption. This should be a key objective of the Chinese government’s technology policy. Coal can be efficiently and cleanly utilized at large coal-fired power plants. Currently, about 60% of the coal consumed in China is for electricity generation, and roughly 6% is for producing alternative energy products. The latter shall continue to gain in share in the coming decade and is expected to reach 10% by 2020 according to forecasts by experts. In the future, increase in coal consumption will be primarily for the purpose of chemicals production. In order to guarantee the energy supply required for economic growth and to reduce coal consumption as much as possible, in addition to using all means necessary to improve the efficiency of coal-fired power plants, China needs to improve conversion efficiencies in the coal chemical industry as well. One way to improve the efficiency of coal-fired power plants is to increase the efficiency 109

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第三部分：中國專家觀點文章

of the equipment, i.e., boilers, steam turbines, electricity generators, and auxiliary equipment. Significant progresses have been made in this regard, achieving remarkably high standards. The efficiency of boilers has reached 94.8%, steam turbines, 92%, electricity generators, 98.8%, and auxiliary equipment (mainly pumps and fans), 90%. There is now little room for improvement for the efficiencies of these components. However, when considering energy conversion efficiencies in coal chemical processing, compared with developed countries, China still has potential for improvement. The National Energy Administration released the “Plan for Deep Coal Processing Demonstration Projects (for approval)” in 2012, which set specified basic and optimal requirements for industrial processes such as coal liquefaction, coal-to-gas, coal-to-olefin and coal-to-synthetic ammonia processes (Table 1). From the below table, we can see that there is room for at least another 4% improvement in energy efficiency for the coal deep processing projects in China and there is a lot of work to be done when comparing the current efficiency levels with that of developed countries. Table 1: Energy efficiency and resource consumption indicators for deep coal processing demonstration projects in China during the “12th Five-Year Plan” period * Energy Efficiency Project Indirect coal liquefaction Coal-to-gas

Basic Requirement >= 42%

>= 56%

Coal-to>= 40% olefin Coal-to>= 48% synthetic ammonia Low>= 75% grade coal enhancement

Standard Coal Equivalent (ton) Fresh Water Consumption

Optimal Level Basic Optimal Level Basic Requirement Requirement >= 47% <= 3.6 ton/ton <= 3.4 ton/ton <= 2.75 ton/ of fuel of fuel ton of standard coal >= 60% <= 2.3 <=2.0 <= 3.0 ton/ton ton/1,000 m3 ton/1,000 m3 of standard natural gas natural gas coal >= 44% <= 5.3 ton/ton <= 5.0 ton/ton <= 4 ton/ton of of olefin of olefin standard coal >= 52% <= 1.5 ton/ton <= 1.4 ton/ton <= 4 ton/ton of of ammonia of ammonia standard coal

Optimal Level

>= 52%

<= 0.13 ton/ton of coal input

—

<= 0.1 ton/ton of coal input

<= 2 ton/ton of standard coal <= 2.5 ton/ton of standard coal <= 3 ton/ton of standard coal <= 3 ton/ton of standard coal

*: Requirements for projects using low-grade coal may be relaxed accordingly; projects in areas that make it hard to adopt air-cooling technology may adjust these water consumption requirements accordingly. China has enjoyed tremendous success in the development and promotion of clean coal utilization technologies since the implementation of the 11th Five-Year Plan. Significant progress has been 110

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made in the different routes for coal conversion, processing techniques and the domestic production of processing equipment. Prominent coal conversion routes include proprietary technologies such as Shenhua Group’s direct coal liquefaction technology, methanol to olefin technology developed by the Chinese Academy of Sciences (CAS) Dalian Institute of Chemical Physics, Zhongke Synthetic Oil Technology Company’s indirect coal liquefaction technology, the coal-to-ethylene glycol technology developed by the Fujian Institute of Research on the Structure of Matter, the methanol-to-gasoline technology developed by the CAS Shanxi Institute of Coal Chemistry, and the coal tar hydrogenation technology developed by the Shaanxi Coal Chemistry Corporation. The aforementioned technologies have been successfully demonstrated in large-scale engineering projects and are ready for commercial demonstration and operation. Leading processing techniques such as the opposed multi-nozzle coal-water slurry gasification technology developed by Huadong Polytechnic University, Beijing Changzheng Engineering Company’s pulverized coal gasification technology, Tsinghua University’s Oxygen Staged Entrained Flow (OSEF) Gasifier technology, as well as low-grade coal enhancement techniques, methane generation, isothermal transformation technology, methanol-based washing processes and sulfur recycling technologies, are all being gradually refined and adopted in large production units. II. China’s Current Clean Energy Utilization On the agenda of the Third Plenary Session of the 11th CPPCC National Committee in 2010, developing China’s low-carbon economy was a priority issue for discussion, prompting a wave of preliminary proposals regarding a “low-carbon economy”. This made clear to the public that the world is facing challenges regarding energy and the environment, and, as such, developing a low-carbon, environmentally friendly green economy is an issue of immediate concern. However, because China is a country that has long relied on coal as its main source of energy, and given the fact that alternative energy sources are not sufficiently developed, concentrating on energy conservation, emissions reduction and guaranteeing the clean and efficient utilization of coal is imperative. Coal is considered a non-renewable resource. In order to greatly improve energy conservation, optimize economic structure, and to maintain the sustainable development of coal industries and improve their overall competitiveness, the integrated utilization of resources at every stage of coal production is necessary. Waste must be minimized, detoxified and utilized, and a circular economy should be developed to achieve the clean and efficient utilization of coal. Since 2005, the Chinese government has developed and implemented a series of supportive 111

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policies and measures aimed at strengthening the efficient development and clean utilization of coal resources, in conjunction with proactive and effective economic policies to develop and guide the industry onto the path of sustainable development. However, there are still many problems facing the use of coal. In particular, there are increasing challenges in terms of resource utilization and environmental protection. Under the current global initiative for low-carbon economic development, new requirements have been set forth regarding clean and efficient coal utilization. Therefore, speeding up the pace of clean coal production and utilization, improving development and utilization efficiencies of coal resources, controlling pollutant emissions and fostering a new coal consuming industry structure that focuses on resource-saving, clean, safe and sustainable development are vital for guaranteeing a stable national energy supply and supporting rapid and stable socio-economic development. A circular economy is an emerging model of economic development in the coal sector. Implementing such an economic strategy is the best way to ensuring sustainable development as it directly influences areas such as national energy security, ecological conservation and economic sustainability. It can be said that, in order for coal-consuming enterprises to further realize clean and efficient coal utilization, the development of a circular economy cannot be circumvented. In accordance with this line of thought on the development of a circular economy, enterprises should follow the principle of “reducing consumption, reutilization and recycling” put forward by the government. Discharged water from wells, coal ashes, gangue and coal-bed gas should be utilized to greater effect. Enterprises should shift from relying on consumption-driven growth to focusing on improving the quality and effectiveness of their utilization of coal in an effort to achieve a more comprehensive development of coal and its associated resources, deep coal processing, efficient utilization and eco-friendly coal industries. Separating the carbon of higher heating value from the hydrocarbons and lighter components of lower heating values can enhance coal utilization and improve coal conversion efficiencies, thus adding value to the production process. Since the turn of the century, several research institutes in China have emerged dedicated to improving the quality of coal. Several of these institutes have rolled out industrial demonstration units, such as Lanzhou Tianhua Research Institute’s Gyration Drying technology, Jinan Tianli Fluidized-Bed Coal Drying system, the LCC Low-Temperature Carbon Distilling technology co-developed by Wuhuan Engineering Company and Datang Huayin, Beijing Shenwu’s Dry Distillation Rotary Kiln technology, Shenhua’s Low-Grade Coal Enhancement technology, the Coal Quality Improvement technology developed by the Institute of Process Engineering of the Chinese Academy of Sciences (CAS), Tsinghua-Tiansu Fast Pyrolysis 112

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technology, and Zhongke Synthetic Oil Company’s Staged Coal Liquefaction technology. Given today’s high oil prices, if these technologies can be widely adopted, China will be able to reduce its over-reliance on oil and gain an economic advantage. At the same time, such technologies allow China to make full use of its abundant coal resources and are in line with the world-wide trend of low-carbon and environmentally friendly development. In the long term, the future of coal chemical processing technologies is promising. Promoting these technologies is crucial for advancing the development of a green economy in China. III. Coal-based Fuel Production Technologies in China Of the coal liquefaction demonstration projects undertaken in the 11th Five-Year Plan, four are coal-to-liquid commercial demonstration projects: Shenhua’s direct liquefaction plant, Zhongke’s indirect liquefaction plant, Yongzhou Mining Company’s indirect liquefaction plant and CAS Shanxi Institute of Coal Chemistry’s MTG (methanol-to-gasoline) facility. In essence, coal-toliquids production is an example of clean and comprehensive coal chemical utilization. It can help to diversify a coal enterprise’s oil production chain and optimize its energy mix, thereby improving the sustainability of related heavy chemical processing industries. Because coal resources are rich in the remote, western parts of China, utilizing in-house developed coal liquefaction technologies will help provide a dynamic and adaptable “strategic oil reserve” for China and offer a solution to the air pollution troubling major Chinese cities. The Yitai Group of Inner Mongolia, Shanxi Lu’an Mining Group, Shenhua Group and Yongzhou Mining Company of Shanxi, have all begun trials with commercial demonstration projects. Under the National Energy Administration’s development plan, six companies have undertaken coal liquefaction projects with an annual production capacity totaling 18.3 million tons in Inner Mongolia, Xinjiang, Ningxia, Guizhou, Shanxi and Shaanxi. These initiatives, once fully implemented, will undoubtedly be of great significance to China’s national energy strategy. Globally speaking, China’s coal-to-olefin technologies (MTP, MTO) now rank among the world’s best. In 2010, a 600,000 ton annual coal-to-olefins (propylene, ethylene) project in Baotou by Shenhua commenced production, breaking the age-old tradition of refining naphtha from petroleum and using this as the primary source for olefin production. This has helped ease the Chinese government’s concerns over an oil shortage, and has demonstrated benefits with respect to raw material and production costs. This technology has opened up an alternative route to producing olefins from naphtha, significantly relieving China’s oil shortage and promoting the growth of the country’s new chemical processing industry. 113

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The relatively low capital requirement and maturity of the technology have led to large capital flows into the coal-to-methanol industry in China. By the end of 2012, China’s total methanol production capacity had amounted to 51.491 million tons, or roughly 50% of total global capacity. The load factor for the entire coal-based methanol fleet was only 60.8% with a total production of 31.29 million tons and an apparent consumption of 36.22 million tons. The capacity surplus in the methanol industry has given rise to the current dimethyl ether (DME) and methanol-gasoline supply chains in China today. The National Development and Reform Commission (NDRC) has released the M85 methanol-gasoline standard for vehicles, and vehicles that run solely on DME and methanol are in the process of being developed. Nitrogen fertilizer production is a traditional coal chemical industry in China. Technological advances in coal chemical processes in general are directly applicable to the nitrogen fertilizer industry, with the industry as a whole consuming almost half the coal used for chemical processing. China’s designed capacity for urea production in 2011 reached 69 million tons and is expected to increase to 85 million tons by 2015. Spare urea capacity is expected to exceed 10 million tons. IV. Emissions Reduction in China’s Coal Industry The chemical processing industry, based on coal, natural gas and oil, is a cornerstone of China’s national economy and is responsible for a large portion of energy resource consumption and pollutant emission. In 2012, this industry consumed 473 million tons of standard coal equivalent, accounting for about 18% of total industrial energy consumption. In 2011, total wastewater discharges from the industry amounted to 4.39 billion tons, with 581,000 tons of chemical oxygen demand (COD), 2.311 million tons of sulfur dioxide, 115,000 tons of ammonia nitride and almost 1 million tons of nitrogen oxides, making the chemical processing industry one of the most polluting within the industrial sector. The environmental costs associated with developing coal chemical processing capacities are huge. Severe smog was an issue for major Chinese cities during the winter of 2013, sounding alarm bells for China. The Chinese government, having learnt from the experiences of developed countries, has released a basket of environmental policies and laws and has stipulated stricter standards to limit total emission volumes. According to the government target, energy consumption for every RMB 10,000 of added industrial value in the coal chemical and petrochemical production industry should be 18% lower than the levels reached in 2012 by the end of 2017. For this to happen, the energy intensity of key industrial products must continue to fall. In addition, the entire industrial chemical oxygen demand will be reduced by 8% and the emission of sulfur dioxide, ammonia nitride and nitrogen 114

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oxides emissions will have to be reduced by 8%, 10% and 10%, respectively. Water consumption per unit of added industrial value must decrease by 30%. The goal is to achieve 100% waste water treatment before its steady and safe discharge. The water reuse rate should be increased to 93% or above, the comprehensive reutilization of solid waste should reach 75%, while the secured disposal rate of hazardous materials should be 100%. Since the 11th Five-Year Plan, the coal chemical industry has accelerated its pace of industrial restructuring in accordance with energy saving and emission reduction requirements, actively promoting energy saving environmental technologies, new devices, and continues to strengthen operational and management practices. These efforts have led to noticeable results, with energy consumption decreasing significantly and waste volumes reaching unexpectedly low levels. In terms of energy efficiency, the transformed coal chemical industry has shown signs of great improvement and is now at an advanced, world-class level. However, certain conventional chemical processing industries still consume a high level of energy resources and emit large amounts of pollutants. There are discrepancies across the industry with respect to technological equipment and technical expertise, and certain enterprises are lagging behind with their development of energy saving measures, cleaner production techniques and comprehensive utilization of resources. While energy consumption per unit of production and levels of pollutant emission at certain facilities are well above international standards, across the industry, statistics reporting, monitoring and evaluation systems are yet to be established or improved. All in all, environmental standards are far from those expected of an ecological civilization. China’s continued economic and energy demand growth poses a serious threat to resources and the environment. Consequently, certain conventional petrochemical and chemical industries that are highly polluting and energy consuming are now under public scrutiny, posing new challenges to the sustainable development of the industry as a whole. In order to meet the country’s medium to long term binding targets of energy saving and emission reduction and its objective to control overall consumption, the coal chemical industry must adopt the so-called “new industrialization scheme”, centralizing and scaling up production while also eliminating outdated production capacity. Development must be based on endogenous and innovative growth, energy utilization efficiencies must be further improved, cleaner production methods should be actively promoted and a circular economy should be developed, all in an effort to create resource-saving and environmentally friendly enterprises. In conclusion, China has to expand the development of coal-based fuels and chemicals during the forthcoming energy transition phase in the next few decades, with the hope to partially 115

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substitute demand for scarce resources, such as oil and gas, with coal resources. Efficient and clean coal conversion will be essential and in this regard, relevant technologies in China should be encouraged to gradually mature and more commercial demonstration projects should made to be under way.

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Chapter 6: Current Application and Development Prospects of China’s Coal Gasification Technology 第六章：中國煤氣化技術的現狀及發展趨勢 WANG Yuqing (王玉慶) 王玉慶，中國石油化工集團公司科技部副主任，教授級高級工程師 WANG Yuqing is the deputy director of the research and development department of Sinopec. He graduated from the Department of Chemical Engineering at the Tianjin University in 1982 and had more than 20 years of experiences working with Sinopec. He worked as the deputy director and then director of the Chemical Division of the Research and Development Department of Sinopec and was appointed as the deputy director of the Research and Development Department of Sinopec in 2005. Mr. Wang also served as the director general of the Synthetic Rubber Industry Association of China between 2005 and 2013 and member of the Patent Committee of the Intellectual Property Society of China. He has published more than twenty papers in the academic journals in China.

Abstract: This article reviews the recent progress in the development of coal gasification technology both in China and overseas, as well as the current application and development trends in fixed bed, fluidized bed, entrained-flow gasification and catalytic coal gasification technologies. It also gives a comparison of major coal gasification technologies in China and abroad and further examines key development areas in the coal chemical industry, such as high-efficiency energy conversion and recycling, adaptability to coal type, feasibility of scaling up, operating reliability, waste water treatment, technology integration and industry policies and regulations, etc. 117

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Keywords: coal gasification; entrained flow gasification; catalytic coal gasification Coal gasification technology is the basis of the modern coal chemical industry. It refers to the conversion of coal to synthesis gas (syngas) under high temperature, and the further conversion of the syngas to primary products such as methanol, synthetic oil and natural gas, as well as secondary products such as ethylene and propylene. The gasifier is the key equipment of the coal gasification plant that requires high up-front investment and high operating reliability, and adds a great amount of value throughout the production chain. When carrying out a decision as to which specific type of gasifier is to be utilized, it is critical to choose an appropriate gasification technology that can adapt to the type of coal as the feedstock, as well as the type of downstream products. I. The Status of the Development of Coal Gasification Technology in China and Abroad Coal accounts for 79% of global energy reserves, which makes the research and development of coal utilization technology an important part of the global energy strategy. Gasification technology has been through three stages of evolution: The first generation is featured by fixed- or movingbed gasification technology, which is exposed to key constraints in plant size, raw material selection, energy consumption and environmental performance; the second, which for the time being is the most widely used technology, is the improved fluidized bed or entrained-flow coal gasification, which is characterized by continuous feeding and high temperature liquid slagging. The third generation gasification technology, such as catalytic or hydrogenate gasification, is still at laboratory or pilot scale. China’s coal gasification industry has rapidly transitioned from the conventional UGI (United Gas Improvement) gasifiers (involving the intermittent gasification of lump coal) to pressurized gasification technology, and has developed its own patented coal gasification technologies. According to preliminary statistics, there are more than 80 advanced coal gasification units at various development stages in China, of which more than half are already in operation. These units adopt largely two types of technologies: coal-water slurry gasifier (CWS) and dry pulverized coal gasifier. Among the CWS gasifiers, 27 are GE (General Electric) gasifiers (16 in operation), 35 are four nozzle packages (13 in operation), and the rest are staged gasifiers and multi-component slurry gasifiers (MCSG). Among the dry pulverized coal gasifiers, 18 are Shell gasifiers (11 in operation), 2 are GSP (Gas Subcooled Process) gasifiers, with the rest using other technological packages from Lurgi, BGL(British Gas/Lurgi), China Aerospace Science and Technology Co (HTL pulverized coal gasification), Sinopec Engineering (single nozzle cold-wall type pressurized 118

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pulverized coal gasification), and the Thermal Power Research Institute (TPRI) based in Xian (two-stage dry pressurized pulverized coal gasification). 1.1 Fixed bed coal gasification technology Fixed bed coal gasification, also known as moving bed coal gasification, is the world’s earliest commercialized coal gasification technology. A Fixed bed normally uses lump coal or coking coal as feedstock, which are loaded into the top of the gasifier, then move downward through a drying zone, a carbonization zone, a gasification zone, and a combustion zone, before reducing to ash or slag to be moved out of the furnace. The gasification agent is introduced at the bottom of the gasifier and flows countercurrently upward, preheated in the ash/slag zone before entering the combustion zone and gasification zone. Major large-scale fixed bed coal gasification technologies include processes developed by Lurgi and BGL. The BGL process has evolved from the Lurgi process and improves the latter’s performance through lowering the volume ratio of steam to oxygen, increasing the temperature of the gasification zone and achieving environment-friendly molten state slagging. The BGL method is more suitable for coal with a low ash melting point and low steam gasification reactivity. 1.2 Fluidized bed and boiling bed coal gasification technology This type of technology requires the gasification agent to be blown from the bottom of the furnace, so that fine coal (particles less than 6 mm in size) forms a con- or counter-current reaction in the furnace whereby pulverized coal and the gasification agent move concurrently at the tapered bottom part of the furnace, and con- or counter-currently at the cylindrical top portion of the furnace. The ash from the production process is removed at solid state. Typical furnaces include the normal pressure Winkler furnace and pressurized HTW (High Temperature Winkler) furnace, as well as ash agglomerating technology developed by the Shanxi Institute of Coal Chemistry. 1.3 Entrained flow coal gasification technology Entrained-flow gasification technology takes coal in its pulverized or slurry form and mixes it with a gasification agent, and feeds the components concurrently into a reaction furnace of a temperature higher than the ash’s melting point. To compensate for the loss due to the short duration of reaction, the size of the coal particles has to be less than 0.1 mm to ensure large enough surface areas for reaction. The ash is then discharged in liquid form from the gasifier. Entrained-flow gasification technology represents the mainstream large-scale development of clean and efficient 119

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coal gasification technology, and can be further classified into two categories - pulverized coal feed and coal water slurry feed. GE Energy gasifier, multi-nozzle mounted gasifier, E-gas gasifier and Tsinghua gasifier use coal water slurry feed technique, while Shell gasifier, GSP gasifier, aerospace heaters and SE gasifier use pulverized coal feed technique. 1.4 Advanced coal gasification technology The third generation coal gasification technologies include catalytic gasification, hydrogasification, underground coal gasification, plasma gasification, solar gasification and nuclear residual heat gasification, and are mostly in the laboratory testing or pilot trial phase. Among them the catalytic gasification technology is deemed to be the most promising and attracts the greatest amount of attention and research resources. It is a solid state reaction that mixes pulverized coal with a catalyst at a predetermined ratio. The catalyst then erodes the coal’s surface and speeds up reaction through greater contact area between coal and gasification agent. Compared with conventional coal gasification technology, catalytic gasification can significantly reduce the reaction temperature, increase the reaction rate, and improve the gas mixture composition resulting in an increase in yield. Syngas generated from catalytic gasification shortens the methane production process and improves its economics. Currently, the difficulties related to catalytic gasification lie in the catalyst, specifically in the price, recycling ratio, and secondary pollution concerns of the catalyst. The U.S. company Great Point Energy (GPE) owns the world-class “onestep low-temperature catalytic hydrolysis methanation” coal gasification technology, patented as BluegasTM. This technology and China’s ENN catalytic coal gasification technology have both undergone pilot-scale testing and early commercial demonstrations. II. A Comparison of Major Coal Gasification Technologies Among the three technological categories of coal gasification, fixed-bed gasification is relatively simple, but requires a higher uniformity and permeability of the bed, and has specific requirements for lump coal as the fuel source. It also has a lower output rate of product gas (CO + H2) and needs a complex procedure to treat the wastewater and other byproducts and thus comes with higher environmental risks. The fluidized bed takes pulverized coal and can recycle water from ash/slag; however it still has problems with low gasification reaction temperatures, short reaction durations, and requirements for higher coal reactivity. Fluidized bed technology also has problems with slag and airborne ash particles. Entrained-flow gasification technology uses dry pulverized coal or coal-water slurry as the feed, has greater feedstock flexibility, greater gasification capacities, 120

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and higher carbon conversion efficiencies. Therefore, this technology is easier to scale up and has been rapidly deployed in many projects. According to the information released at the “2013 Gasification Technologies Conference” held in Springs, Colorado, USA, Shell’s coal gasification technology, GE’s coal-water-slurry gasification technology and multi-nozzle mounted gasification technologies are among the top three technologies adopted by industrial users, based on syngas production capacity. In terms of high-temperature syngas cooling, waste heat recovery boilers are suitable for the Integrated Gasification Combined Cycle (IGCC) process. Shell, E-GAS and GE all adopt waste heat recovery boilers in their IGCC facilities, which generate high- or medium-pressure steam from waste heat and utilizes the steam to generate electricity. In other processes such as hydrogen gasification, where the conversion process requires a large amount of steam to react with CO in the raw syngas to form H2, a direct quench system is more suitable. Saturated steam generated from the syngas water quench cooling process can be used for the conversion, which eliminates the need to generate steam otherwise and shortens the process substantially. These gasifiers, called water quench gasifiers, do not need waste heat recovery boilers and have good operating stability, and therefore have significantly lower overall cost. III. Coal Gasification Technology Trends and Countermeasures Entrained flow gasification technology has demonstrated good economic and social benefits, and is now one of the cleanest coal utilization technologies. Future efforts on coal gasification technologies need to be focused on further improvements to the overall efficiency of coal gasification, coal type adaptability, single gasifier production capacity and reliability, enhancement and promotion of green gasification process, reduction of emissions, lowering up-front investment costs in the project, and strengthening the integration of new coal gasification and chemical technologies.. 3.1 Efficient energy conversion and recovery during the coal gasification process Recovery of the waste heat generated from the syngas conversion process is a key production issue in the coal gasification industry. Major techniques applied to the recovery of waste heat include direct quench and waste heat recovery steam generation. The quench process requires equipment that is simple to build and low in price, but has relatively low heat recovery efficiency. Waste heat boilers enjoy higher heat recovery efficiency, but require higher capital investment and have larger footprint. Currently, entrained-flow gasification technology has achieved a carbon 121

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Chapter 6: Current Application and Development Prospects of China’s Coal Gasification Technology 第六章：中國煤氣化技術的現狀及發展趨勢

conversion rate of about 99%, which leaves little room for further improvement of the gasifier efficiency. More research and development focus shall be placed on the integration of processes and recovery of high-temperature waste heat to achieve further energy savings. 3.2 Coal type adaptability What has driven the evolution of coal gasification technology from fixed (moving) beds to fluidized beds and then to entrained-flow bed technology is not only the need for large-scale production capacity, but also, more importantly, the need for feedstock flexibility. Selecting the right gasification technologies to match coal availability and quality as well as desired end product is the key for coal gasification projects. Developing coal blending techniques, improving coal quality and combing multiple gasification technologies can help optimize the allocation of resources and improve the efficiencies of coal utilization. 3.3 Large-scale coal gasification Large-scale, single-product is the key feature of the modern process industries. Similarly, the transition of coal gasification technology to large-scale gasifiers is in sync with this general trend. Large-scale coal chemical processing projects not only greatly improve the economic performance of a single project, but can also optimize the development of the entire industrial chain. As the size of the gasifier is limited by manufacturing, transportation and installation capacities, largescale production can be better achieved through improving the temperature, pressure, and the mixing of coal and gasification agent in the gasifier. Entrained-flow gasification thus emerges as the most appealing technology for scaling-up. In fact, almost all the production facilities with a capacity of 1500 t/d or greater have adopted pressurized entrained-flow gasification technology. Further increasing the pressure, intensifying the mixing of coal and gasification agent and adopting multiple feeds can strengthen the advantages of entrained-flow gasification. 3.4 Improving coal gasification plant reliability Gasifiers’ stability directly impacts the stable operation of the entire coal chemical processing plant. Therefore, the industry sets high reliability requirements for gasification facilities. Gasifier reliability can be improved through mainly three approaches. The first is improving feedstock quality and consistency through establishing standards for coal fed into the furnace and proper blending or limestone addition. The second is process optimization through reducing process complexity and process innovation. The third is the optimization of key equipment (such as 122

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nozzles, valves, refractory lining, and etc.) including reliability improvement and breakthroughs in key equipment design, key material, and key area protection technologies. 3.5 Coal gasification wastewater issues and treatment Coal gasification wastewater is a typical organic industrial wastewater that contains a high concentration of toxics and hard-to-degrade pollutants. The wastewater composition also varies depending on the type of raw coal and gasification technology the plant is using. Entrained-flow coal gasification generates the least amount of wastewater with the lowest level of pollution, whereas fixed bed coal gasification generates wastewater with higher levels of pollution. In particular, the phenolic compounds in the wastewater from the latter is difficult to treat and involves high treatment costs. Therefore, choosing gasification technologies with lower wastewater discharge, and actively and steadily adopting new technologies, processes, equipment and materials are critical to resolving wastewater issues related to coal gasification. 3.6 The integration of coal gasification and coal chemical processing technology Based on the characteristics of the coal and the desired final products, hybrid and polygeneration technologies should be developed for coal processing and conversion. For example, the integration of coal gasification and coal chemical processing technologies can be achieved through selecting the appropriate sulfur-tolerant CO conversion and acid gas removal processes and catalysts and solvents to match the gasification technology. Such integrations help improve the stability and economics of coal gasification plants and can eventually lead to systematic improvements in coal utilization and higher conversion efficiencies. 3.7 The influence of China’s coal chemical industry policy China’s energy mix, characterized by a lack of oil and gas and an abundance of coal, has given the coal chemical processing industry a critical role in the country’s energy security and restructuring of its raw material supply. China has the most diverse portfolio of coal gasification technologies, and has built the largest number of coal gasification facilities in the world. However, the intensive water consumption, CO2 emission, solid and liquid waste discharge, and air emissions from coal chemical processing have significantly impacted the environment. The “12th Five-Year Plan for Energy Development” issued by the Chinese government has rolled out stricter national policy that regulates the coal chemical industry and specifies targets for new coal chemical projects’ energy conversion efficiency, overall energy consumption and fresh water consumption per ton of 123

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product. It also specifies technological and equipment requirements for demonstration projects. By further improving gasification efficiency and achieving higher recycling of CO2, an ideal facility could greatly reduce its carbon footprint and costs associated with carbon taxes. These policies will help spur innovations in China’s coal chemical processing industry and continue advancing coal gasification technologies. IV. Summary Development of the coal gasification industry and technology has to be based on the efficient use of coal resources and environmentally friendly practices and production processes, thereby allowing efficient and clean coal gasification technologies to become standard in the industry. Entrained-flow gasification technology, with its ability of large-scale production and cleaner and more efficient utilization of coal as well as stronger coal type adaptabilities, represents the direction of the industry’s future development. Further improvements to the entrained-flow gasification technology shall be made through the gasifier’s heterogeneous reaction process control, high-temperature syngas cooling optimization, gasification process optimization, key equipment improvements, efficient energy conversion and waste heat recovery, expanding coal type adaptability, and achieving higher reliability. The development of co-gasification of coal and organic waste and high temperature entrained-flow gasifier can enable reuse of organic pollutants. For other advanced technologies such as catalytic coal gasification, more fundamental research is required to achieve breakthroughs that are critical for commercialization.

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Chapter 7: Improving the Competitiveness of China’s Petrochemical Industry Through Clean Coal Technologies 第七章：利用潔淨煤技術提升中國石化行業競爭力 WU Qingle (吳慶樂) 吳慶樂，殼牌中國公司總經理 WU Qingle is currently the general manager for downstream strategy and business development at Shell China. He joined Shell China in 2005 and has 18 years of experiences in China’s oil and gas industries. He also worked for China International Engineering Consulting Company (CIECC) as a consultant and has provided consultancy services to the central government on numerous refining and petrochemical projects. Before joining Shell, Mr. Wu was the chief representative of Unocal’s Shanghai Office, in charge of the LNG and the rare earth business in China. Wu obtained his master’s degree from Tsinghua University.

Over the past ten years, rising global oil prices have put pressure on governments all over the world to use more alternative energy sources such as coal, natural gas and renewables. China is an “energy giant”, but energy resources per capita remains low and coal consumption accounts for roughly 67% of primary energy consumption. Taking into account economic reform and adjustments to the energy structure, and with demand from energy-intensive industries such as steel and cement expected to peak soon, the demand for coal in the heavy chemical industry is stabilizing. Coal consumption growth, therefore, will slow down, and will be driven in the future primarily by the power generation sector. It is expected that coal consumption will increase annually by 3.8% from 2010 to 2020, and China will need 3.25 billion tons of coal equivalent, 125

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or 4.55 billion tons of raw coal, in 2020. After 2020, with industrialization and the large-scale development of renewables and shale gas, it is possible that the demand for coal in China will gradually decrease. In the fairly long term it will be very difficult for China to change its energy structure, which is currently dominated by coal. In order to meet the energy demand for China’s future economic and social growth and as a promising technological alternative to petrochemicals in the near future, there is a need for promoting clean coal utilization and developing coal-based energy and chemical processing systems based on advanced coal gasification. Not only will this improve efficiency in the coal conversion process and reduce the emission of pollutants, by-products such as fertilizer, methanol, hydrogen gas, liquid fuels and olefins can also be extracted from the process. This will play a significant role in lowering the country’s reliance on imported oil, mitigating the impact of high oil prices on the economy and satisfying the demand for transportation fuel and petrochemical products amidst China’s rapid economic development. Given China’s resource endowment and efficiencies in energy utilization, coal should be prioritized for power generation. The research, development and industrial application of Integrated Gasification Combined Cycle (IGCC) technology as well as ultra-supercritical power generation (reaching steam temperatures of 700 Degrees Celsius), will further enhance coal combustion efficiency. Also important is the clean and efficient development of a medium-scale coal chemical industry. Special focus should be placed on strategic oil and gas replacement technologies such as coal-to-liquids (CTL), coal-to-syngas (CSNG), coal-to-methanol (CTM) and coal-to-olefins (CTO) processes. A certain number of industrial installations should be built to preserve the capability of scaling and commercialization of these technologies. However, the development of coal chemical should be carefully controlled due to its low conversion efficiency, high water consumption and pollutions. All things considered, CTL capacity by 2020 should not exceed 20 million tons, CTM and matching methanol-to-olefins, 20 million tons, CSNG, 50 billion cubic meters, and other coal chemical capacity, 10 million tons. Development goals for after 2020 hinge on the future energy security status. Policy-wise, China should establish strict standards for energy consumption, water consumption and pollution controls, and encourage centralized polygeneration with higher energy conversion efficiencies. A particular focus should be given to the development of IGCC. In this process, the high-quality components of syngas are used to produce coal chemical products, and the remainder is used to generate electricity through a syngas-steam combined cycle. This process combines chemical processing and energy production, and allows for the maximum utilization of both fuel and energy. 126

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Coal Chemical as the Feasible Option to Improve the Profitability of Petrochemical Companies The syngas produced from coal gasification is mainly comprised of carbon monoxide (CO) and hydrogen (H2), which can be further processed into high-purity hydrogen. As a result of Sinopec’s “coal for oil” project, most oil refineries have now modified their hydrogen generators to use coal instead of heavy oil or asphalt, with apparent improvements in profitability. Based on current oil prices, the per-ton cost of hydrogen produced from light oil is over RMB 20, 000, and that produced from heavy oil is above RMB 15,000. However, given that the delivered cost of coal is RMB 500 per ton (including taxes), if we were to use coal instead, the cost of per ton of hydrogen would be merely between RMB 8,000 and RMB 8,500. (Figure 1) A complete hydrogenation refinery that processes over 10 million tons of imported sour crude needs 50,000 – 70,000 tons of hydrogen in addition to reformed hydrogen. Substituting coal for light oil in the hydrogen plant can reduce the refinery’s cost by RMB 600 - 800 million annually. This demonstrates the economic benefits of generating hydrogen through coal/petroleum-coke gasification. Figure 1: Comparison of hydrogen manufacturing cost by sources (RMB/ton)

Moreover, as more and more high-sulfur crude is imported and processed, more and more high-sulfur petroleum coke is produced. Using high-sulfur petroleum coke to produce hydrogen not only puts the former to good use, but reduces refining costs as well. Blending Coal-based Syngas with Refinery Dry Gas or Fuel Oil Currently, refineries primarily use natural gas, dry gas and fuel oil as fuel. As domestic natural 127

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gas price gradually linked with international prices, refineries are faced with shortage of natural gas and higher prices. Meanwhile fuel oil prices also linger at higher levels with low-sulfur fuel oil priced largely above RMB 3000 per ton. Blending lower-heating-value syngas with the higherheating-value refinery dry gas or co-firing syngas with fuel oil can reduce the overall fuel demand of refineries. To some extent, it is equivalent to building a coal-to-liquids plant with much lower investment cost. Furthermore, the refinery dry gas saved in this process can serve as feedstock for olefins production, which improves the overall profitability. Take an integrated refinery and petrochemical complex in China for example. It needs 300,000 tons of fuel oil a year in net. If fed with low-sulfur fuel oil purchased at RMB 3,000 per ton, the fuel cost would be RMB 900 million a year. However, if blending in coal-based syngas, the demand for syngas would be around 178,000 cubic meters per hour - equivalent to the output of a 2,500 ton/day gasifier. Preliminary estimates indicate that the blending would save about RMB 300 - 400 million a year of fuel cost. Coal-based Polygeneration - the Future Development trend The government has introduced a binding target that by 2020, CO2 emissions per unit of GDP shall be 45% lower than 2005 levels. However, low carbon development means more than just the development and deployment of new energy sources. Given China’s resource endowment and technological capability, the development of renewables will have a limited effect in reducing carbon emissions in the short to medium term. Hence, clean and efficient utilization of conventional energy sources, such as fossil fuels, shall play a decisive role in China’s energy strategy. The lower-heating-value-based gross efficiency of an IGCC plant that uses a Shell gasifier and a state-of-the-art gas turbine can reach about 46%. Compared with an advanced conventional pulverized coal plant, the IGCC plant’s carbon dioxide (CO2) emissions are 10-15% lower. Sulfur dioxide and particulate emissions from the combustion of clean syngas are very low, and the nitrogen oxides emissions can be controlled by adding excess nitrogen and water to the syngas before it entering the gas turbine. Overall, the emissions performance of IGCC plants has a clear edge over that of advanced conventional coal-fired power plants, and is comparable with that of combined-cycle gas turbine (CCGT) plants. Power cost is one of the major factors that impact the profitability of a petrochemical company. Due to environmental regulations, building conventional coal boilers in eastern China is no longer possible. This is an incentive for oil refineries in eastern china and southern coastal regions to use IGCC technology for onsite power generation. Coal-based polygeneration allows for more efficient 128

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and integrated utilization of coal, and should be a new model for technological and industrial development. These systems gasify coal, residual oil and petroleum coke to produce raw syngas. The raw syngas, once purified, can be used for combined electricity, chemicals, heat, and hydrogen production. In other words, polygeneration yields high value-added chemical products, such as methanol (feedstock for producing olefins), acetic acid and ethanol, dimethyl ether, and synthetic ammonia, and town gas in addition to electricity. It can also generate hydrogen for fuel cells. By optimizing the flows of raw materials and energies in this process, significant advantages can be attained in terms of up-front investment costs, unit production costs and pollutant emissions, compared to producing these products separately. The output of polygeneration can also be adjusted in response to market demand changes or electricity load fluctuations. The ethanol produced can be used directly for ethanol gasoline blending, and the methanol produced can be used for olefins and propylene production. Combining modern coal chemical processing and conventional petrochemical production represents a new direction for China’s petrochemical industry, which can effectively reduce reliance on foreign oil and improve industrial competitiveness.

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Chapter 8: An Outlook for Sinopec’s Coal Chemical Development 第八章：中石化新型煤化工發展展望

第三部分：中國專家觀點文章

Chapter 8: An Outlook for Sinopec’s Coal Chemical Development 第八章：中石化新型煤化工發展展望 XU Yi (許毅) 許毅，中石化煤化工領導小組副主任，中石化長城能源化工公司副總經理 XU Yi is the deputy director of Sinopec’s leading group office on coal chemical development and also the deputy general manager of the Sinopec Great Wall Energy and Chemical Co. Ltd. He has rich experience in the management of coal chemical projects in China and has been deeply involved in business negotiation and engineering management. He earned a Master of Western Economics degree from the Huazhong University of Science and Technology and obtained his bachelor’s degree in chemistry from the Chengdu University of Science and Technology (known as the Sichuan University now)

Abstract: China’s abundant coal resources have fueled the country’s economic growth, but have also brought serious environmental problems. Improving current coal utilization processes and promoting clean coal utilization technologies have become topmost concerns in the coal mining and energy industry. Recognizing the necessity of promoting clean coal technologies in China and considering the policy measures currently in place, this article gives a brief review of Sinopec’s expanding coal chemical business, its motivations, technological and industrial advantages, current development and long-term objectives, as well as its ambitions to lead the world in the clean conversion and efficient utilization of coal. Keywords: Clean utilization of coal; 12th Five-Year Plan; Coal chemical; Carbon emission

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I. Rapid Development of the Coal Chemical Industry in China 1.1 The necessity for advancing clean coal utilization technologies in China Energy is the backbone of a nation’s economy. In terms of energy supply, China’s geological conditions present a scenario that is rich in coal but lacking in oil and gas. Coal accounts for over 95% of proven energy reserves in China, and over 70% of primary energy supply and consumption. The dominance of coal in the country’s energy mix will remain unchallenged in the coming decades despite the national strategy of vigorously developing newer and greener forms of energy. However, while coal has allowed for the rapid economic development of China, poor utilization techniques have brought significant environmental and ecological consequences. Statistics have shown that China’s CO2 emissions exceeded 8 billion tons in 2012, with SO2 emissions of 21.176 million tons and NOx emissions of 23.378 million tons. High levels of carbon emissions have brought huge pressures from international influences, while inadequately controlled flue gas emissions have caused severe air pollution. Ash and heavy metal particles released from coal combustion are regarded as one of the key factors leading to the smog in big cities such as Beijing. Furthermore, coal utilization uses vast amounts of water resources. If industrial water-use cannot be appropriately handled severe ecological problems such as groundwater depletion, deterioration of vegetation and land desertification would occur as aftermath. In an attempt to better utilize China’s advantage with its coal reserves, there is a dire need for better coal utilization processes and the widespread adoption of clean technologies. Clean coal technology is a blanket term used to describe anti-pollution measures and efficiency improvement technologies adopted in coal mining, processing, combustion and conversion. It primarily includes clean coal mining, coal processing, high efficiency coal combustion and coal conversion technologies. Of these, advanced coal conversion technologies have laid the foundation for the rapidly developing coal chemical industry. In recent years, the rapid deployment and successful operation of coal chemical demonstration projects has validated the technological and economic feasibility of this technology. 1.2 Policy support creates valuable development opportunities for the coal chemical industry China has made it clear in its “12th Five-Year Plan for Energy Technology Development” that research efforts will be focused on exploring cleaner and more efficient technologies for the coal processing and conversion industries. A number of key technologies will be given priority in the development plan, such as: underground coal selection technologies, quality improvement technologies for lignite and other lower-grade coal, advanced coal gasification technologies, 131

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indirect and direct coal liquefaction technologies, coal-to-chemicals conversion technologies, low-to-medium temperature conversion of coal tar to liquid and chemicals, coking efficiency improvement systems, advanced “three wastes” (air emissions, wastewater, and coal combustion residuals) processing systems, as well as combined heat, power and chemical polygeneration technologies. The Plan also sets out specific requirements for relevant technologies including their deployment of techniques, equipment and catalysts. In another national plan, the “12th Five-Year Plan for Coal Industry Development”, the central government set the target of building 10 hundred-million-ton and 10 fifty-million-ton large-scale coal enterprises by 2015 to deliver 60% or more of the total coal production. Achieving these goals will require the large-scale coal enterprises in China to lead the massive expansion of coal production and processing sites to ensure a stable and efficient supply of energy from coal. This will generate greater economic and environmental benefits while curbing coal consumption growth. In provincial regions like Inner Mongolia, Shaanxi, Shanxi, Yunnan, Guizhou and Xinjiang, the “12th Five-Year Plan for Coal Industry Development” also calls for identifying areas with suitable coal types and relatively abundant water resources to develop demonstration plants for coal-to-liquid, coal-to-gas, coal-to-olefins and coal-to-ethylene glycol projects. This is to speed up the industrial application of advanced technologies, to constantly innovate and refine these technologies in order to improve conversion efficiency, lower water and coal consumption, lower production costs and to increase competitiveness. It also supports the research, development and demonstration of carbon capture, utilization and sequestration technologies. In the 12th Five-Year period, the Chinese government emphasized the transition from “preliminary processing of coal” to “deep processing of coal” in order to maximize the utilization and the value of the same amount of coal while reducing emissions. The plan encourages the development of optimized routes of coal conversion while either holding coal consumption constant or even reducing the consumption. The purpose for developing “coal deep processing” is to reduce the amounts used as well as to optimize the use of coal, to maximize benefits using technology, and to support greater economic development with the same amount of resources. The Plan also encourages divestment from outdated production capacities and replacing them with advanced coal chemical demonstration projects. The National Development and Reform Commission (NDRC) has planned to approve 15 deep coal processing demonstration projects by the end of the 12th FiveYear period and provide strong policy and administrative support for other advanced coal chemical projects. This has created remarkable development opportunities for the modern coal chemical industry in China. 132

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II. Sinopec’s Progress in Pushing Forward with Clean Coal Utilization 2.1 Current developments of Sinopec’s clean coal utilization Sinopec is a vertically integrated energy conglomerate. It bears the dual responsibility of safeguarding national energy security and ensuring the market supply of oil products. Since 2002, in response to the demand for hydrorefining and to capture the economic advantage of coal-tohydrogen production, Sinopec has introduced advanced coal gasification technologies and has since built several coal-to-hydrogen units in cities like Anqing, Yueyang, Jinling and Nanhua. In the development of these coal gasification projects, Sinopec has not only adopted Shell’s dry-feed pulverized coal gasification technology and GE’s coal water slurry gasification technology, but has also developed its own SE-Oriental single nozzle cold wall pulverized coal gasification technology at a demonstration plant in its Yangzi Petrochemical Project. The research, design, construction and continued operation of the abovementioned units have laid a solid foundation for Sinopec in the development of its coal chemical business. 2.2 Sinopec’s coal chemical technologies Sinopec owns a number of core technology patents for modern coal chemical plant development, and has accrued rich operational, management and maintenance experience from its modern coal chemical units. Through years of dedication to research and development, design, construction and operation, Sinopec has now acquired the key techniques and design capabilities for modern coal chemical units. Its research and engineering subsidiaries have completed the design, construction and retrofitting of several liquefaction, purification, methanol synthesis, MTO, ethylene glycol and Fischer-Tropsch synthesis projects. In doing so, Sinopec currently holds multiple patents and proprietary technologies in process and key equipment design, control systems optimization, and etc. Already owning independent intellectual property rights to a series of packaged technologies, Sinopec is also conducting pilot demonstrations of its high-temperature methanation catalyst and packaged technology for coal-based synthetic natural gas (CSNG) production. Coal-to-chemical and coal-to-liquids equipment are in the same category as oil refining and petrochemical equipment. Compared with companies in the power, coal, and other industries, Sinopec has the advantages of rich experience with the management and construction of largescale oil refineries and petrochemical facilities, as well as high-quality professional operating teams and equipment maintenance teams. Sinopec Engineering Incorporation (SEI) and Sinopec Luoyang Engineering Co. Ltd. (LPEC) have successfully completed the engineering development and design for Shenhua’s 1 million ton direct coal-to-liquid facility in Erdos, Inner Mongolia, 133

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and its 1.8 million ton methanol-to-olefin plant in Baotou, respectively. Sinopec’s expertise in the design, construction, management and operation of large-scale coal chemical and coal-to-liquid units has also been well demonstrated by the successful operations of the above two projects. 2.3 Sinopec’s efforts in the consolidated development of coal chemical The main objectives of Sinopec’s development of advanced coal chemical technologies are to diversify feedstock structure and improve product competitiveness. In 2012, China’s reliance on oil imports was as high as 58%, where Sinopec’s dependency on oil imports reached 81%. By the end of 2013, the WTI and Brent crude prices remained at $98/barrel and $110/barrel respectively. At the same time, however, the domestic coal price reached a ten-year low, allowing its per BTU price to stay well below that of oil’s . With an estimated shallow seam coal reserves (within 2,000 meters of the earth’s surface) of 38.8 trillion tons, coal appears to be the most affordable and accessible energy source for China. Sinopec has now completed the acquisition of several coal fields totaling at 30 billion tons of reserves located in Xinjiang, Inner Mongolia, Ningxia, Anhui, Guizhou and Henan, as the prerequisite for large-scale coal chemical project development. It is also planning to acquire more coal resources overseas to better position itself strategically in developing its coal chemical business. Given Sinopec’s resource and technological endowment, it has been logical and imperative for it to produce modern coal-based chemical products to moderately substitute oil derivatives. This may also help to diversify its resource mix, and allow it to organically combine petroleum, gas and coal processing to create a horizontally integrated chemical processing company that would perform better in the dual capacity of safeguarding national energy security and serving market demand. Furthermore, efforts made by Sinopec in advancing coal chemical bear great significance in terms of driving economic development and employment in Midwest China. It was under this context that Sinopec Changcheng Energy and Petrochem LLC was established in 2012. As an investment platform for the coal chemical business of Sinopec, the firm bears responsibilities for investments and operations, coordinating the construction of coal chemical projects and the specialized management of coal chemical enterprises. To some extent, this marks the dawn of a new phase of scientific management and market-oriented, standardized operation. Sinopec Changcheng will strive to be an industry leader in the field of coal chemical, and also aims to lead the world in the clean and efficient utilization of coal.

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III. Outlook for Sinopec’s Coal Chemical Development 3.1 Development areas of Sinopec’s new coal chemical technology In order to promote its modern coal chemical sector, Sinopec first needs to effectively consolidate its resources, conduct its coal mining procedures optimally and effectively and fully utilize the various ranks of coal based on their characteristics. The aim is to achieve efficient utilization while keeping capital and environmental costs at a minimum. Secondly, through the expansion and centralization of the sector, Sinopec should set up industrial parks and adopt large-scale gasifiers and reactors to minimize operation, production and transportation costs, and improve the overall economic benefits. Furthermore, Sinopec will aim for the synchronized development of its coal chemical and petrochemical products, such as low-sulfur diesel, aromatic compounds and lowcarbon olefins. From a technical perspective, Sinopec should promote large-scale, stable and efficient gasification technologies, and develop large-scale gasifiers based on current facilities in order to increase overall production capacities. From a production chain point of view, Sinopec needs to accelerate commercial demonstrations and pilot demonstrations of butanol-to-olefin, syngas to liquid fuels and high-temperature syngas methanation; the need for rapid development of various forward-looking technologies such as syngas-to-aromatics and one-step catalytic gasification, and the need for speeding up the development and deployment of various synthetic fuel technologies. It is also crucial to strengthen independent development and technological cooperation, consolidate Sinopec’s relevant resources and undertake due planning for the creation of a coal chemical platform in order to achieve the industrialization of even more core technologies. The company should also seriously and proactively address the problem of increasing carbon emissions and waste water generated from coal to chemical processes, and invest more in carbon capture and storage (CCS). Coal chemical generates significant amounts of carbon dioxide, which is only partially mitigated through conservation measures. A solution to the root of the problem lies in the capture, transportation and sequestration of the relatively high concentrations of CO2 generated from coal conversion and combustion processes. Water availability is a primary constraint in the development of coal chemical. Per capita water resources available in China are far below the world average, and the water-rich regions are usually located far from the coal reserves. In key development areas such as Xinjiang, Inner Mongolia and Shanxi, ratios of water resources to coal are 1:22, 1:30 and 1:45, respectively. With the tightening of environmental protection standards,‘zero waste water discharge’ has become a prerequisite for the approval of coal chemical units in water-scarce regions. As such, a technological breakthrough that can fundamentally resolve 135

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water conservation issues is vital for achieving ‘zero waste water discharge’. Of course, one should also consider the total reutilization of waste water in coal chemical. Depending on geological constraints, technologies that are relatively mature and cheap to deploy should be prioritized to reduce the risks and costs associated with attaining ‘zero waste water discharge’, and likewise introduced to other coal chemical enterprises. At the same time, the development and planning of core technologies such as the efficient processing of the “three wastes”, the comprehensive utilization of by-products, and the development of combined heat and power generation as well as the development of energy-saving materials will be necessary. 3.2 Long-term goals for Sinopec’s development of coal chemical projects The key focus for Sinopec’s development of coal chemical is, on one hand, the deployment of coal-to-hydrogen demonstration plants; and on the other, a concerted effort towards the construction of coal chemical projects in coal-rich provinces such as Inner Mongolia, Anhui, Xinjiang, Guizhou and Henan. Over the next eight to ten years, the company aims to become an industry leader in the field of coal chemical and a world leader in the clean and efficient utilization of coal. The company now has coal reserves totaling more than 40 billion tons, and seeks to complete a fleet of coal-to-hydrogen units and several large-scale, modern integrated coal-chemical (MTO、 CTL、 SNG) demonstration plants during the 12th Five-Year period. The goal is to supplement Sinopec’s mainstream petrochemical products with coal chemical products, which are estimated to account for 5-10% of Sinopec’s total refinery production and have become a new economic driver for the company. In doing so, Sinopec is laying the foundation for the establishment of a world class chemical processing company. With this core target in mind, the company plans to utilize its government-backed resources (including human resources) to optimize the distribution of resources, projects and products, and develop a technology platform for the chemical processing of coal. It will comprehensively push forward with the utilization of coal resources and technologies such as coal-to-gas, coal-to-olefins, coal-based non-olefin chemical products and coal-to-liquids. All in all, Sinopec will strive to be at the forefront of clean coal conversion and efficient coal utilization technologies. IV. Conclusion Given the dominance of coal in China’s energy mix and with the aim of fully utilizing the country’s coal reserves, China has been actively promoting clean coal technologies and has provided policy support for clean coal projects. In the “12th Five-Year Plan for Energy Development”, 136

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deep coal processing projects are one of the key focal areas of policy prioritization. Under these circumstances, Sinopec has acted accordingly with the national energy plan and has taken the development of coal chemical business as its top priority. Aimed at staying ahead of the curve with core technologies and reducing its carbon footprint, Sinopec plans to actively consolidate its coal resources and fully exploit its advantage in modern coal chemical businesses; while at the same time develop new coal chemical techniques. Sinopec will also be focusing on issues with carbon emissions and waste water treatment, all in an attempt to balance energy development with the economy and the environment.

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Chapter 9: Smog Control will Change China’s Coal-Centric Energy Structure 第九章：霧霾治理將改善中國以煤為主的能源結構 LIN Boqiang (林伯強) 林伯強，新華都商學院副院長，廈門大學中國能源經濟研究中心主任 LIN Boqiang is currently serving as the deputy dean of the Newhuadu Business School in China. He is also director of the China Center for Energy Economics Research (CCEER) at the Xiamen University and was appointed by the Chinese Ministry of Education as a distinguished professor under the Changjiang Scholars Program in 2008. He is also a member of the Expert Advisory Committee under the National Energy Council of China and a member of the Energy Advisory Board of the World Economic Forum. Professor Lin obtained his Ph.D in economics from the University of California at Santa Barbara.

China’s widespread smog pollution in recent years is directly related to the large-scale consumption of coal. While it is difficult to avoid pollution amidst such rapid economic development, China’s natural resource endowment, characterized by “an abundance of coal, a lack of oil and a shortage in gas”, along with industrialization and urbanization processes and the cost advantage held by coal, has made coal the primary resource in China’s energy mix. However, reducing smog requires a reduction in coal consumption and, in fact, the public outcry for curbing smog has become the greatest and most direct constraint to coal consumption in China. Tackling the smog problem calls for lowering the percentage of coal in primary energy consumption as far as possible. Coal combustion is the major source of primary and secondary PM2.5 emissions, key contributors to the smog formation. The large absolute amount of coal consumption has resulted in, astonishingly high level of emissions each year. There has been much 138

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debate as to the sources of smog formation, but it is generally agreed that fossil fuel (mainly coal) combustion and tail pipe emissions from vehicles are the top two factors. Of these two, tail pipe emissions can be addressed through stricter standards on vehicle fuels and traffic management and vehicle controls. These measures are relatively easy to implement and their effectiveness is also predictable. Yet addressing the primary source of smog - the combustion of coal – brings about challenges of various kinds. The experience of developed countries has demonstrated that effective reduction of smog requires cutting fossil fuels’ share in the energy mix, especially coal’s share, to certain lower level. However, the reality that coal has supplied a lion’s share of China’s huge energy demand at relatively low cost makes it rather difficult to reduce coal consumption in the country. When it comes to replacing coal with alternatives, the path is fairly clear; natural gas could work in the short- to middle-term, and renewables and nuclear power offer long-term alternatives. In recent years, coal’s share in primary energy consumption has steadily decreased by roughly 1% per year. Apart from the development of clean energy, the decline was mainly due to the substitution of coal with natural gas. The next step would be to aim to reduce coal consumption to 60% of the primary energy consumption by 2020, by continually substituting coal with alternative energy sources. Nuclear power has the potential to replace coal at large scale but is constrained by relatively long construction lead time. Hydropower is limited by the magnitude of potential energy. Oil is not only expensive but also approaching 60% in import dependency, so it is not a viable choice for substituting coal. The share of wind, solar and other renewable energies in primary energy consumption is very low and will not be able to replace coal in the near future (In 2013, renewables such as wind and solar accounted for less than 3% of electricity generation, and about 1% of primary energy consumption). The shortage of oil and gas, price differentials between oil/gas and coal, and the safety issues associated with nuclear suggest that, a large-scale substitution of coal will require additional support. Increasing the efficiency of coal utilization and promoting clean coal technologies are also of critical importance in the mitigation of smog formation. The room is relatively small for the electricity industry in China to improve the clean and efficient utilization of coal, but is plenty for other large coal-consuming industries. For example, district heat generators and steel and mining industries are responsible for almost 70% of national total ash emissions. Therefore, promoting clean coal utilization and efficiency improvement in non-utility industries such as manufacturing and heating should be a primary focus in the future. It is important not to underestimate the importance of coal in China’s and the world’s energy system. Coal remains the foundation of China’s energy supply. Although the coal’s share in China’s 139

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primary energy consumption has decreased by 1% annually over the past three years, coal still accounted for over 66% of primary energy consumption and 76% of the electricity generation in China in 2013. China consumed 3.61 billion tons of coal in 2013, equivalent to 49.3% of world’s total coal consumption. In other words, China consumes about the same amount of coal as all of the other countries combined. Furthermore, China’s increase in coal consumption accounted for 30.43% of the world’s increased coal consumption. Even if the growth of China’s energy demand were to slow, total demand is so high that any rate of increase in demand would still translate into a large quantity. For example, annual growth of coal demand has decreased from almost 10% to a current rate of 3%, but the latter still translates into an annual growth in quantity of almost 100 million tons. On the other hand, “using electricity to substitute for coal” as the fuel source for the end users will provide strong support for electricity demand growth and help maintain the 1:1 ratio between electricity demand and GDP growth. In turn, a strong demand for electricity provides a strong feedback signal for increasing coal consumption. In reality, coal, as a conventional fossil-fuel, plays a significant part in global energy consumption as well. Coal grew the fastest among all energy sources in 2013, contributing 57.8% of the world total energy consumption increase. According to projections by the International Energy Agency (IEA), coal could possibly replace oil as the most important energy source worldwide after the year 2017. Although more and more developed countries (such as the U.S.) are choosing to exploit greener energy sources, “coal dependence” will continue in many countries, especially in Asia, in the long term. Coal accounts for a large proportion of the energy consumption in Japan and Korea. Coal demand in India, an up-and-coming developing nation, is also increasing. Nonetheless, the days for rapid expansion of coal consumption have passed. Smog mitigation principles will undoubtedly hasten the reform of China’s energy structure, and coal consumption will likely peak sooner than expected. This peak in coal consumption (the point at which consumption growth is zero) may be reached before the year 2020, at a value of around 4.2 billion tons. Of course, reaching this consumption peak will depend on many factors, such as the government’s resolve in curbing environmental pollution, the development pace of clean energy sources, the imposition of carbon tax, energy price reform and developments in coal gasification etc. On the consumption side, vigorous public participation is crucial. For example, if the public had a better understanding of the developments of distributional wind power and solar power, more people would choose to consume clean energy, thus fundamentally reducing the reliance on coal. China’s economic growth is slowing down. Nevertheless, an annual GDP growth rate of 7% still translates into a huge pressure in energy demand. An ample energy supply is vital for safeguarding 140

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China’s economic growth, and reducing coal consumption will require alternative energy sources. In the short term, natural gas, as a relatively clean energy form, would be a prime choice for substituting coal. While the shares of wind and solar power are currently small, assuming that the current two-digit rate of growth of these energy forms continues, within a period of five years they will become a far more effective substitute for coal. In addition, further speedy expansion of nuclear power in China can also help mitigate its coal consumption.

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Chapter 10: Clean Utilization of Coal-The Most Important Energy Policy in China Today 第十章：煤炭清潔利用是當下中國最重要的能源政策

Chapter 10: Clean Utilization of Coal-The Most Important Energy Policy in China Today 第十章：煤炭清潔利用是當下中國最重要的能源政策 ZHENG Xinye (鄭新業) 鄭新業，中國人民大學經濟學院副院長，能源經濟系主任 ZHENG Xinye is the assistant dean of the School of Economics and the chair of the Department of Energy Economics of Renmin University of China since 2008. Professor Zheng’s research interests include energy economics and public finance. He has published peer-reviewed papers in international journals such as Environmental and Development Economics, Energy Policy, Regional Environmental Change, etc. His current research focuses on the evaluation of effects of environmental policy on emission reduction at power plants and analysis of the determinants of energy demand using household survey data. Professor Zheng is also a non-residential fellow at the Brookings Institution. He also writes columns for national newspapers.

I. Foreword In today’s China, energy demand grows rapidly, the share of energy imports is increasing, and local pollution and carbon dioxide emissions are worsening. In this context, how to scientifically devise energy policies that balance environmental protection, energy security and economic development is a fundamental concern for researchers both in China and overseas. Natural gas remains limited in its capacity to dominate the energy mix; nuclear power requires relatively long construction periods and will not be able to adequately satisfy immediate demand; and energy pricing policy is in need of further reform. Given these factors, coal will continue to be the primary source of energy supply in the long term. On the other hand, pollution and greenhouse gas emissions continue to rise and reliance on energy imports is increasing, painting a grim picture 142

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of China’s energy security. At present, the main reason for the ineffectiveness of China’s energy policy is that non-fossil energy is too costly and its total supply is unable to effectively satisfy existing energy demand. At the same time, China has “abundant coal, a lack of oil and a shortage in gas”, and this particular resource endowment makes it difficult for non-fossil fuels to increase in share. This means that, in the fairly long term, coal will continue to dominate China’s energy consumption. Therefore, the clean utilization of coal will be an important measure for resolving energy issues, and is currently the government’s foremost important energy policy. This paper begins with discussing the necessity of clean coal utilization from the perspective of the energy demand and supply structure. It will then review problems associated with the production, transport and consumption of coal, offering effective approaches and measures to achieve clean coal utilization, in conclusion. II. Clean Coal Utilization is a Core Aspect of Energy Policy 2.1. Coal will continue to dominate the energy mix in the foreseeable future The share of coal in China’s energy consumption has remained consistently at around 70% for the past 30 years (Figure 1). Although the country has greatly intensified efforts to develop renewable and new forms of energy, it is as yet very difficult to change coal’s fundamental role in the energy mix. Figure 1: Breakdown of China’s energy consumption by energy source, 1978 - 2011 Source: China Energy Statistical Yearbook

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China’s natural resource endowments have determined its coal-dominated energy mix. In contrast to many developed countries that rely primarily on oil and gas, the size of China’s remaining coal reserves ranks the third in the world. In 2010, coal accounted for 95.8% of the country’s fossil fuel reserves (Figure 2). Figure 2: Breakdown of China’s fossil fuel reserves Source: Statistical Communiqué of the People’s Republic of China on the 2011 National Economic and Social Development

China produced 3.24 billion tons of coal in 2010, 5.2 times that of 1980 and accounting for 76.6% of the total energy supply that year. Of total primary energy consumption, coal’s share was 68.0%, which was mainly used for power generation. Electricity and heating collectively accounted for 55.1% of total coal consumption that year. Compared with other countries, the share of coal-fired power in China’s overall electricity supply is vast, at 78.7% (Table 1). Although power generated from new energy sources has grown rapidly in recent years, increasing tenfold since 1995, in 2012, electricity produced from new energy sources supplied a mere 5% of the society’s needs. China’s energy resource endowments and energy supply structure has hence determined coal’s long-term dominance in primary energy consumption and electricity generation.

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Table 1: Breakdown of electricity generation by energy source for selected countries (%), 2010 Source of power Coal Oil Natural gas Nuclear Hydro Non-hydro renewables

World 40.5 5.1 21.5 13.5 16.2 3.2

Source: IEA U.S. Japan 45.5 26.8 1.2 8.8 22.9 27.4 19.9 26.9 6.6 7.2 3.9 2.9

Germany 43.9 1.6 13.4 23.0 3.2 14.9

France 5.3 1.2 4.0 76.2 10.6 2.7

China 5.3 0.5 1.6 1.9 16.5 0.8

2.2. Clean coal utilization is central to China’s energy strategy This paper summarizes China’s energy development objectives into four categories: satisfying energy demand, ensuring energy security, improving environmental friendliness and maintaining affordable energy prices. Below is a comparison of coal with other major energy sources with respect to each of these categories, illustrating their advantages and disadvantages and the potential of clean coal utilization. 2.2.1. Ensuring energy security China holds but 1.1% of global crude oil reserves, and per capita reserves are 17 times lower than the world average. Proven natural gas reserves only account for 1.3% of the global total, which translates into a per capita figure that is 15 times lower than the world average. Given these numbers, it is inevitable that China will have to continue to rely heavily on oil and gas imports, giving rise to the following energy supply security issues: First of all, China is a newcomer in the international energy markets, where it is a passive receiver with limited market power. Secondly, international energy markets are susceptible to changes in international affairs. Key energy exporters such as those in the Middle East, Africa and Central Asia are suffering from political instability, incessant conflicts and rampant terrorism, threatening production. Lastly, international energy supply routes are over-concentrated, leading to fierce competition among countries over their control. 2.2.2. Maintaining the affordability of energy prices From an economic perspective, in order to exploit an energy source on a large scale, not only must it be technically recoverable, but also cost-effective. Looking at the figures below, although 145

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several new energy forms are emerging as promising alternatives, in the near term they will still be reliant on government subsidies and policy support. Wind power: The cost of on-shore wind power in China has dropped to RMB 6000/kW, with an electricity generation cost of RMB 0.375/kWh, and is subject to further reduction. Solar power: Despite the fact that innovations in solar photovoltaic technology and lower silicon prices have reduced the cost of photovoltaic products, current on-grid tariffs mean that the technology is not yet profitable. Biomass: Biomass power generation projects are capital intensive and have high operating costs. Even with subsidized electricity prices, profitability is still below that of conventional coalfired plants. Per-unit production costs are high, currently at RMB 12,000/kW; Fuel costs are also high, at RMB 0.4/kWh, which is substantially higher than coal. In addition, the taxation policies that apply to the conventional power industry apply equally to biomass power generation projects. The effective tax rate for biomass power enterprises is around 12%, higher than the 6% to 8% faced by conventional power companies. New energy power generation facilities are emerging around China, featuring wind, solar and biomass energy. However, these three primary forms of new energy lag far behind conventional power generation in terms of profitability. Conservative estimates within the industry are as follows: Wind energy costs twice as much as conventional energy, and solar power, 10 times. Furthermore, China’s power grid is not yet able to support distributed energy systems, further lowering the cost competitiveness of new energies. These conditions are unlikely to change in the near future, making coal the most economically viable option. The clean utilization of coal remains a safe and reliable option, and, relatively speaking, it is economically affordable. The U.S. Energy Information Administration (EIA) lists average costs for several major forms of power generation, and noted that even with the addition of carbon capture and sequestration (CCS) technology, the average cost of power generation using coal is only USD 210-210/MWh. This is still lower than the cost of USD 200-490/MWh of solar power and comparable to the cost of USD 90-230/MWh for wind power. In terms of investment efficiency and affordability, clean coal utilization is a competitive option. 2.2.3.Improving the environmental performance of energy utilization With respect to the four aspects discussed above, the greatest disadvantage of using coal to generate electricity is the associated pollution. Compared with other fossil fuels such as oil and natural gas, coal utilization emits higher quantities of CO, NOX and SO2, and higher volumes of the 146

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greenhouse gas CO2 (Figure 3). Figure 3: Comparison of pollutant emissions from combusting natural gas, oil and coal

Although the extraction, transportation and combustion of coal generates various atmospheric pollutants as shown above, their root causes are the irresponsible methods and processes deployed but not the use of coal per se. In fact, there is a lot of room for improving the cleanliness of processes such as extraction, conversion, power generation and end-use consumption. It is possible to achieve energy utilization efficiencies and pollutant emissions equivalent to many other types of energy. China’s coal consumption accounts for 50% of the world’s total, and, domestically, 60% of the country’s primary energy consumption is coal-based. Extensive and irresponsible coal utilization has already brought severe environmental problems to China. According to a communiqué released by the Ministry of Environmental Protection (MEP) in 2013, out of the first batch of 74 cities to be monitored based on new air quality standards, only three were satisfactory. One of the main reasons for this is that extensive coal use has resulted in frequent smog. Implementing clean and efficient coal utilization processes is therefore vital for optimizing the energy mix and revolutionizing energy production and consumption, and is crucial for ensuring energy security and smog mitigation. In summary, targets for major energy sources can be characterized in a 147

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matrix as follows (Table 2):

Energy Source Coal Oil Natural Gas Nuclear Hydroelectric Wind Solar Biomass

Table 2: Targets for major energy sources Satisfies Energy Ensures Energy Maintains Demand Supply Security Energy Affordability √ √ √ √ √ √ √ √ √ √ √

√

Improves Clean Energy Utilization

√ √ √ √ √ √

III. Problems with the Current Mode of Coal Utilization in China Although China produces large amounts of coal and uses much of it for power generation, there remain many problems with its extraction and utilization. 3.1. Low efficiency Firstly, China’s lacks large-scale coal mines. The coal industry is relatively decentralized, with the 10 largest enterprises producing less than 36% of the industry’s total output in 2010. This has prevented coal industries from enjoying economies of scale and undermined safety and the sustainable development of the industry. Secondly, coal mining is inefficient and wasteful. Most coal mines in China are of small to medium size and do not adopt advanced mining techniques and equipment. Major state-owned coal mines have resource recovery ratios of around 50%. Regional state-owned mines and mines in small towns and villages have ratios of less than 30%, with some even at 10% to 15%, far below the global average of 60%. In addition, coal conversion efficiencies remain low. A considerable portion of coal is directly combusted in small and medium-sized furnaces. Not only does this lower the efficiency of energy utilization, but also means that pollutants are widely dispersed, increasing the complexity and cost of handling them.

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3.2. Heavy pollution At each stage of coal mining, transportation and combustion, various pollutants are generated, giving rise to severe negative externalities. It is for this reason that the coal industry has always been a focal area for emissions reduction. With respect to the entire life cycle of coal-fired electricity generation, the table below (Table 3) describes the negative externalities of environmental pollution. Table 3: External coats associated with the full life cycle of electricity generation

3.3. Frequent mining disasters China’s mining incidents have become the focus of international attention. According to statistics, 6,995 people died in mining disasters in 2002, which accounted for 80% of worldwide mining deaths that year. Thereafter, the annual death toll from mining disasters in China has been steadily decreasing, but the numbers are still alarmingly high. In 2011, the death rate per 100 million tons of coal mined in China was 67, far higher than that of the U.S. – 3 people, and higher 149

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than India – another developing country (Figures 4). Therefore, in addition to the clean utilization of coal, it is important to pay more attention to coal mining incidents and strengthen government regulation. Figure 4: Mining death rates in the three largest coal producing countries (persons / 100 million tons of coal mined) Source: BP Global Energy Statistical Annals, American Mining Safety and Health Administration Bureau, China Industry Safety Administration Bureau.

IV. Effective Policies for Promoting Clean Coal Utilization There has been increasing concern on the part of the international community with respect to ecological preservation and climate change, inspiring countries around the world to tighten standards on energy exploitation, environmental protection and emissions in an attempt to achieve clean energy development. Clean energy development does not only address the share of renewable energies in a country’s energy mix but also includes the clean utilization of fossil fuels, which in the case of China, can be translated into the clean development and utilization of coal. Over the years, a lot of work has been done in China on the research and development of clean coal utilization, especially on improving thermal efficiency and reducing pollutant emissions. For example, in 1995, in accordance with instructions by the State Council, the National Clean Coal Technology Promotion and Planning Committee was established. In 1997, the State Development 150

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Planning Commission released “The 9th Five-year Plan for Clean Coal Technology and 2010 Development Goal Framework”, which has become the guiding document for promoting the development of clean coal utilization technologies in China. According to these policy documents, the clean use of coal must be promoted from extraction to utilization, which requires combining a wide range of different policies. There are numerous policies targeting the promotion of clean coal utilization, but in general, they can be classified into three major arenas: technical policies, economic policies or managerial policies. Below is a summary of China’s policies regarding coal utilization in these three arenas. 4.1. Technological innovation Speaking at the working conference on the preparation of the “13th Five-year Plan for Energy Development”, the then director of the National Energy Administration, Wu Xinxiong pointed out that if the country is to continue to increase the share of coal-fired power, it is necessary to strengthen the industry’s management capacity. Specifically, “coal consumption at new coal-fired plants must be lower than 300 grams of standard coal equivalent per kWh of electricity generation, and pollutant emissions should be brought down to levels comparable to that of gas-fired units. Ideally, within 5 years, existing generators with a capacity of 600 MW or above should reduce raw coal consumption to 300 grams of standard coal per kWh”, compared to 326 grams in 2012. A rough calculation shows that in 2012, only about 15% of generators with capacity of 600 MW or above met this target. In the future, if all such generators are to be able to achieve the abovementioned target, the external cost per kWh of electricity generated would decrease by RMB 0.07 per kWh. Based on the number of 3910.8 million MWh of total thermal power generated in China in 2012, this would translate into a saving in environmental costs of up to RMB 270 billion. Moreover, intensifying research efforts and developing proprietary clean coal utilization technologies is of utmost importance. Outdated modes of coal utilization must be eliminated as soon as possible and technological reform should be given full support. As long as industries are able to meet the new emission standards, their modes of coal consumption should not be limited. Promising research results should be put into application and more demonstration projects should be constructed to develop these breakthroughs. At the same time, pollutant emission controls must be tightened and the industry’s capacity to comprehensively utilize coal resources should be vigorously developed. Promoting the reuse of coal wastes can reduce the environmental damage caused by its long-term build-up, and will help the industry in the development of a circular economy. 151

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Chapter 10: Clean Utilization of Coal-The Most Important Energy Policy in China Today 第十章：煤炭清潔利用是當下中國最重要的能源政策

4.2. Economic support Full cost pricing is the most effective way of solving the environmental problems associated with coal use In economics, external costs arise from actions of an individual or enterprise that directly or indirectly cause adverse effects to a third party, for which no compensation is provided. In essence, external costs stem from flaws in pricing mechanisms that lead to a misallocation of market resources. Currently, for coal-fired power generation in China, only around 30% of external costs are reflected in the on-grid tariff. Therefore, the government should implement full cost pricing for electricity and make appropriate adjustments to environmental taxes and renewable energy subsidies. This will allow prices to accurately reflect environmental remediation costs and the scarcity of resources, so that electricity consumers bear the external costs of energy, i.e. a total internalization of external costs arising from the power generation process. Reducing carbon dioxide emissions The carbon dioxide emissions generated from coal combustion is a major factor contributing to global warming. In addition to using technical measures such as carbon capture and sequestration (CCS) to regulate carbon dioxide emissions, it is important to concurrently implement economic measures as well. As with “full cost pricing” mentioned above, through price reform, the demand for coal should be controlled and its environmental costs should be internalized, thereby reducing carbon dioxide emissions. Economic policies such as a carbon tax or carbon trading scheme should be further explored to develop an efficient, reasonable and executable mechanism in which greenhouse gas emissions could be minimized. Furthermore, demonstration programs for the application and promotion of clean coal technologies should also be established with the combined support of economic incentives and financial support. The central government should also provide dedicated fiscal support and increase subsidies for clean coal utilization and provide tax benefits. Whilst considering the affordability of industrial players in retrofitting, clean coal utilization should be duly subsidized to incentivize enterprises and the general public to increase their usage of cleaner coal. Other policy measures include refunding pollution charges to enterprises for use in clean coal production, addressing the shortage of capital through the earmarking of funds. Government procurement leverage should be employed to encourage clean coal production and utilization, and the government can also adopt policies in favor of enterprises that implement clean coal technologies.

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V. Closing Remarks In summary, coal will continue to serve as China’s dominant energy source in the foreseeable future. Balancing energy demand, environmental protection and energy security, clean coal utilization is an obvious choice and is, therefore, the most important energy policy in China today. Developing clean coal technology will not only bring development opportunities to the entire coal industry, but will also have a profound impact on the electric power and power plant equipment manufacturing industries. Compared to the rapid development of new energy in China at the moment, clean coal technology has yet to attract widespread public attention. The crux of the problem is the lack of coordinated policy guidance and support for the development of clean coal technologies in China. However, clean coal utilization was listed as one of ten emerging energy industries in the “Development Plan for Emerging Energy Industries” , which has made up for its previously slow pace of adoption due to policy stagnations. Today, as the country bolsters its efforts to develop a low-carbon economy, the development of clean coal utilization industries is of top priority. In the coming years, achieving widespread and advanced clean coal utilization on a technical, managerial and economic level will be one of the primary tasks of China’s energy sector.

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Chapter 11: Rebalancing Efficiency with Environmental Consciousness: Experience of a Chinese New Coal Chemical Company 第十一章：效率與環保兼顧：一家中國新型煤化工企業的發展經驗

Chapter 11: Rebalancing Efficiency with Environmental Consciousness: Experience of a Chinese New Coal Chemical Company

第十一章：效率與環保兼顧：一家中國新型煤化工企業的發展經驗 ZHANG Jinyong (張金勇) 張金勇，惠生（南京）清潔能源股份有限公司總工程師 ZHANG Jinyong is currently the chief engineer of Wison (Nanjing) Clean Energy Co. Ltd responsible for strategic planning, business development and technological management. He has more than twenty-two years of experience with the petrochemical and coal chemical industries in China. He joined Wison (Nanjing) Clean Energy Co. Ltd in 2004 and was fully engaged in the design and construction of the Wison’s MTO project in Nanjing. He has been working with a Sinopec subsidiary in Shandong for twelve years, responsible for plant operation and technology management. He obtained a bachelor’s degree in chemical engineering and has an Executive MBA degree.

Wison (Nanjing) Clean Energy Co., Ltd. was established in 2003. Up till the commercial operation of its Phase III project in October 2013, Wison has witnessed a rapid growth of the Chinese coal chemical processing industry for over a decade. The Company has taken advantage of both industry opportunities and the development of industrial parks and has set a good example for peer companies in the sector. 154

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Phase I of the Wison Clean Energy project kick-started in 2005 incorporating three GE slurry gasifiers, with two operating and one for back-up. The design processing capacity is 1,700 tons of coal per day, which leads to an annual production of 300,000 tons of carbon monoxide and 200,000 tons of methanol. Phase I went into production in April 2007. Due to the high demand for carbon monoxide, hydrogen and synthetic gas within the industrial complex, Phase II was commissioned immediately after Phase I entered commercial operation. Construction for Phase II started in the second half of 2007 and went into production in September 2009, adding a production capacity of 300,000 tons of carbon monoxide and 200,000 tons of methanol, with an additional 20,000 Nm3/h of hydrogen and 11,000 Nm3/h of syngas. The completion of Phases’ I and II enabled Wison Clean Energy to process 1.1 million tons of coal annually, and produce almost 1.1 million tons of final products including almost 700,000 tons of gaseous products and 400,000 tons of methanol. Moreover, following the commercial operation of Phase II, Wison gradually become vertically integrated and, through collaborations with partners, developed a multi-product-line industry chain centered around coal chemicals at the Nanjing Chemical Industrial Park. The business model features steady and long-term cooperation and complementary products and facilitates win-win outcomes. In particular, carbon monoxide and methanol feed into the production of acetic acid and its downstream derivatives, formic acid, DMF, DMAC and etc.; hydrogen is used for hydrogenation to produce 1,4-Butanediol and etc.; and syngas is used in the production of alcohol from aldehydes through using syngas to join olefin and carboxyl groups. 2009 is another milestone for China’s coal chemical processing industry. New technologies such as coal-to-oil, methanol-to-olefins (MTO) and coal-to-ethylene glycol have all matured. Through observing the market and gaining insights into the trend, Wison decided to build a MTO-OXO (Butanol and 2-Ethylhexanol (abbreviated 2-EH)) project, so as to meet the industrial park’s rising demand for downstream products. This Phase III development includes one GE slurry gasifier and one Shell gasifier, which further added 50,000 Nm3/h hydrogen and 50,000 Nm3/h syngas production to the existing product supply. The other parts of Phase III is MTO - OXO plant which annually produces 300,000 tons olefin and 250,000 tons of OXO (from 180,000 tons of propylene) and a byproduct of 120,000 tons of ethylene for downstream users in the park. Phase III went into production in September 2013, and concluded a cumulative investment of RMB 6 billion by Wison in the Nanjing Chemical Industrial Park. In total, there are seven slurry gasifiers and one Shell gasifier that are capable of processing 1.6 million tons of coal annually. This generated RMB 5 billion in annual sales through final products including carbon monoxide, 155

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syngas, hydrogen, butanol and 2-EH. Wison also fueled the entire industrial park’s demand for coal-based gaseous products as these products have a significant cost advantage over those derived from oil and natural gas. Based on the delivered cost of coal from Qinhuangdao via seaborne shipping, the internal rate of return (IRR) of Wison’s investment is consistently over 10%. Through the ten-year, three-phase development, Wison has identified a development path in the coal chemical processing industry, and has established two strong and reliable revenue streams from coal-to-gas (coal to syngas, hydrogen and carbon monoxide, which replace light oil and natural gas) and methanol-to-olefins (which replaces the conventional process of naphtha cracking). Combining coal chemical with petrochemical processes requires operating stability, which is all the more important when collaborating with international companies. Wison fully recognizes the importance of stable supply to the business development of the company. From the beginning of Phase I project, Wison has consistently set new records amongst peers in stability measures and has satisfied downstream client expectations. Issues relating to resource utilization and environmental preservation are inseparable from developing coal chemical business. Environmental concerns have been rising and have become primary constraints to the further development of many companies. Wison has placed a high emphasis on environment-friendly solutions as it develops production facilities. The first two Phases adopted slurry gasification techniques from GE, with the third Phase adopting a gasifier co-developed by Shell and Wison Engineering Company. The gasifier is also the first of its kind in the world and achieves higher coal efficiency and lower emissions. To clean crude gas, Wison uses low-temperature methanol washing techniques from Linde Group for all three Phases, including two 300,000-ton carbon monoxide cryogenic separation boxes. The MTO-OXO project uses MTO technology from the UOP Company and low-pressure carboxyl synthesis techniques co-owned by Davy-Dow. It is also the first time that UOP’s MTO technology was utilized in large-scale industrialized units, and Wison’s practices have verified that both technologies are mature, reliable and economically viable. Higher efficiency in resource utilization translates into lower costs and stronger competitiveness, and stricter environmental standards force companies to practice cleaner production. Cleaning up the production processes have always been a priority in Wison’s development. Advanced techniques such as pre-processing of wastewater, pulping with Chemical Oxygen Demand (COD) wastewater, intermediate water recycling and low-grade saturated steam for electricity generation have been added with additional investment after the commercial operation began. Particularly, two 12 MW waste heat electricity generators successfully pioneered waste heat recycling in the coal slurry 156

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gasification industry and are able to supply over 50% of the company’s power consumption. With these add-ons to their production facility, Wison has been truly exemplary in China with respect to energy efficiency and emissions reduction. Looking back to the past decade, Wison’s success would not be achievable without China’s ever-rising energy demand and changes in the energy supply structure driven by its economic expansion. After China first became a net-importer of crude oil in 1993, crude oil imports exceeded 100 million tons in 2003 and reached 282 million tons in 2013. With a 60% of crude oil import dependency, sustainable energy supply has become a serious challenge that faces both the country and the companies within. In this context, Wison’s production streams of coal-to-gas and MTO both serve the purpose of replacing oil and gas with coal, which subsequently lowers the feedstock costs for many downstream companies. We believe that coal chemical processing is an essential supplement to the conventional petrochemical process and will benefit the country’s strategic energy supply as a whole in the future.

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Chapter 12: SASOL’s Experience in Coal Conversion 第十二章：南非薩索爾公司的煤轉化經驗

Chapter 12: SASOL’s Experience in Coal Conversion 第十二章：南非薩索爾公司的煤轉化經驗 MA Liqun (馬立群) 馬立群，南非薩索公司中國區經理 Ma Liqun is currently the managing director of Sasol China Ltd.

The core of the Coal-to-Liquids process lies within the Fischer Tropsch technology, invented in 1925 with commercial production beginning in Germany in 1929. An annual output of over half a million tons of syncrude was achieved in Germany during World War II. During the 1920s and 1930s, English and American companies involved themselves in the development of the technology and built pilot plants. Their interests evaporated when large new oil fields were found in Texas, Louisiana and the Middle East. Between World War II and the first oil crisis in 1973, abundant oil reserves, the dominance of western power in the Middle East and the ability of the U.S. to meet any supply shortfall caused by a supply disruption sustained a prolonged period of low oil prices. Although research in the U.S. continued after WW II, most notably the Synthetic Liquid Fuels Program run by the United States Bureau of Mines (1944-1985), this did not progress from the laboratory stage to commercial production. The U.S. tried in the aftermath of the two oil crisis, with President Richard Nixon in 1973 and President Jimmy Carter in 1980, to deploy on a large scale a synthetic fuel industry from coal and other unconventional sources like tar sands and shale oil reserves, by private industry, to reduce America’s dependence on foreign oil. The Energy Security Act created by Jimmy Carter in 1980 authorized $20 billion in subsidies to promote the production of synthetic fuels. The target was to make, by 1990, 2.5 million barrels per day (bbl/d) of synthetic fuels derived from coal and shale oil. The entire program was scrapped by the Reagan Administration in 1985 except for the synthetic fuels tax credit, under the pretext that private industry, not government, should shoulder all the costs. Companies like Unocal and 158

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Exxon who ventured into the synfuel industry suffered heavy financial losses. In 1985, after 40 years, the U.S. Congress abolished the Synthetic Liquid Fuels Program. In recent years, riding on an increasingly high oil price and instability in the Middle Eastern region, interests in the coal-to-liquid (CTL) technology have rekindled in the U.S.; as is the case in China, South Africa, India and Australia – countries with abundant coal reserves but shortages in oil and gas reserves. Sasol’s CTL Development In 1927 the South African Parliament initiated a formal investigation into the merits of establishing an Oil-from-Coal industry in South Africa. The Government was concerned with South Africa’s dependence on imported crude oil while having no known oil reserves of its own, as well as the need to protect the country’s balance of payments and to strengthen its security of energy supply. South Africa was rich in coal, and the creation of a domestic CTL industry could have not only added value to the vast and cheap coal reserves, but also created more jobs for a fast-expanding population. It would have reduced the economy’s exposure to the vagaries of the international oil market, reduced import bills to allow foreign reserves to be spent on developing manufacturing capability, and would have industrialized the economy that was predominantly based on mining and agriculture. Various private companies in the following years tried and failed to establish CTL in South Africa, largely due to the complexity of the technology, high capital investment and the unwillingness of the finance community to provide loans. It was not until 1950 that the South African government decided that energy self-sufficiency was of key importance and took a long term and strategic decision to formally incorporate Sasol as a state-owned company, to develop an oil-from-coal project large enough to provide a meaningful degree of national self-sufficiency. In 1950, work was started in Sasolburg, employing both Low Temperature and High Temperature Fischer Tropsch processes. By 1960, major technical problems were solved, the plant was running reliably and design capacities were achieved. During the first oil crisis in October 1973, OPEC raised the price of oil to $12/barrel (compared to $3/barrel in 1970). The South African government decided in 1974 that the Sasolburg plant was doing so well that a new plant, 10 times bigger than the Sasolburg plant, would be built. This was the Sasol II plant in Secunda, constructed in the late 1970s and completed in 1980. In 1979 the revolution in Iran led to oil prices that peaked at $40/barrel, and the decision was taken immediately to start construction on a third Sasol plant (Sasol III). Both Sasol II and III 159

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were largely financed by government loans (80%). In 1979, Sasol was privatized and listed on the Johannesburg Stock Exchange. The Sasol Process The CTL process consists of three main steps: gasification and syngas cleaning, Fischer Tropsch (FT) synthesis, and product upgrading. There are a number of gasification technologies available, the selection of which should be based on a set of criteria such as coal quality, syngas requirements, reliability and availability of the gasifier, and investment costs. A good understanding of the coal reserve and supply is beneficial. There are both High Temperature and Low Temperature FT processes. Sasol has operated a HTFT process since 1955, using a circulating fluidized bed reactor operating at pressure of about 25 bar and temperature between 330-350 °C; the products of the process consist of a light syncrude and olefins. Originally fixed bed reactors were used for Low Temperature FT processes. Later, tubular fixed bed reactors were used, which are still used in Sasol 1 in South Africa and by Shell in Malaysia and in Russia. They typically operate between 180 and 250 °C and at pressures ranging from 10 to 45 bar, producing a syncrude with a large fraction of heavy, waxy hydrocarbons. Sasol started developing a slurry phase distillate process since the 1990s, which offered advantages on reactor scale-up, catalyst replacement, temperature control, simpler construction, maintenance and repair. The slurry phase distillate process employed at Sasol’s Qatar Oryx plant has a throughput of 17,000 bbl/day per train. The last step is the mild hydroprocessing of the waxy syncrude to diesel and naphtha as the final products. The CTL process is a clean coal technology. Sulfur contained in the coal is removed in the syngas cleaning step and can be sold as a product. CTL diesel is clean and readily biodegradable. It has virtually no sulfur or aromatics and has a high cetane rating, which is beneficial during cold-start and low-temperature operation, and enables the use of catalytic exhaust after-treatment systems. CTL diesel can be used in all diesel engines, providing a fuel platform for application of the latest engines in China. It also significantly reduces emissions and leads to a cleaner urban environment. Experience has shown that the CTL process is highly complex; and its overall energy efficiency could vary significantly depending on the selection and integration of various technologies, the degree of optimization of the process scheme, use of the tail gas, economies of scale, the need for 160

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power, optimum use of the FT tail gas as fuel gas, and the steam generation pressure. The development and perfection of the FT technology would be limited if undertaken by one single company. Internationally, Sasol has established collaboration with universities, research institutes, auto industries and other related industries. A whole set of FT-technology-related value chains have been developed. Sasol has cooperated with St Andrews University of Scotland and the University of Twente of Netherlands to set up R&D centers to assist with catalyst development and reactor design. FT diesel and gasoline are quite different from the diesel and gasoline produced from petroleum. They must undergo extensive tests and verification processes before being understood and accepted by automakers. Together with the University of Cape Town, Sasol has established two FT fuel engine test centers, and built long-term cooperative relations with Citroen, Chrysler, Peugeot, Volkswagen and Caterpillar. The company also worked with the manufacturers of automobile exhaust catalysts such as Engelhard and Johnson Matthey to test the impact of FT fuel on automobile exhaust catalysts. For many years, Sasol has made unremitting efforts to promote the application of FT products aimed at breaking into markets that are exclusively held by traditional petroleum-based products, as well as creating new development opportunities for the CTL industry. Sasol is the first company to gain the international approval for semi-synthetic and fully synthetic jet fuel. The jet fuel industry is well known for being highly conservative. The international approval process has taken Sasol 30 years. Through Sasol’s continuous commercial operations and stable product quality over a long period of time, it has proven to the international approval agencies, the aircraft engine manufacturers, and the airlines that the homogeneity of the synthetic jet fuel produced by Sasol can be ensured in different continents, different destinations, and different refueling sources. The FT stream contains a wide range of high value chemical components that could be extracted. Sasol has gradually extended its value chain and found new applications. Sasol today produces about 250 kinds of products, encompassing the fuel chemical categories. Globalization With the dawn of a new era in 1994 that saw the abolition of the Apartheid Regime and the subsequent lifting of international sanctions, Sasol embarked on its long anticipated globalization drive. With the title of being the only commercially viable Fischer Tropsch technology operator in the world, Sasol began to actively explore business opportunities outside South Africa. In 2007, Sasol’s first international Gas-to-Liquid (GTL) plant, Oryx, began operations in 161

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Qatar. The Oryx project was the largest commercial scale GTL project at the time, and won two international financing awards. It has employed the largest slurry FT reactor in the world and the largest Air Separation Unit. A second GTL facility in Nigeria is expected to come online in 2014. The shale gas revolution in the U.S. has meant abundant gas and cheap prices that are favorable for GTL. It was estimated that the capital cost of a GTL plant is about 50% ~ 70% lower than a CTL plant of similar scale. Today the feedstock costs required to produce one ton of FT product are similar for a GTL plant based in the U.S. and a CTL plant based in western China. The GTL process is also more energy efficient and emits far less CO2. Sasol is currently evaluating GTL opportunities in Uzbekistan, the U.S. and Canada, where cheap gas supplies are abundantly available. Sasol Today Today, Sasol produces the equivalent of 160,000 bbl/day of fuels and chemical feedstock from more than 40 million tons of low grade coal per annum. Sasol has grown over the years by improving existing technology to optimize the full product value chain, venturing into the downstream processing of products by producing chemicals, and in recent years, by employing its proprietary FT technology to establish GTL projects in regions that have abundant and cheap stranded natural gas. The South African government’s decision to establish Sasol and its continuous support proved to be both far-sighted and profitable. The company today is South Africa’s single biggest tax payer and direct capital investor, providing direct employment for 34,000 people, accounting for almost 4.4 % of the national gross domestic product (GDP), supplying 23% of South Africa’s transportation fuel requirements from coal derived fuels and saving the country more than $4 billion (2004) a year in foreign exchange. Sasol has grown into an international, integrated energy/petrochemical company that is listed on both the New York and Johannesburg Stock Exchanges. The company has established production and sales operations in more than 30 countries, and currently exports to over 100 countries throughout the world. During the 2013 financial year, Sasol earned an operating profit of USD 4.7 billion on top of a revenue of USD 20.8 billion. Its market capitalization was estimated at USD 36 billion and ranked No. 321 in the 2014 Forbes Global 2000 list.

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Conclusion The coal rich western region in China seems to offer the best location for the CTL industry. There are nevertheless significant challenges: water shortage, a fragile environment, long distances to the consumption markets and a shortage of skilled people etc. These challenges lead to substantial commercial risks. The path that Sasol has followed over the last six decades and its success could certainly be used as a blueprint for the emerging CTL industry in China.

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Section Four:

Acknowledgment 第四部分：

鳴謝

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This report serves to introduce the latest development of issues related to China’s plan of promoting clean and efficient utilization of coal in its energy mix. It was prepared by the Hong Kong Office of the China Energy Fund Committee (CEFC), under the direction of our Secretary General, Dr. Patrick, HO Chi-ping (何志平), as Editor-in chief. In this publication, there are a number of individuals and groups deserving both our recognition and deepest gratitude for their invaluable contributions in making this report possible. First and the foremost, we need to thank Mrs. Ayaka JONES (錢文華), General Engineer from the U.S. Energy Information Administration (EIA) and the chief guest editor of the report, who spent countless hours and efforts in helping us to verify technical details of the contents and giving her most candid and inspiring advise as an industrial insider. We are also grateful for the professional guidance provided by Mr. LIU Wenlong (劉文龍), Senior Consultant of CEFC and the former Chief Economist of Sinopec, who has attentively followed progress of the report and provided invaluable technical guidance since its inception. We shall also thank Prof. Larry, CHOW Chuen Ho (周全浩) for his kind proofreading of the contents of the report. As a publication intended to convey the Chinese views to the world, we must also thank all the distinguished energy scholars and industrialists from China for sharing with us their most candid and insightful views by granting telephone interviews and/or contributing their articles. Without their efforts, this report would not have been possible. The contributors for this year’s publication are (In alphabetical order by surname): Mr. JIANG Jiansheng (薑建生), Deputy General Manger of the Yitai Energy Group; Mr. LIU Wenlong (劉文龍), Senior Consultant for the China Energy Fund Committee and former Chief Economist/Assistant General Manager of Sinopec; Prof. LIN Boqiang (林伯強), Deputy Dean of the Newhuadu Business School in China and Director of the China Center for Energy Economics Research (CCEER) at the Xiamen University;

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Mr. MA Liqun (馬立群), Senior Manager, Sasol China; Mr. WANG Zhixuan (王志軒), Secretary General of the China Electricity Council (CEC); Mr. WANG Yuqing (王玉慶), Deputy Director of the Research and Development Department of Sinopec; Mr. WU Qingle (吳慶樂), Senior Manager, Shell China; Mr. XU Yi(許毅), Deputy Director of Sinopec’s Leading Group Office on Coal Chemical Development and is also the deputy general manager of the Sinopec Great Wall Energy and Chemical Co. Ltd. Prof. ZHANG Jiansheng (張建勝), Professor, Department of Thermal Engineering, Tsinghua University; Mr. ZHANG Jinyong (張金勇), Chief Engineer of the Wison (Nanjing) Clean Energy Co. Ltd; Prof. ZHENG Xinye (鄭新業), Professor of Economics and Deputy Director of the School of Economics, Renmin University of China; We also owes thanks to the China Energy News (中國能源報) and Ms. WANG Haixia (王海霞) for their assistance in liaising with certain authors. We also need to acknowledge the commitments and contributions of our staff officers: Mr. Leo D.L. WANG (王鼎立), the project manager who oversaw the publication issues and was responsible for drafting the survey article and conducting interviews with the Chinese experts, and Mr. Daniyal NASIR (黎庭耀), who provided excellent editorial support throughout the project.

Andrew C. O. LO (路祥安) Deputy Secretary General China Energy Fund Committee for and on behalf of the Editorial Board

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Appeal for Support China Energy Fund Committee (CEFC) is a not-for-profit civil society organization and a public charity under Sec. 501(c)(3) of the Internal Revenue Code of the USA. It relies on contributions entirely from the public, individuals, groups and foundations. With your financial support, we are able to deliver research programs, launch cultural exchanges, lectures and briefings led by international specialists, enabling us to fulfill our mission to promote international understanding and cooperation, and mutual respect through public diplomacy. CEFC is also registered as a tax-exempt non-governmental organization in Hong Kong. All contributions are tax deductible to the full extent allowed by law. For more information about CEFC activities, contact JohnTsang@chinaenergyfund.org. We appreciate gifts of any amount. Please make your cheque payable to China Energy Fund Committee (USA) INC. and mail it to our office which is located at 1100 Wilson Blvd, Suite 2500, Arlington, VA 22209. Please also provide with your name and your mailing address, so that a tax deductible receipt can be sent to you.

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