Coal Power Overcapacity and the Investment Bubble in China Report Briefing
1. Background In recent years, new norms have been established in both economic development and the power industry in China. In terms of economic development, an overall look at changes in national GDP over the 12 th Five Year Plan period clearly show that while there were cyclical increases in GDP in the latter quarters of 2012, Q3 of 2013 and early 2014, there was an obvious general slowdown in GDP growth. Growth rates of more than 10% that China maintained for over 30 years ended during the 12th Five Year Plan period and continued to gradually fall to just under 7% in Q3 2015. This new economic norm is not random. Objective factors include a general transition from super-high economic growth to mid/high economic growth rates. But a more direct factor may be the continued optimization of industrial structures spurred by a sustained transition in China’s internal demand structure during the 12th Five Year Plan. This is mainly due to continued increase in quantity of GDP contributed by the tertiary sector. Data from Q3 2015 show that tertiary sectors contributed 51.4% of domestic GDP, 10.8 percentage points higher than secondary sectors. [1-7] One of the factors behind the continued optimization of industrial structures is the sustained depressed growth in energy intensive industries, which is the main reason for the new norm in China’s power industry. This is the last year of the 12 th Five Year Plan and based on figures on total electricity consumption for the first three quarters of 2015 released by the National Energy Administration, quarter-on-quarter growth was only 0.8%, nearly 15 times lower than the 12% growth observed at the beginning of the 12th Five Year Plan. [8, 9] In terms of industry contributes to GDP, increases in power consumption by tertiary industries in the first three quarters of 2015 reached 7.3%, while secondary industries, which make up 70% of total electricity consumption, saw negative growth of 1%. This is proof that the decrease in power demand is a result of the slowdown in secondary industry growth. [9] Industry insiders point out that total electricity consumption will for the most part continue to follow a downward trend in response to this new norm in economic development.
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Figure 1: Growth Rates for National GDP Growth and Total Electricity Consumption Growth between 2011 and Q3 2015 Data Source: Documents [1-12] However, also linked with China’s new economic normal and the continued decrease in power usage is the continued rapid growth in new thermal power capacity (mainly coal power) and the habitual arrangement of potential capacity. Overall growth of nationwide coal power capacity during the 12th Five Year Plan period showed a decrease from 7.77% in 2011 to 4.30% in 2014 due to rapid growth in renewable energy sources. The growth of thermal power capacity remained at 4.3% for the first three quarters of 2015 and current trends indicate it will surpass this number in Q4. While growth of coal power capacity is slightly lower than 4.3%, this number is still far higher than the 0.8% growth in total electricity consumption. The result of this is that the number of hours that thermal power units are in operation continues to fall with the average number of hours thermal power equipment is in use decreasing from a shocking 4,706 hours (the lowest value since 1978) even further to 2,158 hours in the first half of 2015 and 3,247 hours in Q3 2015. [8-12]
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Figure 2: Thermal Power Production and Usage Hours for 2010-2014 Data Source: Documents [8-15] While new lows continue to be set in the number of hours thermal power equipment is used, the installed capacity of potential thermal/coal power projects is actually increasing. Information released by the media shows that in addition to projects already engaged in production, the capacity of thermal power projects approved in the first half of 2015 alone is as high as 200 gigawatt. [16] Incomplete statistics from Greenpeace show that the total scale of coal power projects whose environmental impact assessments were accepted for review, are waiting to be approved or were approved in 2015 reached 123 gigawatt. [17] This number is equivalent to nearly 80% of all coal power projects whose environmental impact assessments were approved from 2012-2014 (not including CHP projects). [10] There are clearly many underlying factors that resulted in this increase, the biggest of which is an historical change in the approvals mechanism. The power to approve CHP coal power projects using back-pressure turbines was transferred to the provincial level in 2013, while approval powers for general coal power projects were gradually transferred from the National Energy Administration, the National Reform and Development Commission and the Ministry of Environmental Protection to corresponding bodies at the provincial level. [18-21] The result of this was that a measure originally intended to simplify bureaucracy and increase efficiency has now become a carte-blanche for local governments to increase GDP, especially in provinces that rely heavily on coal.
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The problem has not gone unrecognized by government bodies. The former head of the National Energy Administration, Zhang Guobao, has pointed out that the average number of hours that power generation equipment was in use in 2014 was only 4,706, indicating that usage of installed power generation equipment was very low and that China’s endemic power shortages were now at an end. Director of National Center for Climate Change Strategy and International Cooperation, Li Junfeng, also noted during a recent media interview that China is currently transitioning toward clean and low-carbon energy sources and that large-scale construction of coal-fired power plants would be a waste of resources. The Chinese government has promised to place a cap on CO2 emissions by around 2030 and would work to reach that cap as early as possible. According to the current timeline, coal consumption would be capped by at least by 2025 if not by 2020. Under these conditions, there is no more room for coal consumption to grow and new capacity need even more coal to accommodate them. The result of this type of arrangement will be a surplus similar to that experienced by China’s steel industry, and will ultimately be a waste of both economic resources and investment capital. [24] The aim of this study is to increase understanding of the current surplus of coal power production in China based on current discussions of industry development and existing surpluses and inspire deeper consideration of the economic issues and industry impacts behind this phenomenon as well as case studies of development trends in certain key provinces. In it, we attempt to answer the following questions: 1. How big is the current coal power surplus? Based on the size of coal power plants whose environmental impact assessments have been passed or are submitted, how far will the current surplus expand by 2020? What impact will it have on the current coal power industry? 2. If increases in coal power surpluses do happen, how big will be the loss on investment? 3. What is a reasonable limit on the number of coal power capacity in order to reach the 15% goal for non-fossil fuels by 2020 as required by the State Council’s “Energy Development Strategy Action Plan (2014-2020)”? 4. By 2020, what will be the coal power surplus for Shanxi, Xinjiang, Jiangsu, Zhejiang and Hebei? How big will be the loss on investment?
2. Methodology The unique part of this study is that it analyzes trends in coal power during the 12th Five Year Plan in order to provide a reasonable prediction of future development under the 13th Five Year Plan. It also carries out investment risk assessment for coal power plans under the 13th Five Year Plan period and fills in information gaps on coal power surpluses for key provinces. The study was led by Associate Professor Yuan Jiahai and his research team from North China Electric
Power University with support from the former head of planning for the Ministry of Power and Industry Mr. Wang Xinmao and Deputy Dean of the State Grid Energy Research Institute, Mr. Hu Zhaoguang.
3. Conclusions
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1. The Current State of Coal Power Surpluses: With the arrival of new economic norms in China, the growth in the demand for power began to level out in 2014. However, due to delayed implementation of existing plans and the long approvals process for power resource projects, the number of new coal power projects in 2014 remained high. By 2015, it is expected that the number of hours thermal power plants are in operation will drop further to 4,330 hours. The excess capacity of current coal power units is estimated at 80-100 gigawatt. This surplus of coal power production is a risk that both the government and the industry should watch closely.
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Figure 3: Changes in the Operational Hours of Thermal Power Facilities during the 13th Five Year Plan (Report Figure 2-1)
2. This study carried out three different scenario simulations for the number of planned coal power capacity in the 13th Five Year Plan period – rapid, recommended and slow. The installation number under the recommended scenario was based on a range of power demand growth ranging between 3.5-4.9% and found that after implementing national goals for non-fossil fuels, by 2020 a reasonable output level for coal power capacity should be between 860-960 gigawatt. Based on recommended growth rate of 4.2%, by 2020 total electricity consumption should reach 6.92 trillion kWh and if coal fired power plants operate 4,800 hours per year, a
reasonable output level for coal power facilities would be 910 gigawatt. If an active policy of power substitution is implemented and power demand reaches its upper limit (4.9% growth), the reasonable output for coal power could be increased by 50 gigawatt, bringing overall output to 960 gigawatt. A one-time increase in the proportion of non-fossil fuel power production from 13.4% to 14% would shrink coal power contributions by 22 gigawatt. This values for all scenarios in this study for coal power output by 2020 were all below industry predictions of 1040-1100 gigawatt. [10, 26]
3. If unbridled development continues, coal power surpluses will continue to increase over the 13th Five Year Plan period, resulting in massive losses in investment. Under the recommended power demand scenario, if all of the coal power projects approved between 2012-2014, which have a capacity of 160 gigawatt, go online during the 13th Five Year Plan period, the total installed capacity of coal power facilities will jump instantly to 1030 gigawatt and the coal power surplus will range between 70-120 gigawatt. If the retirement of some currently active facilities is taken into consideration, this value may change. [10] If all facilities under construction or slated for construction as of September 2015, which have a total output of 283 gigawatt, go into production by 2020, the coal power surplus will instantly increase to 200 gigawatt. [17] A surplus this large has considerable negative implications. At a cost of 3,500 RMB per kW, the loss on investment would be as high as 700 billion RMB. As the number of hours coal power facilities operate continues to drop to around 3,800, the solvency of these businesses will also decline considerably. The large scale of coal power capacity will also further suppress the development of renewable resources, resulting in many renewable energy facilities being left inactive this squeezing-out effect due to misplaced investment may also cause China to miss a strategic opportunity in its energy transition drive. 4. For China’s five major coal consumption provinces, coal power surpluses will also have an especially large impact at the provincial level. If only a portion of the facilities currently under construction go into operation by 2020, with the exception of provinces like Xinjiang, Shanxi, Hebei, Jiangsu and Zhejiang, which exceed ideal installation capacities by 2-3 gigawatt, surpluses in other areas may be kept under control. If all of these projects enter production, each of the five major coal producing provinces will have higher than ideal output with Zhejiang being the lowest at 2.3 gigawatt, while the others are much higher than this with the most serious example being major power producer Shanxi, whose surplus would exceed 21 gigawatt and result in a loss in investment of 73.5 billion RMB. Xinjiang would have a surplus of 15.5 gigawatt and experience losses of 54.2 billion RMB, while the surplus of major power importer Jiangsu would approach 10 gigawatt and experience investment losses of 35 billion RMB.
4. Greenpeace Policy Recommendations If coal power projects continue to go forward on such a large scale, the number of operation hours that these facilities will continue to decrease, creating a massive surplus and investment loss as well as a negative impact on the industry that will be difficult to reverse. In addition, this situation is in direct conflict with improvements in the load rate and operating quality proposed by the State Council “Energy Development Strategy Action Plan (2014-2020)” as well as the “Plan for Emissions Reduction, Upgrading and Restructuring of Coal Power (2014-2020)” issued in 2014 by the National Development and Reform Commission, National Energy Administration and Ministry of Environmental Protection which includes guideline strategies that give priority to energy conservation and green low-carbon industries. [27, 28]
In light of this report’s findings, Greenpeace East Asia raises the following four suggestions: 1. Control the rampant expansion of coal power facilities. Under the new norm of slowing demand for power during the 13th Five Year Plan, no new coal fired power plants should be approved in the five years between 2016 and 2020. 2. Closely control the construction of newly approved units. It is recommended all provinces enhance regulation of the large number of newly approved coal fired power plants following the transfer of approval powers from the central to the provincial level based on guidelines in the power plan of the 13th Five Year Plan. 3. Establish an early warning mechanism for investment in power projects. It is recommended that relevant government departments release regular forecast reports on national and regional power markets based on actual growth trends in power demand and the construction of new power plants in order to warn investors of potential risk. 4. Fully implement national guidelines and strengthen coordination between various departments to ensure that policies are better integrated into actual regulation of the coal power industry.
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[21] Xinhua Net, Ministry of Environmental Protection Transfers Approval Powers for Thermal Power, Geothermal Power and Highways to Provincial Governments. 2015 http://news.xinhuanet.com/politics/2015-03/19/c_1114698435.htm [22] Sina Finance, Surpluses in Coal Power Beyond Doubt, Interest Groups in Denial. 2015 http://finance.sina.com.cn/chanjing/sdbd/20150902/141623149663.shtml [23] BJX Power Net, The Most Talked about Energy Policy of the 13th Five Year Plan is Here!. 2015 http://news.bjx.com.cn/html/20151028/675698.shtml [24] ESCN.com, Li Junfeng: Large-Scale Development of Coal Power Will Result in the Same Surpluses as the Iron Industry. 2015 http://www.escn.com.cn/news/show-279217.html [25] China Energy Net, Would things be better if we didn’t build more thermal power plants? Zhou Dadi predicts negative growth this year in energy consumption. 2015 http://www.cnenergy.org/dl/hd/201511/t20151105_213415.html [26] China Electricity News Network, Wu Jingru: Development of the Power Industry for 2012-2050. 2015 http://www.askci.com/news/chanye/2015/05/29/162316p10.shtml [27] State Council, State Council Office Notice on Issuing Strategic Plans for Energy Development (2014-2020). 2014 http://www.gov.cn/zhengce/content/2014-11/19/content_9222.htm [28] National Reform and Development Commission, Notice on Issuing ‘Plan for Emissions Reduction and Restructuring of Coal Power at the Provincial Level (2014-2020)’. 2014 http://www.sdpc.gov.cn/gzdt/201409/t20140919_626240.html