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China Faces 4 Big Risks if it Continues Building More Coal Plants

As the world turns attention to the UN climate meetings this week, news from China has captured global headlines: From January 2018 to June 2019, the country added 43 gigawatts (GW) of net new coal power capacity to its existing 1,000 GW coal fleet, while the rest of the world collectively reduced coal capacity by 8 GW. During the same period, China installed 85 GW of solar and wind power generation capacity. And from 2005-2018, China reduced its carbon intensity by 45.8% and increased its non-fossil fuels to 14.3% of its total primary energy mix.

If China is meeting its stated energy targets and has a goal to peak carbon emissions in 2030, is this success?

Not exactly – it depends on the timeline.

Even beyond the global urgency of achieving dramatic greenhouse gas emissions reductions, China must also consider if its current pathway is the most economically efficient and sustainable option for its own longer-term development. The continued expansion of coal in the short-term undercuts its aspiration to be an “ecological civilization” and increases the economic costs of China’s energy economy over the coming decades.

There are four main risks to continued coal expansion:

1. Financial and economic risks

China is both a global economic powerhouse and a developing country. It boasts a strong coal mining industry providing needed jobs, and it is a leader in efficient coal combustion technology, which helped launch its economic successes in past decades. But today’s China is not the China of a decade ago. Today, China’s coal fleet is over capacity; most plants are only operating at about 50% of their total capacity. And although jobs in coal remain important and the energy system is considered more secure because of local coal, China is the largest coal importer in the world. In the past decade, China has increasingly imported lower-sulfur coal from Australia and Indonesia because it produces less air pollution.

So why are power plants that were on hold until recently being constructed? Local economic development and stimulus are driving short-term decisions. Provincial leaders eager for local development are trying to satisfy local industries. Global Energy Monitor reports that provincial authorities issued 245 GW of coal plant permits between 2014 and 2016. Continuing to develop new market rules could help integrate regional grids and help deliver a more financially sound, efficient energy system that can accommodate more renewable energy. 

Given their potentially low utilization, investing in coal plants is a risky proposition for the banking sector, which is extremely important to providing economic security nationally. In past years, over half of operating coal power stations faced net financial losses, resulting from overinvestment in coal power, increasing coal prices, and reduced renewable energy curtailment (more of the renewable power generated is actually being dispatched to meet electricity demand).

2. Health and air pollution costs

China’s deployment of coal has dangerous implications for the environment, for human health and for the country’s economy. Coal combustion is the single-largest source of air pollution-related health impacts in the country, contributing to some 366,000 premature deaths in 2013 alone. These burdens could grow substantially by 2030 if coal plants continue to operate at current rates. Air pollution-related health impacts total $38 billion (267 billion yuan) per year.

Mounting health and pollution damages may also lead to more stringent regulation in the future, including emissions caps or performance standards for coal power stations. These additional environmental and air pollution requirements will make coal even less competitive and more financially risky.

3. Long-term growth and markets

China is the world’s leader on clean energy. It’s the largest producer of solar panels, wind turbines, batteries and electric vehicles, and was responsible for 32% of all global renewables investment in 2018. In fact, it was the top investor in clean energy for nine out of the last 10 years, and leads the world in installed capacity of hydropower, solar PV and wind.

Yet its reputation as a global clean energy leader could be at risk. Investment in renewable energy dropped last year with changes in subsidies for solar projects, and China is also in the middle of a rollback of additional subsidies for wind. Investment in coal and the surprising swift negative impact of the changed subsidy policy mean that the scales are now tipped toward pursuing high-pollution, high-cost infrastructure instead of low-cost clean technologies. Capital investment is favoring business as usual.

China’s clean energy future can be secured by shifting investment and modernizing energy markets, upgrading and digitalizing transmission and distribution infrastructure, and recognizing the low operating costs of clean energy and storage.

4. Mounting climate risks and impacts

China is one of the world’s countries most vulnerable to climate disturbance. The China Meteorological Administration’s 2019 report found that the country is already experiencing more frequent and intense extreme weather, glacier retreat, significant flooding, and sea level rise bringing additional salinity and infrastructure risk. Continued coal development will only heighten these risks.

Power plants must also compete for scarce fresh groundwater with agriculture and other human and ecological needs. WRI’s analysis shows that 51% of China’s planned coal projects in 2013 — some of the very plants constructed recently — were in water-stressed regions. As many countries seek to reduce their coal fleets, and as renewable energy is increasingly recognized as the lowest-cost electricity resource, China may be locking-in significant emissions or prematurely retiring expensive power assets.

Significantly, China’s coal expansion also limits its leadership in global climate diplomacy. Other countries are watching China. If China leads on the low carbon transition, others will likely follow. If China reverts to a high-coal energy strategy, others will likely follow. China’s climate policy has a multiplier effect.

Coal expansion is a lose-lose for China as a global leader: Both its economic standing and global reputation may suffer.

China Can Still Lead the World in Sustainable Energy

China is known for its careful long-term development planning and can re-shape its near-term investment. A recent Energy Transitions Commission report conducted by the Rocky Mountain Institute shows that China can technically and economically achieve its twin goals of reaching net-zero carbon emissions and becoming a rich developed economy by 2050. But in the case of the power sector, incumbent and provincial interests are standing in the way.

China is building its economy of the future. But to get there, policymakers must look to sectoral pathways that shift energy demand, implement power market reforms, act on new clean energy technology and engage provincial leaders in a new investment approach. China must re-examine its coal plants in the pipeline against the four risks above. New coal plants create economic drag, ensnaring financial prosperity and climate action opportunities. By avoiding future coal development, China can still seize the opportunity to lead the world toward a clean, affordable, sustainable energy system.

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