China may be investing too much in coal power, with construction of new plants accelerating at the same time that demand growth for electricity is slowing, the International Energy Agency said.
The world’s biggest investor in fossil-fuel generation started more than 70 gigawatts of new coal projects last year and had 200 gigawatts under construction at the end of April, the Paris-based institution said in a report published Wednesday. At the same time, most plants are sitting idle more than half the time, and low-carbon sources of electricity including nuclear and renewables are covering additional demand.
The findings add weight to concerns voiced by environmental groups such as Greenpeace that China is apt to waste 1 trillion yuan ($150 billion) on excess power capacity by 2020. It suggests that generators haven’t yet responded to the government’s ambition to scale back on the pollution causing global warming.
“It is becoming apparent that China has overinvested in new fossil fuel capacity,” the IEA said in its World Energy Investment report. “Measures permitting renewables and the pricing of coal-fired power could make it more difficult for generators to recover the capital costs of coal plants.”
China installed a record 46.9 gigawatts of solar and wind last year, according to Bloomberg New Energy Finance, reflecting the government’s pledge to ratify the Paris accord on climate change and bring greenhouse-gas emissions to a peak no later than 2030. Despite the country’s efforts clean up the energy industry, coal still accounts for a majority of the China’s power needs.
The chart above from the report shows the pace of new electricity demand growth slowing in the past two years. Additional thermal power generation, including plants that burn coal, are labeled in grey.
The IEA estimated power demand grew 2.7 percent in the first half of this year compared with the same period a year ago. Utilization of China’s coal plants — the measure of how much of the time each was getting paid for its output — fell to 46 percent from 50 percent. About 21 gigawatts of new plants came online.
“In the period 2000 to 2013, electricity demand grew rapidly,” the report said. “The past two years of slowing demand growth has resulted in a narrowing of the energy gap to be filled by fossil fuel power generation. Based on IEA projections, low-carbon sources are expected to be able to cover annual demand growth of at least 2 percent to 2.5 percent through 2020, leaving little scope for an expansion in fossil fuel generation.”
Chinese coal firms have struggled as the nation’s worst economic slowdown in a quarter century batters demand and Premier Li Keqiang vows to cut excess capacity in industries. The companies need to repay 263 billion yuan of bonds next year, Bloomberg-compiled data show.
Sichuan Coal Industry Group LLC, based in the southwestern province of Sichuan, failed to repay 1.057 billion yuan of bond principal and interest due in June, paying off the debt only in July. Chinacoal Group Shanxi Huayu Energy Co. failed to make a note payment in April. Industries reliant on the fuel have also grappled with debt woes. Dongbei Special Steel Group Co. missed multiple debt payments this year.
Widespread Issue
China isn’t alone in facing a surplus. Utilities and other companies in Japan pushing ahead with new investments in coal-power plants risk creating 6.22 trillion yen ($57 billion) of stranded assets, according to a study by Oxford University’s Smith School of Enterprise and the Environment.
“Stranded coal assets would affect utility returns for investors, impair the ability of utilities to service outstanding debt obligations, and create stranded assets that have to be absorbed by taxpayers and ratepayers,” according to the study, which examined the overcapacity in Japan.
Worldwide investment in coal supply decreased 9 percent in 2015 to a level not seen since 2015 as China worked to restructure its mining to reduce excess capacity, IEA said.
The IEA estimates China was over-investing in coal supply by about 50 percent at its peak in 2012.
The boom in coal-plant building is underpinned by power prices, which haven’t fallen in line with the cost of building coal plants. The IEA said the cost of electricity in China is two-thirds higher than the average in Europe, though building a coal plant costs only half as much in China. Local authorities have sped up approvals for new plants, and financing is available cheaply. Coal mining and transport companies are diversifying into power plant construction to diversify their sources of income, the institution said.