China Conflicted Over Coal-Fired Power – Analysis

By Michael Lelyveld

China has promised big steps to cut pollution from coal-fired power plants, but recent measures have left the moves’ progress in doubt.

On Dec. 2, the State Council, or cabinet, announced ambitious plans to upgrade coal-fired generators and reduce pollutants by 60 percent before 2020.

The changes would save some 100 million tons of raw coal and 180 million tons of carbon dioxide (CO2) annually, the official Xinhua news agency said.

The government also promised to close all plants that fail to meet energy-saving standards by 2020.

The pledges followed new guidelines for reforming the electricity market and opening distribution networks to competition that were issued by the National Development and Reform Commission (NDRC) planning agency on Nov. 30.

The reforms would develop electricity trading platforms and encourage industrial users to negotiate rates directly with producers, curbing the monopoly of the State Grid.

All the new power sector policies are meant to be consistent with China’s climate pledge to reach a peak in carbon emissions by 2030 and government promises to reduce urban smog.

Questions raised

But details of the plans for boosting coal-fired efficiency and cutting pollution have some curious features, raising questions about how well and how soon they will work.

On Dec. 9, the NDRC said it would pay bonuses in the form of higher rates to plants that meet coal efficiency standards starting Jan. 1, Reuters reported.

Under the plan, existing plants will be paid an extra 0.01 yuan (U.S. 0.15 cents) per kilowatt hour (kWh) for meeting the standards, while new plants would receive half that amount.

The reward reflects the judgment that generators need incentives as well as fines to comply with costly anti-smog requirements, according to Reuters.

Noncompliance has cost power producers 635 million yuan (U.S. $96.3 million) in lost subsidies and fines since new regulations took effect in 2014, the news agency said last month in a separate report.

But on Dec. 23, the State Council announced another rate change starting Jan. 1 that lowered the price paid for coal-fired power “to reduce the burden on enterprises and cut emissions,” Xinhua said.

‘Saved funds’

Ordinarily, reduced prices would be expected to boost electricity use and emissions, but this cut of 0.03 yuan (U.S. 0.45 cents) per kWh primarily affected prices paid to the generators by the State Grid rather than consumer rates.

The “saved funds” would be used partially to lower rates for businesses but also to upgrade power plants and increase renewable energy supplies, the State Council said.

A fund would be established to support laid-off workers in the coal and steel sectors, said the statement, suggesting proceeds from the rate cut might be used for that, as well.

But the net effect for coal-fired power producers is that their prices would be set lower than they were before the series of changes took place, erasing the incentive to upgrade.

Based on the separate rate announcements, the price cut is three to six times more than the compliance bonuses that the government would pay.

Even without the offsetting drop in rates, the bonus incentive may be much too small make a difference in emissions.

For plants already operating, the additional 0.01 yuan per kWh would raise 42 million yuan (U.S. $6.3 million) if all thermal power output in 2014 had been produced at plants meeting the standards, Reuters said.

Combined pressures

Although the policies seem to be at cross-purposes, they may be the result of combined pressures from low coal prices, high pollution, and huge surpluses of generating capacity, said Philip Andrews-Speed, a China energy expert at National University of Singapore.

“Given that all fossil fuel prices are low, they have to lower the on-grid tariff for thermal power, but they then add a very small incentive to be cleaner,” said Andrews-Speed.

“Given that there is a large and growing excess of thermal power capacity, power stations and companies which cannot make money will go bankrupt, in theory, unless they are protected by local governments,” he said.

In theory, the policies would wash out the least efficient and most polluting power plants, but since coal prices are so low and generating overcapacity is so high, the shakeout in the industry could take years to have environmental effects.

Despite the surplus of generating capacity and near-zero growth in power consumption last year, China has continued to build coal-fired power plants at a rapid rate.

As of December, officials granted permits for 155 new coal-fired power projects last year, The New York Times reported.

At the same time, the utilization rate for existing coal-fired plants is at a 37-year low, according to a study released by Greenpeace East Asia in November.

Despite the government’s pledge to shut down all noncompliant plants by 2020, the pace of building suggests that the coal-fired surplus could reach 200 gigawatts (GW) by then, exceeding all the coal-fired capacity in the European Union, Greenpeace East Asia said.

Project lead-times

A major question for China is why it keeps building more coal-fired plants when utilization is so low, profits are so poor, and pollution is so severe.

The answer is a combination of local political pressures and long lead times for projects that may have been planned when demand growth was high, said the Greenpeace study conducted with North China Electric Power University.

The trouble can be traced to a decision in 2013 to transfer power for project approvals to provincial authorities.

“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 (gross domestic product), especially in provinces heavily relied on coal,” the study said.

Greenpeace urged that no more permits for coal-fired projects should be granted during the 13th Five-Year Plan period, running from this year through 2020.

On Dec. 29, a senior energy official suggested that the central government will try to bring the pace of new projects under control.

Nur Bekri, director of the National Energy Administration (NEA), said that “a warning mechanism” would be established for coal-fired power plant construction and production, Xinhua reported.

But the statement appeared to fall short of an outright ban on new generating plants, leaving room for local governments to keep building more.