China surprised many observers when its coal consumption (which had grown at more than 8% per year on average since the turn of the century) stopped growing in 2014 and declined in 2015. Some thought this was a temporary blip that would be reversed. With the release of China’s 13th Five Year Plan in March this year, and six months of 2016 economic data to analyse, it's clear that the direction of both government policy and actual coal consumption in China continues to be toward further cuts in coal.
In a chapter contribution to the 2016 China Economic Update volume, launched yesterday at the Australian National University, Professor Nicholas Stern and I explain the energy demand and energy supply factors that have driven this historic turnaround in coal consumption (references below to Figures are to the figures in the chapter).
On the demand side, changes in China’s wider economy have caused a dramatic slowdown in energy demand growth. First, China’s economic growth rate has slowed, for structural reasons, from the double-digit average of the first decade of this century to less than 7% over the last 18 months (Fig. 18.1).
The slowdown in energy demand growth has been even more pronounced due to shifts in the composition of economic activity away from energy-intensive industries. The higher GDP growth rates of the first decade or so were fuelled by extremely high growth in investment and production in construction, infrastructure and highly energy-intensive basic materials such as steel, cement and aluminium. In China’s old economic growth model, GDP growth went hand in hand with energy-intensity.
But much of the capital investment in recent years, induced by monetary and fiscal stimulus in response to the global financial crisis, went into unnecessary capacity expansions that have led to large excesses in buildings and industrial capacity, low prices for basic materials, and debt-related financial challenges in these industries. As a result, production in sectors like steel and cement slowed in 2014 and contracted in 2015. Meanwhile, high-tech manufacturing and services sectors (which use much less energy) have grown. In the transition toward China’s new economic growth model, GDP growth is going hand in hand with accelerated reductions in energy intensity (Fig. 18.2).
The result of these changes in the rate and composition of China’s economic activity, along with steady improvements in energy efficiency within industries, have resulted in a dramatic slowdown in energy demand growth from an average of over 8% per year between 2000 to 2013 to around 1% in 2015 (Fig. 18.3).
The slowdown in energy demand growth occurred at the same time as a longer-running trend, the decarbonisation of China’s energy supply mix, accelerated. Chinese government policy has strongly supported the expansion of non-fossil energy: hydroelectricity, solar, wind and nuclear (Fig. 18.4). More recently, policy has directly restricted coal consumption and production in various ways. These policies have been motivated by a mix of concerns about energy security, local air pollution and climate change, and an industrial strategy that aims to capture global market opportunities in innovative clean-technology industries such as solar photovoltaics and wind power. Figure 18.4 shows how the expansions in non-coal energy sources, amid much slower growth in energy consumption overall, contributed to the absolute decline in coal consumption in 2015.
Because the above factors driving the coal turnaround are predominantly structural, we argue that they are likely to continue in broadly the same direction in the coming years. As a result, coal will likely continue to decline gradually. Recent Chinese economic data and policy announcements lend further support to that prediction.
In the first half of 2016, preliminary Chinese data show a continued decline in thermal power generation (which is predominantly coal-based) and a large reduction in coal production. Thermal power generation declined 3.1% year-on-year over this period and, since gas-fired power generation would have increased, we can infer that coal-fired power generation fell even further (Chinese statistics do not disaggregate the ‘thermal generation’ category).
Moreover, crude steel production (which drives both coking coal and electricity demand) also continued to fall, by 1.1% year-on-year. A combination of lower demand and government policy to close down coal mines (to reduce the excess capacity that is playing havoc in the Chinese coal industry) caused coal production to plummet nearly 10% during this period.
In 2014–15, China’s coal imports fell dramatically (around 11% in 2014 and 30% in 2015). This decline was reversed in the first half of 2016, with imports rising 8.2% year-on-year, as large domestic production cuts meant more imported coal was needed. But imports make up a relatively small proportion (around 5%) of Chinese coal supply. In absolute terms, therefore, the increase in imports was dwarfed by the decline in domestic coal production.
A more concerning trend is the recent expansion in the construction of coal-fired power plants and high-voltage transmission infrastructure intended to carry coal-fired electricity from western provinces to eastern demand centres. Outside observers might be tempted to conclude from this expansion, along with the upswing in coal imports mentioned above, that China is headed for a new surge in coal consumption. But this would be incorrect.
While coal-fired power stations are still being built at a rapid rate and many more are being planned, they are simply not being used; as generation capacity expands while coal-fired power generation continues to fall, the utilisation rate of China’s coal fleet plummeted to less than 45% by the end of May 2016. China’s already over-capacity coal-fired generation sector is experiencing a bubble in redundant capacity, implying a waste of capital on a large scale. The best explanation for it is that local authorities have been encouraging power station construction to stimulate short-term growth in their regions, with little concern for the weak long-term economic justification for such new plants.
The central government is aware of this problem and has indicated its plans for a nationwide moratorium on new coal-fired power stations for three years (which may well become permanent). Together with its policies to close inefficient coal mines and redeploy coal workers, its regional restrictions on coal and coal-fired power production to mitigate air pollution, and the strong ‘green’ focus of the 13th Five Year Plan, it’s clear that the direction of government policy is to reduce coal consumption overall.
Nonetheless, the failure to rein in coal-fired power infrastructure is indicative of an inability to redirect investment away from the heavy industries of China’s old economy and into the new sources of Chinese economic growth.
Coal consumption is falling, and that’s good news from a climate-change perspective. But, for a country that aspires to a greener, more services-oriented and people-centred economy, the fact that the country is on track to spend US$160 billion on redundant coal-fired power stations purely to boost short-term GDP growth highlights some deeper problems in the Chinese political economy.
Photo: Getty Images/Kevin Frayer