Where is China‘s Coal Policy Heading?

13 December 2015

Levent Yilmaz

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Low Utilization of Thermal Power Plants in China

Utilization rates dropped 7.7% y/y in the 10 months of 2015 and were also down c27% from the utilization rate in China’s best year, 2005

They believe China’s power demand will double over the next 20 years as per-capita residential and commercial consumption of power catches up with developed world average (the per-capita industrial consumption of power is at developed world levels).

They build when they have permits.

FCF yield of some Chinese IPPs = 23% (2015E).

net debt/equity = 130% to  400%

Current high margins are unsustainable in the medium term as the government cuts tariffs

Source: Greenpeace

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Glut of Coal-Fired Plants Casts Doubts on China’s Energy Priorities 155 planned coal plant projects that have a total capacity of 123 GW

received a permit this year, according to Greenpeace

That capacity is equal to 15 percent of China’s coal-fired power capacity

China’s state-controlled economy creates strong incentives for provinces to manage their own energy sources to generate jobs and revenue.

Disconnect between the provincial building boom and the country’s overall energy requirements harder for China to convert to a system that is not dominated by

dirty fuel.

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Coal-fired Power Plants Planned and Under Construction

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China Leads the World in Build Out of Super and Ultra-Supercritical Coal Plants

High-efficiency plants achieve a 25% lower

CO2 profile than the oldest U.S. plants

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Advanced Coal Gen-eration Online or Un-der Construction (in

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Advanced Coal With Controls Drives Major Emission Reductions

Supercritical and ultrasupercritical plants in operation and under construction through 2016. Source: Peabody Energy, Platts World Electric Power Plant Database, March 2015.

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China’s Intended Nationally Determined Contributions (INDCs) Cut CO2 emissions per unit of GDP by 60 to 65% by 2030 from 2005 levels

Increase non-fossil fuel in primary energy consumption to around 20% by 2030

Achieve 200 GW of wind power capacity by 2020

Achieve 100 GW of solar power capacity by 2020

Increase the proportion of concentrated and highly efficient electricity generation from coal

coal consumption of electricity generation from newly built coal-fired power plants: 300gr ce per kWh

Strengthen R&D and commercial demonstration for low-carbon technologies energy conservation renewable energy advanced nuclear power technologies carbon capture, utilization, and storage promote the technologies utilizing CO2 to enhance oil recovery and coal-bed

methane recovery

Build on carbon emission trading pilots, steadily implementing a nationwide emission trading system and gradually establishing the carbon emission trading mechanism

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Coal Power Plant Efficiency Coal consumption of newly built coal

fired generating units < 300gce/kwh

Existing coal fired generating units < 310 gce/kwh during the 2015-2020 period

Most modern advanced units already in operation have a thermal efficiency of 280 gce/kwh.

Target for bringing down the average of the existing fleet to below 310 gce/kwh more challenging -> retrofitting and boiler replacements

Less coal demand from these plantsSource Barclays, June 2015

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Efficiency improvements can significantly contributeto CO2 emission reductions

•The most important near-term action to reduce CO2 emissions is to increase the efficiency of coal-fired power plants

•1% increase LHV efficiency = 2–3% points decrease in CO2 emissions

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China offers bonus to ultra-low emission coal power plantsEmission concentration of dust should < 10mg/Nm³

Sulfur dioxide < 35mg/Nm³

Nitrogen oxides < 50mg/Nm³

Power plants that open after January 1 will get an 0.005 yuan/kWh bonus on top of the basic grid tariff

Those already in operation will get an extra 0.01 yuan/kWh

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Major challenges related to peaking emissions by 2030 Improving efficiency to 300 gce/kWh would require ultrasuper-

critical (USC) boilers, with water cooling instead of air cooling condensers (ACC) which typically result in a 4–5% energy penalty, according to Barclays. However, coal-fired power units in provinces with limited

freshwater are mandated to use ACC technology, which helps to save up to 80% of freshwater demand in power plants.

Given that a typical ACC coal plant consumes 12–13 gce/kWh more fuel than units using conventional water cooling, a realistic new coal-fired plant in inland provinces (with ACC) would be around 315 gce/kWh.

Elsewhere, integrated gasification combined-cycle (IGCC) is comparable to USC in efficiency terms, but is not a commercially-mature technology.

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Domestic Coal Industry Protection Policies

reestablishing taxes on coal imports

placing limits on allowable sulfur, ash, and trace elements for imported coal

reduce their annual coal imports by 55 mt

reduced demand for Indonesia's lower-quality export coals

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In China: new energy policies have already accelerated the shift of energy-intensive industries from eastern to western provinces

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Supply: Debottlenecking through the northern routes allows foradditional volume to reach coastal provinces

Source: Kapsarc

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Carbon capture and storage could dramatically reduce CO2 emissions

CCS might be deployed on a significant scale in China, acccording to Wood Mackenzie policy-driven approach to growth.

Demonstration and deployment of the technology occurring too slowly

The considerable challenges: high cost for post-combustion capture lack of policy clarity in China attention increasingly diverted to other low-emission options.

For China to cap its emissions by 2030, the country will require a slowdown in economic growth to 4.5% would reduce power generation growth.

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China modifies VAT to help lower coal miners’ costInput tax on items for mine roadway construction,

drivage and backfilling and open-pit reclamation shall be credited against the output tax (17% VAT )

China can abolish 3% export tax to stimulate exports

 China's tax on imports of thermal coal

applies to Australian, Russian and South African origins

6% on the delivered CFR price at Chinese ports.

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Chinese non-power coal market also under pressure

Controls over cement production, penalties for misuse, and shutdowns of underutilized, inefficient boilers in heavy urban and industrial areas, according to Wood Mackenzie.

Energy Development Strategic Action Plan: raise the share of centralized coal power penetration in industry to over 60% from today’s 52%, by phasing out dispersed, small coal-fired facilities

fall in oil prices reduces the economic viability of coal-to-chemicals conversion projects. high water requirement for conversion projects will add to cost and

uncertainty.

Water Pollution Prevention and Control Action Plan will largely target the non-power sector and especially the chemical conversion sector.

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Difficulty around nuclear deployment Limited domestic uranium supplies

unproven third-generation technology

fluctuations in quality and production capacity for key reactor components

significant lack of experienced reactor operators

limited capacity for spent fuel reprocessing and storage.

Nuclear capacity growth from 26 GW at the end of 2015 to 50 GW by 2019 can be achieved, according to Wood Mackenzie.

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Sources: IEA, 2010; IRENA, 2015, KAPSARC Analysis

Lower Fuel prices, price of renewable energies and Electricity.

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Sources: IEA, 2010; IRENA, 2015, KAPSARC Analysis

A Carbon price of $30 would impact coal market, but a coal price adjustment could be the consequence

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World energy demand is growing at a rapid paceWorld total primary energy demand by scenario

Source: World Coal Association (WCA), IEA, WEO 2015

World energy demand is set to grow significantly, in any scenario

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Coal will still have a big rolePrimary energy demand by fuel in the New Policies Scenario

Source: World Coal Association (WCA), IEA, WEO 2015

Even with the IEA’s ambitious growth projection for renewables and significantinternational climate action, coal will still be a major source of electricity in 2040

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Having the right information can help stimulate support

Source: IEA ETP 2015

Developing a richer set of data and tracking the right metrics can enhance confidence that efforts pay off

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Coal Oversupply

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Will 2015 finally provide the floor for prices in the coal market?Critical market risks centered around the pace of industrialisation, structure of Asian s/d,and penetration of meaningful, scalable alternatives in power markets

Source: globalCOAL and Various Pricing Surveys (History), Wood Mackenzie Coal Market Service (Forecasts)