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Time for China to Stop Bankrolling Coal

 
 

On April 19, China’s National Energy Administration announced a reassessment of its coal power overcapacity traffic light warning system. It removed a total of 11 provinces, including Beijing’s neighboring province, Hebei, from the red light category, meaning that they are now free to continue constructing the coal power plants they had previously suspended due to overcapacity concerns.

This is just latest development in a trend of China turning back to coal domestically. In 2018 China increased both its coal power generation and its coal mining capacity, and resumed development of previously suspended coal plants.

Overseas, meanwhile, Chinese financial institutions are involved in a quarter of all coal power plant capacity under development. Much of this funding goes under the banner of the “Belt and Road.” While the Belt and Road Initiative (BRI) is technology-agnostic, funding for energy has been dominated by coal: From 2014 to 2017, China spent $51 billion on power projects under the BRI, 36 percent of which went to coal projects and 11 percent to solar and wind.

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With the second Belt and Road Forum held in Beijing over the weekend, the nature of these energy investments in the supposedly “green” initiative is in the spotlight.

The world is watching. At home and abroad, it’s time for China to pull away from coal.

Coal is the biggest contributor to climate change, the effects of which are growing more severe by the day. According to the Intergovernmental Panel on Climate Change (IPCC), meeting Paris climate goals requires coal power generation be radically reduced in just 12 years, by 2030, and phased out by 2050. New coal plants, which could have a lifespan of over 30 years or more, are impossible to reconcile with these requirements.

In addition, coal is a major contributor to outdoor air pollution, which recent studies estimate cause 4.2 million to 5.6 million premature deaths every year. Coal is also very water-intensive, using up crucial and dwindling freshwater resources.

Thanks to these and other concerns, 100 financial institutions around the world have introduced policies restricting coal funding.

In their place, state-owned financial agencies in China, Japan, and South Korea have emerged as the largest sources of funding for coal plants outside their borders. However, funding for future coal plants is dominated by Chinese financial institutions.

Chinese financing is behind an estimated one-quarter of all coal power capacity under development outside China. The biggest lenders are China Development Bank and China Export-Import Bank, while the corporations most involved are large state-owned entities, including State Grid Corporation of China, China Energy Engineering Corporation, State Power Investment Corporation, and China Huadian.

Although the Chinese government has signaled it will restrict coal lending and “green” the Belt and Road, a major theme of the second Belt and Road Forum, the country has yet to formally limit its investment in coal plants.

Coal Is a Bad Deal for BRI Countries – and for China

Developing coal plants is inherently capital-intensive, and heavy borrowing for the projects carries risks around exchange rate volatility, currency deficits, and inflation, all of which can lead to unsustainable debt for the host countries. Such default risks have been seen in Pakistan, Indonesia, and Turkey over 2018 alone.

Additionally, many proposed coal plants under the BRI include plans for new coal terminals and rail to transport the coal. The coal imports are often traded in U.S. dollars, draining the country’s foreign exchange reserves. Constructing plants based on imported coal creates a long-term dependence on costly coal imports precisely when prices for new solar and wind are falling below coal power.

From 1979 to 2017, China’s real gross domestic product grew at 9.5 percent a year, emphasizing heavy industry fueled predominantly by coal, with extensive coal plant building encouraged through government policy. Power companies had access to cheap, subsidized credit for coal plants and for many years enjoyed guaranteed tariffs and operating hours.

However, due to the quick build-up of coal power capacity, market reforms, and competition from renewables, many coal plants are quickly becoming a bad investment for Chinese power companies. A recent analysis found it costs more to run 32 percent of coal plants in China than to build new renewable generation, a percentage that is expected to reach 100 percent of coal plants by 2030.

China’s five biggest power companies had estimated losses of $2 billion in 2018 due in large part to the volatility of coal prices. One of China’s largest state-owned entities, SDIC, will no longer invest in new coal plants, the first major Chinese domestic financier to announce a total withdrawal.

Despite these market signals away from coal, China’s National Energy Administration just last week lifted a ban on constructing coal power plants in a total of 11 provinces that had previously been forecasted with overcapacity concerns. The move comes just weeks after the country’s power industry publicly called for a large increase in domestic coal power capacity, 290 gigawatts above current levels by 2030. Their proposal is by no means a done deal, but is certainly cause for concern. 2018 saw increased coal power generation and coal mining in the country, as provinces – encouraged by economic stimulus measures – have turned back to smokestack industries to prime local economies in rust-belt regions, all of which contributed to record high global coal emissions in 2018.

Time to Move Away From Coal

If China continues to loosen its policies on coal, the world is destined to see increasing carbon emissions for some years to come, at a time when the science has told us so clearly that we must cut emissions rapidly. Similarly, if Chinese financial institutions continue to back coal power overseas, the world is destined to see more countries take the dirty and polluting path to development, at a time when the technology and the economics allow for a cleaner path to be discovered and followed.

Despite its heavy investments in coal, China was also the top global investor in clean energy investments in 2017, accompanying a record-setting year for renewable installation in the country. Competitiveness for new, clean energy technology is only increasing as renewables continue to fall in cost and market-moving climate risks unfold in real time. It makes sense for China to continue to build on its position as the global leader in renewable energy development, both at home and abroad.

Aiqun Yu and Christine Shearer are energy analysts with Global Energy Monitor

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