One-third of China’s coal plants behind schedule

Clean energy policies and high coal prices have left Chinese investors with little appetite for fossil-fuelled power plants.

Despite China’s ongoing electricity shortages, construction of new fossil-fuelled power plants has slowed. One-third of new projects given full approval by April were behind schedule, according to Lu Junling, an official from China’s top economic planning body, the National Development and Reform Commission (NDRC).

What’s more, of projects where preliminary approval had been given – meaning preparatory work could take place – more than half were still waiting for the final go-ahead after 20 months, he said. These figures point to a big drop in new generating capacity coming online in China.

This is nothing new, according to Han Xiaoping, chief information officer at energy website Since 2005, the amount of new thermal-power capacity – which in China primarily means coal – has fallen every year, Han said. “The state is encouraging investment in new energy and there are big profits to be made in wind and solar. Coal power is losing money, so the generating companies don’t have much appetite to invest.”

Current construction trends indicate non-fossil fuel energy sources will soon replace thermal power as the main source of new capacity in China. In the first four months of this year, 20.8 billion yuan’s (US$3.3 billion) worth of fossil-fuelled power plants were built – a year-on-year drop of 29.3%.

Figures from China Electricity Council (CEC) show that, by the end of the year, 85 gigawatts of new power-generating capacity will have been built in China in 2012. Of this new capacity, thermal power plants account for 50 gigawatts, while hydropower provides 20 gigawatts, wind power 14 gigawatts, and nuclear and solar around 1 gigawatt each. 

The government has not been restricting the construction of coal plants. Although China has been promoting development of new energy sources since the start of the 11th Five Year Plan (2006-2010), coal is still recognised as having a vital role in national energy security. Moreover, electricity shortages have made the NDRC lenient about approvals of new projects. At a National Energy Administration (NEA) meeting about dealing with summer electricity demand last year, head of the administration Liu Tienan said a batch of power-generation and grid projects would be approved in order to relieve electricity shortages in provinces including Zhejiang and Jiangsu in eastern China. Official data shows preliminary approvals had been handed out for 120 gigawatts of fossil-fuel generating capacity by April this year, the highest ever level for the time of year.

But one third of those projects are behind schedule. In Henan, Shanxi, Anhui and Guizhou provinces, numerous power plants have been approved but are not getting built, say media reports.

CEC’s statistics director Xue Jing explained that China’s power companies have been dragging their feet. Strategies include not rushing to obtain full approval despite being given a “pass” to carry out preliminary work, or obtaining full approval but delaying construction. Other devices include starting work but proceeding slowly and completing construction but not putting plants into operation.

Zhu Chengzhang, secretary of the China Energy Research Society pointed out that in 2005 China invested 322.8 billion yuan (US$51 billion) in power generation, of which 70.3% was spent on thermal power plants and the remaining 29.7% on non-fossil fuel power. But in 2010, the situation was virtually reversed: China invested 364.1 billion yuan (US$57.5 billion) in power generation, but thermal power accounted for only 36% of spending, compared with 64% on non-fossil fuel power. Zhu believes that cutting back investment in coal power – which is cheap and reliable – will inevitably result in less stable growth, and a reduction in new electricity-generating capacity added each year.

Given that the 11th Five-Year Plan adjusted the make-up of China’s energy supply in favour of new energy, it was inevitable that money would shift away from fossil fuels. But a lack of financial capacity and enthusiasm for investment are also factors in the spending decline. Chen Zongfa, head of the policy department at energy giant Huadian Group, pointed out that the large increases in coal prices since 2008, along with the global financial crisis, have inflicted four consecutive years of financial losses on the thermal-power sector. The survival of the power companies is threatened by high capital-to-debt ratios and cash flow issues. Industry insiders are almost unanimous in blaming the slowdown on these problems.

Between January and October of 2011, the “big five” power companies lost a total of 31.9 billion yuan (US$5 billion) – 19.6 billion yuan more than they lost in the same period last year, according to figures from CEC. In 2011 as a whole, they lost an average of 7 billion yuan (US$1.1 billion) each thanks to coal. When losses reach a certain level, projects under construction are held back in order to protect the company.

The power companies have all opted to shift investment to more profitable areas. Last year, China Power Investment became the first centrally owned state enterprise to pull out of local coal-power projects, when it sold off its stake in Zhangze Electric Power – which had seen losses of 314 million yuan (US$49.6 million) in six months – to Shanxi Datong Coal. Shortly afterwards, Huadian Group put its 20% stake in Ningxia Datang International Hydropower up for sale and then Huaneng sold off a 40% stake in Yunnan Diandong Energy. Just two or three years ago, the big five power firms were snapping up local power plants, but years of poor financial performance forced a retreat.

“The power companies have a fixed amount they can invest each year,” Chen Zongfa explained. “With pressure to shift to new energy, reduce debt-to-assets ratios and turn around losses, they have to ditch the less profitable fossil-fuel power investments and expand into new and renewable energy – investments that are in line with government plans or can increase profits.”

But this year, the price of coal has fallen due to an unexpected surplus of the fuel, and many believe this will reduce cost pressures on coal-fired plants. Research firm Guosen Securities estimates that the price of coal will fall by another 10%, cutting the cost of generating a kilowatt-hour of electricity by 0.027 yuan. Last year, that lower price would have meant 102.8 billion yuan (US$16.2 million) in extra profits – in a sector which created profits of just 20.6 billion yuan (US$3.3 billion).

This may be wishful thinking. Most of the costs involved in using coal for electricity generation are incurred during transportation. China’s coal fields and centres of electricity consumption are far apart, and so the coal needs to be carried long distances. Rail freight capacity is inadequate, meaning water transport must be used, and costs get pushed up. A report by the State Electricity Regulatory Commission shows that between 30% and 50% of the price that power stations pay for coal comes from transport costs and other charges. Interest payments arising from long term losses are another burden: Huaneng International paid out more than 7.7 billion yuan (US$1.2 billion) in interest in 2011, up 32% on 2010’s 5.3 billion yuan. Its net annual profits were 1.3 billion yuan (US$205 million).

“With coal prices falling and coal power profitable again, there will be more enthusiasm for investing in coal,” said Chen Zongfa. “But it’s hard to say how long that will last. Coal prices are just one factor – the whole system needs to be sorted out.”

This article was first published in Time Weekly, where Cui Xuan is a reporter.

It is translated and published as part of our Green Growth project, a collaboration between
 chinadialogue and The Energy Foundation. 

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