At first glance, recent headlines on coal, energy and emissions in China make little sense. Coal-fired power generation grew slightly, by 1.4%, in 2022, and output in the other major coal-using sectors, steel and cement, contracted. However, the government is reporting a major increase in coal use, of 4.3%.
Clean energy installations made records, but the permitting of new coal-fired power plants also surged.
In its 2023 workplan, the government is aiming to further increase domestic coal production to support energy security, while according to the current Five Year Plan for energy (2021–25), coal is supposed to move from the mainstay of the energy system to a supporting role, and coal consumption is supposed to start falling in the 2026–30 period.
There are both real and apparent contradictions between these headlines.
Did China’s coal consumption increase in 2022?
The 4.3% increase in coal consumption and 2.2% increase in energy sector CO2 emissions in 2022 reported by China’s National Statistics Bureau are very hard to square with what we know about activity in China’s main coal-consuming sectors. This would also be the first time in almost 20 years that coal consumption increased faster than GDP, which clocked 3% growth.
A week after the release of the official government data, the International Energy Agency released its numbers on China’s CO2 emissions, based on more detailed data obtained from government sources. These numbers added to the confusion, as they indicated a much smaller 2% increase in coal consumption, and a fall in fossil CO2 emissions. However, the IEA also said that CO2 emissions in the power sector increased 3%, which doesn’t align with the reported 1.4% growth in coal power generation and falling power generation from gas.
Factories had to burn more coal to get the same energy – and produce the same emissions
A part of the increased coal consumption is due to a switch from gas to coal prompted by sky-high gas prices. However, since gas only makes up 8% of China’s energy mix, while coal makes up 56%, and gas consumption only fell by 1%, this cannot be the main explanation.
The most likely cause then of the conflicting data is that more coal was used in 2022, but it was of lower quality. Average energy content and carbon content of coal fell, meaning power plants and factories had to burn more coal to get the same amount of energy – and produce the same amount of emissions.
Coal consumption can be measured in two ways: the tonnes of coal used, or the amount of energy contained by the coal. Unlike oil, gas and electricity, the energy content of coal varies widely, with the most energy-dense varieties containing up to three times as much energy per tonne as the lowest-quality commercially used varieties. Therefore, accounting for changes in coal quality is a key requirement for accurate statistical reporting.
The background to the changes in coal quality is that the Chinese government has been pushing coal miners to increase output aggressively in response to the coal shortage of 2021. In that year, domestic coal production fell far behind consumption and stockpiles were depleted, leading to electricity rationing. At the same time, to counter the steep increase in international coal prices, the government has pressured miners to sign long-term contracts with power plants and factories at far below market prices.
To fulfil the output targets and delivery contracts, miners have prioritised quantity over quality, resorting to exploiting lower quality coal reserves to hit the quota, or reducing the processing they usually carry out to increase the quality of their mined coal. This was seen for example in a coal market survey report by analysts at CITIC Futures, who in February visited eight coal mines in Inner Mongolia, Shaanxi and Shanxi. The concerns were also reported on by Reuters in June 2022.
Because users are getting worse quality coal, they must burn more of it to run their power plants and factories. The miners are misreporting coal quality to make it seem production targets are being hit. Therefore, the drop in coal quality is not captured by official statistics.
China’s policymakers have been aware of the coal quality issue and have sought to address it. Last August, the state planning agency NDRC (National Development and Reform Commission) released a notice on ensuring the quality of coal under mid- and long-term contracts for coal used in power generation, in response to a recent “decline in the calorific value of coal purchased by power companies”.
In January 2023, a China Electricity Council official noted a “clear decline in coal quality” as a problem associated with long-term coal contracts, as well as deliveries of coal that don’t meet the quality specified in contracts.
Despite the evidence of a decline in coal quality, official statistics imply no change in the average energy content of coal produced, which is highly unlikely given the major increase in output. This is a further indication that the official statistics are failing to account for the changes in coal quality.
The energy content of coal produced in China according to official statistics can be calculated implicitly from the reported total production of primary energy.
Another indication that not all is well with the domestic coal supply is that coal imports increased 74% in the first two months of 2023, compared with the previous year. After a reported 10.5% increase in domestic production in 2022, there shouldn’t be such ferocious demand for imports.
Why did China permit more than 100 new coal plants, despite record growth in clean energy?
Coal power plant permitting, construction starts and new project announcements accelerated dramatically in 2022, with new permits reaching the highest level since 2015, even as clean energy installations made new records. A total of 106 GW of new coal power projects were permitted, the equivalent of two large plants per week, over four times as much as in 2021.
There are a few drivers behind these investments:
◽ China saw a rapid increase in electric peak loads in 2021–2022, with the highest recorded momentary load increasing by 230 GW, due to an increase in the prevalence of air conditioners and exceptionally intense heat waves. This is prompting an increase in coal power plant development – a costly and sub-optimal solution, especially in major electricity demand centres and provinces neighbouring them.
◽ As the prices for imported gas skyrocketed in 2022, the coastal provinces that have relied on gas-fired power plants to cover demand peaks seem to be replacing it or building alternatives.
◽ Some large wind and solar power developments in remote areas require new thermal power to regulate the voltage and frequency of the grid.
Despite impressive acceleration in clean energy installations, annually added power generation still hasn’t reached the level where it matches growth in electricity demand, resulting in continued growth in demand for power generation from coal. However, the point when all demand growth is covered from clean sources is likely to be reached soon, as the targets for annual wind and solar installations, in particular, are increased.
China’s National Energy Administration said in February 2022 that new coal power plants should not be permitted solely for the purpose of bulk power generation, but only to support grid stability or the integration of renewable energy. While some of the new coal power projects follow this rationale, many don’t. It appears that the statements from the central government encouraging new coal projects have created a self-reinforcing boom dynamic, leading to a lot of projects that cannot be justified from a power system planning perspective.
Currently, local governments are allowed to issue permits with very little, if any, scrutiny or justification, and are rushing to permit as much as possible while this remains the case.
Local governments are always keen on new construction projects as they bring in economic activity and demand for construction materials and services from local state-owned enterprises, while the risks are borne by the central-government-controlled banking system.
New coal power projects don’t seem attractive to developers. However, encouragement from the central government to build more coal-fired capacity creates an expectation that investors will be made whole, for example through cuts to coal prices or increases to electricity tariffs, increasing profitability. At the very least, central-government-controlled banks will absorb any losses.
The government is also preparing capacity payments for coal power plants, and the anticipation of such payments can make investments more attractive.
Yet, the wave of new projects shows a real challenge: while China is making rapid progress in scaling up clean energy, the power system remains dependent on coal power capacity for meeting electricity peak loads and managing the variability of demand and clean power supply.
As electricity demand for cooling increases and China needs to start reducing coal power generation, other solutions to manage the variability of demand and clean power supply are needed. They include increased investment in electricity storage, flexibility, and transmission within grid regions.
The growth in peak loads could be effectively mitigated through strengthened energy efficiency requirements for air-conditioning units and for new buildings, and by introducing a programme of large-scale energy-efficiency improvements for existing buildings.
What do China’s conflicting trends mean for emissions?
The government’s focus on energy security means that China will be working simultaneously to: replace coal use in industry and households with electricity use; replace coal power with clean generation; and replace imported coal and gas, and even some imported oil, with domestic coal. This approach explains a lot of the apparent contradictions in promoting both coal and clean energy.
Given the rapid growth of clean energy and expected slower electricity demand growth, the massive additions of coal-fired capacity don’t necessarily mean that China’s coal use or CO2 emissions from the power sector will increase.
China’s emissions-peaking timetable will be dictated by when clean energy growth overtakes total energy demand growth. This may happen in 2024. Clean energy growth would be sufficient this year if it wasn’t for higher growth due to the rebound from China’s zero-Covid policy.
Once clean energy is growing faster than total electricity demand, there will be no space for power generation from coal to increase
Once clean energy is growing faster than total electricity demand, there will be no space for power generation from coal to increase. As more capacity continues to be added, the utilisation rate of China’s vast coal power fleet capacity will decline.
The government’s plan for managing this transition is to relegate coal power to a supporting role, moving from a baseload source to a regulating one that only runs at full steam when wind, solar, hydro and nuclear fall short of meeting electricity demand. In particular, coal power plants will need to ramp generation up and down quickly to respond to changes in generation from variable renewables. This is referred to as “coordinated operation” in the NDRC’s 2023 development plan.
That plan includes studying the introduction of capacity payments, which could be a way of making the transition to a “supporting” role palatable to plant owners – they will make money not just on the electricity that they generate but the regulated capacity that they provide to the system.
But still, China’s targeted rate of emissions reductions after the emission peak is an open question. Adding hundreds of new coal power plants and opening vast amounts of new coal-mining capacity is concerning as it incentivises local governments and companies to continue coal use and avoid a rapid phase-out.
To peak emissions as soon as possible and get on track to reaching carbon neutrality, China will need to keep increasing investments in clean energy, to cover all energy demand growth as quickly as possible and enable the use of fossil fuels to begin falling. To avoid excessive or misplaced investments in coal-fired power, the scrutiny of permits handed out by local governments should be increased and permits that cannot be justified on the basis of serving grid stability, or the integration of renewable energy, should be cancelled. Looking ahead, investments in electricity transmission, more flexible grid operation and storage can help eliminate the need to add more coal power capacity.