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Why you should listen to this podcast

  • The thermal coal price has doubled this year, boosting Australia’s export revenues, the Australian dollar and GDP. Will it last?
  • China’s electricity consumption is up 4% but coal production has fallen 11% and coal fired electricity is up just 2%. Wind generation is up 16% and PV 32% for the year to date. China’s apparent coal consumption is down over 2% despite the 2% increase in thermal generation, 1% increase in crude steel and 2.6% increase in cement consumption year to date.
  • China, Russia, Japan and South Korea are talking about a super grid to connect the four countries which would let China export surplus power to Japan.
  • China is building 200 GW of new coal generation but capacity utilization, already under 50%, will continue to fall and with much higher coal prices profitability will be difficult.
  • China is deregulating generation prices.

These are just some of the topics discussed in this podcast by Lauri Myllyvirta from Greenpeace Asia and Tim Buckley, Director of Energy Finance studies, Australasia from IEEFA. Lauri is Greenpeace’s senior global campaigner on coal and air pollution based in Beijing and has a master of political science from Helsinki University. We here at ITK have always found his analysis to be some of the best in the business. Tim has 25 years experience in investment banking including as head of Research for Citigroup in Australia

China is the world’s largest source of CO2 emissions and India is one of the fastest growing. As was recently reported China has in the past couple of years made enormous strides in reducing the growth rate of CO2.  Most of China’s emissions come from the burning of coal for electricity and steel and cement production and the direct emissions from cement calcification. The slowdown in emissions is occurring as China moves away from coal fired electricity generation and towards a less energy intensive economy and diversified electricity generation base. Some further background on the outlook implied by China’s recently announced 13th 5 year power plan.

What really matters in the 13th 5 year plan for China’s power sector

Although the headlines in the 13th 5 year plan seemed to be about the new generation being built some of the real news is that there is now a hard target for renewable energy curtailment of 5%. Curtailment of wind was 15% in 2015 which amounted to about 34 TWh of lost wind energy. This means its going to be harder to curtail hydro, wind, pv and nuclear in favour of coal as has been the practice over the past five years. Reducing curtailment to 5% is the equivalent of building almost 12 GW of new wind.

As a result coal’s share of total electricity consumption will surely continue to fall, although maybe not as fast as it fell this year.

Figure 1 China electricity supply & demand

Figure 1: China electricity supply & demand

For PV, China is likely to install 30 GW of solar this year, a totally astonishing number, equal to what the entire world including China installed in 2012, and nearly equal to Germany’s cumulative 2015 installed capacity. China only installed this much because Feed in Tariffs were being cut sharply and individual businesses wanted to get their installations in ahead of the cut off dates of 30 June 2016. What it shows though is the huge physical capacity of the China market, that it can install 30 and maybe 35 GW in a year. The 13th plan calls for a 2020 target of 110 GW which implies annual growth from 2017 of about 8-9 GW. Many expect that to be well exceeded.

There was no change that we could see to the nuclear targets where capacity is going from 29-58 GW but a recent article suggests that the Chinese nuclear industry is about 3 years behind target and struggling somewhat with new generation reactors. The view is that 53 GW is more likely than 58 GW.

Coal  generation profitability will fall sharply as capacity utilization falls.

Building coal fired generation that has utilization of 50% is not very efficient. Historically China used its coal fired generation to provide peak and shoulder power and so couldn’t run the plants at the 85% cap use rate that we aim for in Australia. Even so the rate was 61% as recently as 2011. If we also factor in US$75 coal price, but leave the electricity price at around US$63 MWh profitability disappears.

 

Figure 2 Coal plant profitability 2015, v 2018

Figure 2: Coal plant profitability 2015, v 2018

 

Figure 3 Coal price has jumped. Source: Factset

Figure 3 Coal price has jumped. Source: Factset

 

David Leitch is principal of ITK. He was  formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.    

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