China threatens to pierce coal export bubble

The surging growth in China’s hunger for coal – the bedrock of Australian government export revenue forecasts for the next two decades, and for the tens of billions of dollar in private investment in coal mines and infrastructure – could come to an abrupt halt within three years.

News reports from China, quoting Wu Yin, the deputy head of the government’s National Energy Administration, say China is looking to impose an absolute cap on coal energy consumption by 2015 – an innovative twist on global climate change policies that have so far included caps on emissions and renewable energy targets.

According to these reports, the cap will be set at 4.1 billion tonnes in 2015, compared to its consumption of 3.5 billion tonnes in 2011, suggesting that demand growth (which was 7.5 per cent in 2011) will have to be rapidly curtailed in 2012, 2013, and 2014 to meet that interim target.

The news is significant for a couple of reasons. The first is that it signals that China – already the world’s largest energy user and emitter – is clearly prepared to use a range of policy levers to reign in its growth in emissions (unlike in Australia where the government is under pressure to ditch most if not all complementary clean energy policies once it has a carbon price from July 1).

In its current five-year plan, China has already established an ambitious goal to reduce energy consumption per unit of GDP by 16 per cent by 2015, cut carbon emissions per unit of GDP by 17 per cent, and has also increased its “non fossil fuel” energy targets to 11.4 per cent by 2015. It also intends to increase forested areas by 40 million hectares.

Last year, it introduced feed-in tariffs for rooftop and utility-scale solar – a measure that is expected to deliver a sharp increase in solar deployment in coming years, between 50GW and 100GW by 2020), and it is also trialling cap-and-trade schemes for emissions in seven cities and provinces, with a view to wider deployment from 2015.

The proposed cap on coal use is an interesting development, and could come because some of the other measures – such as the reductions in emissions intensity – are proving hard to achieve. According to the reports, individual provinces would be given set budgets which they would be expected to adhere to.

The second point of significance is that it could force Australian industry and energy economists – and those elsewhere in the world – to rethink their forecasts of virtually non-stop growth in the demand for thermal coal in the coming decades.

As we wrote last week, much of the proposed expansion in thermal coal mines and infrastructure development in Australia is based on the assumption that demand – particularly from China and India – will grow unabated over the next two decades. The government’s principal commodities forecasting house, the Bureau of Resources and Energy Economics (BREE), predicts that coal exports will double over the next two decades, growing at 3.3 per cent a year and accounting for almost three-quarters of the growth in mineral exports over the period to 2034–35.

What has not been considered in these forecasts is that China and India may a) join in the rest of the world and set meaningful and ambitious greenhouse gas reduction targets, and/or b) discover that other energy sources such as solar offer not just a cleaner source of energy, but also a cheaper source.

As we pointed out in this article, China expects utility-scale solar to be cheaper than new coal plants by the end of the decade. The Indian government believes that cost curve could be reached within four years because of the higher cost of coal-fired generation and the plunging cost of solar. Even the US government says that wind energy is already cheaper than new-build coal-fired energy, and believes that solar will be too, by the end of the decade.

In its World Energy Outlook 2011, the International Energy Agency forecast that China’s demand for coal would grow around 50 per cent this decade, even under its “New Policies” scenario, where the global community says it will act to limit global warming but fudges on effective policies. It pretty much describes the current state of play.

However, the IEA also recognised that, should the world actually act on limiting average global warming, then China actually ceases to become an importer of any coal beyond 2020, and demand for thermal coal elsewhere is dramatically reduced. In the IEA “450 scenario”, China accounts for one third of global abatement, reducing its emissions by half compared to the”New Policies” scenario, mostly from energy efficiency measures to reduce demand growth, but also from fuel switching from fossil fuels to renewables.

China is yet to announce details of the cap on coal, or explain its reasoning. But it could be that it will opt for increased use of gas-fired generation, along with renewables – particularly solar and offshore wind – and nuclear. Gas offers the opportunity to significantly reduce its domestic emissions. Although gas imported as LNG may not have significantly lower emissions than modern ultra-super critical coal-fired generators, at least one quarter of the emissions will be domiciled in the exporting nations such as Australia, where the gas in processed.