China is rapidly transforming its electricity system, with a central outcome to diversify the system away from coal-fired power generation. This is driven by the cumulative strategies of the Chinese Government to: reduce air pollution; build energy security; grow the economy through investing in new infrastructure for the 21st Century; drive energy efficiency; and rapidly lower the emissions intensity of growth for China. The lesson for Australia is clear; we can ignore the looming problem for our thermal coal export industry, but it wont change the outcome. China is forecast to reach peak thermal coal consumption by 2016 at the latest, and this will permanently alter the dynamics of the seaborne coal markets.
New China electricity system data for the year-to-August 2014 has been published by Reuters.
For the month of August 2014, total electricity output declined 1.5% year-on-year. One month does not make a trend, for certain. But the data is ominous in that with only a small contraction in overall production, the consequence for thermal electricity production was an 11.3% year-on-year decline. This represents the workings of the ‘merit order effect’ which Renew Economy has written about numerous times. Coal and gas have the highest marginal cost of production, so these fuel sources become the least preferred source of generation capacity under a rational economic structure. Wind, solar, hydro and nuclear all have low marginal costs of production. Coal prices hit a six year low in August 2014, showing the immediate implications for thermal coal demand from China, consumer of 50% of the world’s thermal coal.
For China’s electricity system, 2014 is a clear turning point. Having seen a consistent 8% compound annual growth in thermal coal dem and since 2000, thermal coal demand in China has slowed to 4% pa over 2012-2013 and has clearly hit a plateau in 2014. The Institute of Energy Economics and Financial Analysis (IEEFA) forecasts an absolute peak in China’s thermal coal demand by 2016, with a gradual decline thereafter. This is one of the key conclusions that will be detailed in a major series of reports by Carbon Tracker, ET Advisors and IEEFA on the global coal industry today in New York.
Figure 1: Total generation capacity^ (GW)
The data presented in Figure 1 highlights a series of developments to the Chinese electricity sector that combine to rapidly diversify the electricity system and move it towards a lower emissions intensity of growth for China overall. The Premier of China last week highlighted as a key national achievement the 5% annual reduction in energy intensity of demand achieved to June 2014. This is a deliberate strategy carefully crafted as part of the 11th and more recently the 12th Five Year Plan.
Lower electricity intensity of growth: China is forecast to deliver real gross domestic product (GDP) growth of close to 7.5% for 2014 overall. Yet electricity demand year to date in 2014 is up only 4.0%. This represents a 3.5% reduction in the electricity intensity of GDP in a single year. This reflects a combination of energy efficiency initiatives and the economic shift away from electricity intensive heavy industry and construction. Historically the relationship of electricity demand growth and GDP growth has averaged one-to-one. If sustained, a step-down in electricity growth has dramatic implications for the need for more coal. In this context, it is worth considering that despite relatively robust GDP growth, Australia has seen electricity demand decline in each of the last six years.
Greater emphasis on renewables: China is transforming the world’s understanding of the speed and scale that renewables energy can be installed. Technology enhancements and economies of scale and learning by doing are driving down the cost of renewables. Just as well Australia continues to invest aggressively in the CSIRO, ARENA and Australia’s universities under the Abbott Government, given Australian scientists are the world’s leading developers of new solar technologies.
In the last twelve months, China has installed 29.2GW of new hydro electricity, a 20% expansion of total hydro installations across China in a single year. And China has commissioned another 15GW of wind farms, taking total installs up 21.7% year-on-year to 84GW in total (net connections to the grid). IEEFA estimates China has also commissioned 13.1GW of new solar installations in the last year, lifting China’s total solar installations by 80.5% in a single year.
Nuclear was paused post Fukushima: Following the Fukushima disaster, Germany and Japan have pursued a phase out of nuclear power. China was part way through a major nuclear power development program, which was put on hold for two years. However, this program was reinitiated after detailed safety reviews. The last twelve months have seen the commissioning of 12.2GW of new nuclear capacity in China, a trebling of their industry in one year. We anticipate another doubling of China’s installed nuclear capacity within the next 1-2 years. This adds another key element to China’s diversification strategy.
A 16% increase in Coal-Fired Power Plant Efficiency over a Decade: Figure 2 details the gains made in the thermal efficiency of coal-fired power stations across China in the last decade. The amount of coal required to generate a kilowatt hour of electricity has fallen by 16% from 378g/kWh in 2003 to 317g/kWh in the first half of 2014. Any plan to curb low quality coal that is high in ash content and sulphur could accelerate this trend.
Figure 2: China Average Coal Consumption per unit of Electricity – 2003-2014
An overall conclusion is that in the twelve months to August 2014, China installed over 107GW of new electricity generating capacity, and only 35.6% of this was coal-fired power plants. Low carbon emissions capacity was the majority of new installations at almost 60%, with a step up in gas-fired power plants the balance. Also, with capacity growing at 9.1% year-on-year and demand growing at 4.0% in the same period, China has overbuilt new capacity. A slowing in the rate of economic growth will combine with this overbuild to see a slowing in new capacity additions to an annual rate of 80GW going forward, thereby facilitating a major step-down in the building of new coal-fired power plants.
IEEFA forecasts that by 2020, coal-fired power generation production will fall below 60% of China’s total, down from 79% in 2012, 77% in 2013 and our forecast of only 73% in 2014. Given the size of the installed electricity system in China, this is a staggering rate of diversification away from coal. Coal is already down to 64.6% of total installed capacity, but we note that different power sources have very different operating rates – so the share of electricity production is the better guide to the success of system diversification. IEEFA’s analysis supports a forecast made in mid 2013 by Bernstein Research that from a position as the world’s largest importer of thermal coal in 2013 (at 200Mt or 20% of the global seaborne total), China could return to being an opportunistic net exporter of thermal coal this decade.
Tim Buckley, Director of Energy Finance Studies, Australasia for the Institute of Energy Economics and Financial Analysis (IEEFA)