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    China’s Coal Conundrum

    The country is responding to seasonal spikes in demand by plowing money into coal, but the real problem is grid management.

    As temperatures rise and residents crank up their air conditioners for refuge from the summer heat, China’s power industry faces an apparent paradox. Although the overall growth in demand for electricity has been tepid in recent years, a combination of high fuel prices, insufficiently flexible grid operations, and sudden, unpredictable spikes in demand due to extreme weather continue to strain power supplies during peak periods. During one such crisis last fall, over 20 Chinese provinces curbed or rationed power, impacting the lives of tens of millions of residents.

    The government has responded by working frantically to boost coal production and power generation. Investment in coal mines and power has soared, despite signs of overcapacity in the industry. At least five new major coal-fired power projects were approved for construction in the first six weeks of the year; three “billion-dollar” coal mine projects were greenlit in February. And in May, the central government announced 10 billion yuan ($1.5 billion) in favorable loans for coal power generators. Overall, 8.63 gigawatts of new coal power projects were approved for construction in the first quarter of 2022, equal to half the yearly new approved capacity for 2021.

    This massive investment in coal complicates China’s carbon reduction goals. The aim to reach carbon neutrality before 2060 requires an almost complete phase-out of conventional coal-fired power by 2050, leaving little time for these new plants to operate — and giving their owners a vested interest in a slower transition. Ensuring adequate power supplies in an era of increasingly dangerous heat waves and a growing reliance on electrification for both heating and cooling is important. But what China faces today is less a problem of insufficient supplies — in fact, the coal power industry suffers from overcapacity — than bottlenecks in transmission.

    China owns the world’s largest coal power fleet; its coal power capacity increased by 56% over the past decade to reach 1,110 gigawatts in late 2021. However, data shows the average utilization of coal power plants — the proportion of time they spend generating power — fell from 60% 11 years ago to just 50% in 2021. That’s 800 fewer hours a year on average, the equivalent of each plant sitting idle for an additional month.

    Part of the issue is that coal power generation isn’t economically viable. As coal prices have gone up, the profitability of China’s major power companies has fallen. Electricity prices are regulated by the central government. When northeast China experienced widespread power shortages last fall, coal prices spiked, but electricity prices were kept artificially low. The gap between the two was so high that power companies lost money when they generated power. In the runup to last fall’s power crunch, plants claimed technical malfunctions or even outright stopped purchasing coal to avoid being forced to operate at a loss.

    Yet losses in the coal sector continue to rise. Twenty-six power companies listed on China’s Shanghai A-shares stock market lost an estimated 100 billion yuan on thermal power generation last year, while the big five state-owned power groups have increasingly shown little inclination to invest in coal power unless they are asked to do so by local governments.

    Instead of focusing on making up short-term deficits in power generation through investing in coal, policymakers should look to improve power transmission and distribution. Meeting peaks in electricity demand, and managing variations in the output of wind, solar and hydropower, requires a flexible electricity grid in which different provinces import and export power to each other as needed.

    Although regional networks like the East China grid exist, real-time power allocation is currently only feasible within provinces. Arranging the transmission of power from one province to another in real time will require cross-provincial agreements and a unified market. While some provinces, like Zhejiang and Anhui in eastern China, have signed limited power sharing agreements for the summer peak season, most local governments continue to emphasize self-reliance, preferring to use their own plants rather than rely on power from elsewhere. They have powerful incentives to do so: Generating power locally boosts local GDP, tax revenue, and jobs — whether the additional supply is needed or not.

    But relying on local power generation means building abundant capacity to meet rapidly rising seasonal demand peaks. When summer heat waves hit Shanghai, peak loads driven by demand for cooling can jump as high as 40% relative to cooler times of year. The summer peak in the East China grid has almost doubled in the past decade alone. When summer ends, that demand disappears, leading to plants sitting idle.

    As extreme weather becomes more common, the challenges involved in meeting demand peaks will only grow. Take the developed coastal province of Zhejiang, for example. Provincial authorities approved two coal power generation projects worth a combined 13 billion yuan in February, but the two new plants will only generate 3,320 megawatts; the province is estimated to face shortages of about 7,000 megawatts during the current summer peak.

    If grid sharing agreements were more widespread, the flexibility of the grid would increase and these new plants might not be necessary at all. Research done by the Draworld Environment Research Center and the Centre for Research on Energy and Clean Air found that, during demand peaks, the capacity of the East China regional grid is sufficient to meet local demands — provided the power is properly allocated.

    If we sweep away the obstacles to interprovincial power trading, the East China grid could reduce its need for power generation by 8%. That’s equivalent to cutting 30 big new coal power facilities — and a saving of 90 billion yuan. In central China, which experienced a power shortage crisis of its own last year, better integration could cut 11% of local demand for generation capacity.

    This will require investment in new power lines connecting neighboring provinces to create fully integrated regional grids. So far, that investment has focused instead on long-distance connections between different regions. The country would also benefit from an interprovincial market for excess power, allowing provinces to better cope with sudden spikes in demand.

    Although experts agree that the ramp-up of coal is a short-term policy adjustment and does not represent a “walk back” by China on its long-term climate commitments, the full implications of the coal power building spree remain unclear. With its goal of hitting carbon neutrality by 2060, China is running out of time to transition away from fossil fuels.

    Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air, also contributed to this article.

    Editors: Cai Yiwen and Kilian O’Donnell; portrait artist: Wang Zhenhao.

    (Header image: Workers crimp wires on a power transfer project in Yichang, Hubei province, April 13, 2022. Lei Yong/VCG)