This paper addresses the following questions:
- Under plausible scenarios for the development of the demand/supply balance, load factors, and generation margins, what is the profitability of Chinese coal-fired power plants and the scale of potential asset stranding?
- What policies could be deployed to limit the political economy frictions of power sector transition in China?
- What would be the potential economic retirement schedule of Chinese coal-fired power plants, given the modelled investment costs, load factors, and margins? Put more simply, how quickly could China get out of coal power?
Key messages
OVERINVESTMENT IN NEW COAL PLANT
This paper estimates the potential scale of stranded assets in the coal power sector in China under different policy scenarios. A number of factors are putting significant pressure on the coal-power sector: a recent investment bubble in new capacity, structural slowing in electricity demand growth, upcoming moves to liberalize electricity markets and introduce a carbon market, and continued support for renewable and low-carbon sources of electricity. Stranded assets in the Chinese coal-fired power sector are estimated at 90 billion USD2015 under the current policy trajectory (NDC-Style Scenario). This situation threatens to increase the political economy challenges of China’s electricity sector transition to a low-carbon system. This situation is not unique to China: other countries will also face coal-sector stress due to the competitiveness of renewables, and therefore managing existing coal power capacities needs to move to the forefront of climate and energy policy efforts.
INVESTORS AND THE ENVIRONMENT WILL BENEFIT FROM A COAL-PHASE DOWN PLAN
To turn this situation around, Chinese authorities should have a strategy for a managed phase-down of coal power assets. All new construction of coal power plants should cease: recent project cancelations have been a step in the right direction. A planned retirement schedule for old coal plants that have already made a return on investment should be developed to 2030. Existing, newer coal plants should be prepared to play a role and receive revenues for balancing a high renewables system. A managed 2°C-compatible climate mitigation scenario, in which old plant are retired after 30 years, both puts China’s electricity sector on an accelerated pathway to decarbonization, as well as lowering the risks of stranded assets compared to the NDC-Style Scenario, by a total of 12 billion USD2015.
STATE-OWNED ENTERPRISE REFORM IS KEY TO THE POLITICAL ECONOMY OF COAL TRANSITION
Banking sector exposure to stranded assets in the Managed 2°C Scenario are estimated at less than 10% of the banking sector’s loan loss provisions: risks of financial disruption are manageable. State-owned enterprises’ (SOE) lower cost of capital and lower profitability expectations could allow a faster transition out of coal. The key is to create incentives for them to halt investment, and phase out existing plant. A ‘coal sector bad bank’ could achieve this.
