According to a new report from Precergy, new research suggests that Chinese coal-fired power plant installations are set to rise strongly in the short-term, as coal power capacity experiences a mini renaissance.
Just 42 GW of new coal-fired power plants were installed in 2013 – the worst year for coal capacity additions in China since 39 GW were installed in 2004. During the intermediary period, a peak level of 82 GW/year was achieved in 2006 before levels stabilised to around 60 GW/year between 2008 and 2011. However, after the high coal prices witnessed in 2008, 2010 and 2011 impacted the profitability of China’s big five power producers, there was a clear slowdown in coal power project investment. That is, the big five and other coal power project developers delayed final investment decisions (FIDs) and extended project completion timelines to reduce the risk of incurring financial losses as a result of prolonged high coal prices and an inflexible tariff system. Consequently, new coal power plant additions dropped sharply to 48 GW in 2012 before hitting a decade low level in 2013. In this regard, market forces had the impact of supporting the Chinese government’s plans to both diversify the power capacity mix and reduce the country’s dependence on highly polluting coal. However, project economics for coal-fired plants in China have improved greatly since 2012 and provided a strong investment signal for such projects. So, in spite of Premier Li Keqiang declaring war on pollution, annual coal power capacity additions are actually set for a mini renaissance in 2014 and 2015 before starting back on the overriding long-term downward trajectory.
Drivers of improved coal project economics
With overnight capital costs for coal-fired projects remaining relatively stable in recent years, improvements in coal project economics have been driven by tariff reforms and a period of sustained low coal prices:
Tariff reform: Although coal tariffs were increased several times between 2008 and 2012 to reflect higher coal prices, the principal coal power tariff reform occurred in December 2012. As part of the ‘Notice on the Guidelines of Enhancing the Reform of Marketization of Coal Used for Power Generation’, an adjustment was made to the mechanism for passing coal price rises on to consumers. From January 2013, once coal prices fluctuate by more than 5% on an annual basis, on-grid tariffs would be adjusted accordingly. A similar policy was instituted in 2004, but the 2012 policy iteration allows for 90% of the coal price costs to be passed on to consumers, with only 10% being absorbed by the power generator; previously with the 2004 policy, 30% of the fluctuations had to be absorbed by generators.
Sustained low coal prices: the current global coal market oversupply has mitigated the upward price pressure of factors, such as strong global demand growth and tight supply, that drove prices up significantly in 2008 and late 2010. With current QHD FOB spot steam coal prices (5500 kcal/kg) at around RMB 500, down from a peak of RMB 995 in July 2008, it is clear to see that current coal prices and their steady decline are significantly more supportive of coal power project economics. In fact, given these strong falls in coal prices the big five made large profits in 2013 and towards the end of the year tariff reductions were implemented to pass on the benefits of reduced costs to consumers.
Coal project revival to be short-lived
Although the improvement in project economics provided an opportunity for generators to make FIDs and start construction on delayed projects, it must be remembered that government policy, rather than unimpinged market forces, is the primary driver of long-term power technology investment in China. So with the government focussing on addressing the significant environmental challenges that the country faces and prioritising clean energy investment, the recovery in coal power project activity levels is only expected to be short-lived.
Adapted from press release by Sam Dodson