Government Shareholders, Wasted Resources and Climate Ambitions: Why is China Still Building New Coal-Fired Power Plants?

Despite its carbon neutrality commitments and the prospect of increasingly stringent climate policy measures, China is continuing to build new coal-fired power plants domestically. Amid a changing energy market, what is the expected economic performance of these investments after they are completed?

In a new journal article published in Climate Policy, Alex Clark, Philippe Benoit and Jonathan Walters asses the economic risk of China’s coal-fired power plants through an economic framework to measure a broader view of the country-level economic returns on new coal power investments as a complement to the plant-level financial analysis framework commonly used to assess stranded asset risks. This simplified economic framework, in which inputs and outputs are measured according to the costs and benefits they generate for the national economy, leads to markedly different dynamics than financial analysis alone. This framework can be used to help China avoid ‘wasting’ scarce public resources by over-investing in new, uneconomic power plants through its state-owned enterprises.

Main findings:

• Applying this framework to a representative new coal plant in China shows that modest shadow carbon pricing (rising from $15/tCO₂ in 2026, to $30/tCO₂ in 2041) eliminates the expected value of the project to China’s economy.
• Caps on coal-fired electricity generation have less impact on economic returns, but severely undermine financial returns, potentially making such caps a more effective short-term policy tool to dissuade company executives from making new coal investments.
• Without carbon pricing, only a moratorium on coal-fired power generation in 2030 or earlier prevents new plants from realizing a positive economic return.
  • Comparing these results with an alternative solar/storage investment suggests the renewable option generates higher economic returns than the coal plant under modest shadow carbon pricing and lower electricity storage costs.

Key policy insights:

• Economic analysis of proposed coal plants complements plant-level financial analysis and better captures governments’ interests in these projects. Both economic and financial analyses are relevant to the decision-making of government shareholders.

• State-led coal plant investments in China today is likely to be economically wasteful under modest future climate policy scenarios, particularly in light of declining leveled costs of renewable alternatives.

• This framework for combined financial and economic analysis also applies to other countries’ proposed investments in carbon-intensive power generation. The framework is particularly pertinent for countries with state-led coal power investments planned, including India, Indonesia, Pakistan, South Africa and Vietnam.

The results suggest that at least some of the new coal plants planned in China may never generate positive economic returns, especially if the government elects to implement even relatively modest market-based or control policies in pursuit of carbon neutrality and other environmental and societal goals. Investing in a coal plant today on an economic basis risks wasting productive resources better used elsewhere, especially given the decreasing costs of low-carbon alternatives immune to the effects of policies targeting carbon emissions. China’s government and, by extension, its state-owned enterprises as instruments of economic policy, should therefore carefully consider the economic viability of new, long-lived coal investments today in light of future climate policies and trends in competing renewable technologies.