Staying In After Going Out? China’s Coal Plant Expansion Domestically and Overseas
Recent headlines have drawn attention to new domestic coal capacity in China. This development has so far not been discussed in light of changes in China’s investment in overseas coal plants, despite the interconnectedness between the two.
Over the last decade, there has been contrasting development, with a decrease in domestic coal plant constructions and an increase in yearly additions financed outside of China. Research has demonstrated a relationship between these two opposing trends.
In 2021, this trend appears to have shifted, when Chinese leader Xi Jinping announced that China would no longer build coal plants abroad, bringing an abrupt halt to supported projects in 2022.
However, while investment in overseas coal plants dwindled, China’s domestic coal plant development has surged significantly, including in construction start and granted permissions for new projects.
Although these recent developments are likely not directly causal, the increase in domestic coal plant construction helps offset a problem faced by Chinese companies that provide coal plant technology – manufacturing overcapacity, which refers to production capacities that exceed demand leading to lower sales potential.
In the future, both domestic and overseas construction of new coal plants must eventually cease in order to meet climate targets. The trends and implications thereof can inform the current debate on China’s development of new energy infrastructure domestically and in Belt and Road Initiative (BRI) countries.
Past: Domestic overcapacity drove Chinese finance overseas
In the last century, annual additions of coal-fired power plant capacity in China have remained below 20 GW. The years after 2003 saw a rapid increase leading to approximately 82 GW of new coal capacity per year in 2006 and 2007, followed by a gradual decline to 31 GW in 2021. Figure 1 shows the expansion of domestic coal capacity in China.
Figure 1: Yearly Coal Capacity Additions in China (top) and Financed with Chinese Capital Overseas (bottom)
Figure 1 additionally depicts coal capacity that received cross-border funding from China, showing an opposite trend. According to the China’s Global Power Database compiled by the Boston University Global Development Policy Center, foreign direct investment and financial commitments from China’s two development finance institutions, the China Development Bank and the Export-Import Bank of China, have shown an overall upward trend with jagged progression since 2010. In 2021, around 6 GW of new coal capacity was commissioned outside of China but financed by Chinese entities.
Research from the Boston University Global Development Policy Center has established a link between these two trends. The decrease in domestic coal capacity additions after 2006 led to overcapacity in manufacturing for coal plant-related technologies for Chinese firms. This manufacturing overcapacity emerged in 2007 and grew to around 40 GW per year after 2013, implying that the annual capacity addition was considerably below the level of previous years.
As domestic business opportunities shrank, finance became a tool to help the domestic industry seize business opportunities abroad to address the saturated domestic market. China offers vertically integrated projects to host countries, implying that Chinese entities provide, among others, financing, loan securities, construction services and equipment. A recent journal article finds that, as a result, plants funded by China overseas often deploy Chinese technology, such as turbines, generators, steam-supply systems and engineering and construction services.
Present: Export opportunities plummet, domestic construction surges
In 2021, Chinese leader Xi Jinping announced a halt to building new overseas coal plants, joining other nations that had previously made such commitments, including Japan and South Korea. While the projects with Chinese involvement did not immediately stop construction, the announcement could impact nearly 120 GW of coal capacity over the coming years. As a result, Chinese service and manufacturing companies are expected to see a reduction in business opportunities overseas, and domestic overcapacity can no longer be offset through international projects.
In contrast to other countries that agreed to phase out coal domestically before ending support for overseas coal, China has done the opposite. China’s decision to stop funding plants overseas comes at a time when all other major financiers have announced curbing support, hinting at the importance of international campaigns on sustainable finance. In addition, research finds decreasing demand from recipient countries, increasing soft power in greening the BRI and economic concerns rather than environmental ones as drivers. Economic concerns are related to the perceived high risks of projects being cancelled, loans not being repaid and increasing costs. While China has limited influence over these risks in other countries, it wields significant influence over domestic projects.
Accordingly, in the year that followed the announcement, China not only continued to add new coal capacity to its grid, but also significantly increased initiation of new projects. In 2022, the country commissioned new coal plants with a combined capacity of 27 GW, which accounted for 60 percent of global coal capacity additions that year. Coming years will likely see a significant increase in coal plant capacity additions due to the construction activities for 50 GW of coal capacity that began in 2022 (more than 50 percent increase from 2021) and the newly permitted coal capacity in 2022 of 106 GW (four times the amount permitted in 2021).
Several factors have contributed to the increase in China’s coal plant construction. These include concerns regarding energy security in response to the rapid increase in electric peak loads and recent droughts that lead to reduced electricity from hydropower which in turn resulted in power shortages. Moreover, coal plants are considered to stimulate the economy as a post-pandemic response, to increase regions’ self-sufficiency and to avoid increasing prices for liquefied natural gas amid Russia’s war in Ukraine.
Furthermore, while it is unlikely that the opposing trends of domestic and overseas construction in 2022 are directly related, as was the case in the last decade, expanding coal domestically also helps to alleviate manufacturing overcapacity in response to decreasing business opportunities for coal overseas. Arguably, the total capacity of overseas coal plant additions has always been significantly smaller than that of domestic ones. Nevertheless, Chinese manufacturing firms can still leverage the current domestic surge to their advantage, just as they have capitalized on export opportunities in the past.
Future challenges
In the future, the export prospects for coal equipment and services are likely to be negligible, as few countries are still constructing new coal plants. In 2022, only 13 countries, excluding China, commissioned new plants. This number is likely to drop further, as only 20 new coal plant proposals were initiated outside of China in 2022. As a result, the global demand for coal plant technology from China is waning, which is consistent with China’s announcement to halt constructing plants overseas.
Simultaneously, domestic business opportunities are also expected to decline. China has ambitious climate targets, including peaking emissions before 2030 and reaching net zero by 2060. Accordingly, the 15th five-year plan period (2026-2030) aims to reduce coal demand, which requires less electricity generation from coal plants. This could give rise to two potential scenarios. First, if the coal capacity stagnates or continues to increase, it may enable the construction of new units. However, it would also lead to substantially reduced capacity factors for operating plants and thus diminish plant profitability. Second, if the total installed coal capacity is being reduced, there will be fewer new plants constructed. Although coal plants in China require only a few years to generate economic returns, it will become necessary to decrease coal plant construction in both scenarios to prevent substantial losses from stranded assets.
However, if demand for coal plants overseas and domestically dwindles, China’s coal plant manufacturing industry will face significant challenges. A large number of Chinese companies, many of which are state-owned enterprises (SOEs), are currently producing turbines and generators for coal plants or provide engineering and construction services. The cessation of profit potential from coal plants might lead to stranded assets, factory closures and layoffs for coal manufacturing firms.
Shifting production to renewables or gas
The question remains regarding how coal plant manufacturing SOEs will respond to declining coal plant markets. They may utilize their lobbying power to influence political decision-making, attempting to prolong coal usage and the construction of new plants. Alternatively, firms can transition to products required for renewable energy generation such as solar and wind or infrastructure for natural gas plants. The export of these technologies can be facilitated by financial support from Chinese policy banks, similar to the current approach taken for exporting coal plants. There are a couple of points to consider when discussing a potential shift to solar and wind or gas.
On the one hand, Chinese companies are well positioned to export technology for solar and wind. China has successfully built up renewable energy manufacturing industries through local and national government policies, such as tax breaks, accelerated permitting processes and stringent targets for domestic solar and wind installation. These measures have enabled firms to mass-produce innovative products in the renewable energy sector.
In addition, China has established itself as a key player in the realm of transition materials, i.e., minerals that are needed for low-carbon technologies. With mines located around the globe, China has significant production quantities and, furthermore, immense refining capacity. Thus, China has a strong vertically integrated position in renewable energy supply chains, solar in particular.
On the other hand, there are challenges to consider in terms of Chinese cross-border renewable energy investment, including financing risks and uneven regulations between countries. Hence, it remains unclear if Chinese investments in solar and wind will gain momentum.
Moreover, transitioning production from coal plants to renewable energy such as wind and solar is considered challenging for manufacturing and service firms due to significant technological differences. In contrast, gas and coal plants share many similarities, including project size and common components like turbines and generators. Research demonstrates that companies from South Korea and Japan are increasingly involved in exporting gas infrastructure supported by public finance.
Thus far, China does not appear to have a comparative advantage in providing gas infrastructure and there has been no significant industry seeking to export gas plants technology. Consequently, research by the Boston University Global Development Policy Center shows that in the natural gas sector, China primarily finances exploration and extraction for gas to secure its own supply, rather than supporting downstream activities like gas power plants.
However, the possibility of China developing an export industry for gas plants in the future does not appear far-fetched. Natural gas is gaining growing significance in China, as evidenced by the growing demand for imported gas and a drastic increase in the number of natural gas plants – the capacity of operating gas plants is projected to double in the coming years. This trend is fostering the growth of manufacturing capacity and expertise, both of which might eventually result in the export of technology services for gas plants.
Ultimately, with the cessation of overseas coal, it remains uncertain whether Chinese foreign investment in the energy sector will primarily focus on renewable energy sources or if funding for gas infrastructure might accelerate. Concomitantly, it is unclear to what extent Chinese coal plant manufacturing firms will shift production towards components for gas plants in the future.
Implications
There are two significant implications that can be drawn from the state of play in Chinese coal.
First, a comprehensive assessment of coal transitions requires consideration of the manufacturing industry. Research has shown that Chinese SOEs in the coal mining and power sector play a crucial role in the country’s energy transition, owing to their high emissions and political influence. While these coal SOEs have previously been perceived as opposing a shift to low-carbon energies, the role of the coal manufacturing industry in transitions has yet to be adequately examined, in China and elsewhere.
Second, given the interdependence between China’s coal plant fleet and those in recipient nations, a global coal phase-out necessitates the active participation of many countries. A successful global energy transition requires the reduction of fossil fuels in all countries, rather than simply shifting from one to the other. China’s commendable efforts towards greening the BRI should not hinder domestic energy transitions, but rather complement them in a cohesive manner.
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