How China is putting the brakes on coal

Last week I wrote about China and the shift in its energy policy. I mentioned that China is over-investing in coal power, and that the number of power stations being built wasn’t necessarily an indicator of coal use to come. This week we saw confirmation of that problem, as the government instructed 11 different regions to cancel new coal plants. That’s 104 coal power stations that won’t be built, at a total cost of $62 billion.

Some of these power stations were already under construction, making them expensive to cancel. But China already has all the coal power it needs – its existing power stations are only on half the time on average. As the IEA warned before Christmas, it just doesn’t make economic sense to be still building them. China knows this and more cancellations are expected, as the government tries to call in unnecessary projects worth half a trillion dollars.

How did such a spectacular mis-allocation of capital happen? Carbon Tracker explained it well last year in their report Chasing the Dragon. For a start, China devolves much of its infrastructure planning to the regions. When the economy was growing at 10% a year, the last thing anyone wanted to be was the region that dropped the ball by under-investing and holding growth back with power shortages. Since borrowing costs were low, there was every incentive to build. As Carbon Tracker put it, “China’s rapid economic growth, demographic profile and geographical size has meant it often made sense for the government to build power infrastructure first and ask questions later.”

The default has been to build, but as the economy is maturing, it has naturally begun to slow. The growth in energy demand is slowing too, and so estimates of future capacity are being revised downwards. At the same time, renewable energy is expanding fast and is cheaper than anticipated. It makes sense to focus on renewable energy instead of coal capacity, and the same over-investment problem is in fact observable in the solar power market. If you have to start pulling the plug on power projects, what’s it going to be: solar or coal?

Finally, air pollution in China has reached critical levels. We’ve known about the problem for years – you may remember the worries around the Beijing Olympics back in 2008 – but last year there were periods where it was so bad that people couldn’t leave their homes. Schools close, and cars are ordered off the roads. The BBC’s John Sudworth wrote about what it’s like to live with air this dangerous at the weekend, and it’s worth a read. Taping up your windows with duct tape, industrial air purifiers in every room. It’s a daily preoccupation that’s hard to imagine, and it calls for drastic action.

The screeching of brakes from China’s coal market is going to be agony to coal investors, but it’s sweet music to the rest of us.