By Paul Davies and Andrew Westgate

China’s National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) have ordered local authorities to stop construction of coal-fired power plants in 13 provinces where capacity already outstrips demand. A further 15 provinces will be required to delay construction of previously approved coal-fired power plants. These provinces include Shanxi and Inner Mongolia, home to much of China’s coal industry.

These orders reinforce China’s efforts to transition towards a lower-carbon economy – an economy no longer heavily dependent on coal power.

Redundant resources

The current surplus of coal is driven by increased generation from non-fossil fuel sources (wind, hydro, solar and nuclear), which grew by more than 20 percent in 2015. China aims to reduce its greenhouse gas emissions per unit of GDP by 60 percent from its 2015 levels by 2030. To meet this objective, the country is targeting a 9 percent cut in coal mining capacity over the next three years, resulting in an announcement by the Ministry of Human Resources of 1.3 million redundancies in state-owned coal companies. As the country shifts towards a less energy-intensive economy, it is inevitable that China’s energy resources will diversify and thus the role of coal will diminish.

Resource diversification has also coincided with a slowdown in China’s heavy industrial sectors, principally steel and cement.

In addition, energy prices are controlled by the state whereby producers still receive a relatively high price for coal, preventing the market from signaling the surplus. It is undeniable that coal supply outstrips demand in China. The NEA calculated earlier this year that no more than 190GW of additional coal-fired electricity generation is required before 2020 to meet the nation’s energy demands. However, projects adding a total of 300GW have already been approved. Song Ranping of the World Resources Institute noted that China’s government needs to address this issue and develop an early warning mechanism that informs local-level planning decisions to avoid the further addition of redundant coal capacity.

Does coal have any role in China’s low-carbon future?

For the time being, coal will continue to be China’s primary source of energy. It is too cheap, too abundant, and China has invested too much in coal plants to remove coal from its energy mix in the short-term. Yet China’s long-term climate policies require a fundamental shift away from coal; a shift that will be easier the earlier it is started.

That shift is already underway. Surprisingly, China’s coal production actually dropped 3.5 percent in 2015, with electricity generation from coal plants falling 2.8 percent and all power generation falling 0.2 percent – the first such drop in 50 years. Furthermore, the NEA published data showing that in 2015, the average coal-fired power plant was in use for 4,329 hours, the lowest figure in 69 years.

Coal cut-backs are set to be the new normal. Li Junfeng, Director General of the National Climate Change Strategy Research and International Cooperation Centre, a government-sponsored think-tank, says that coal power generation “will continue to drop with an annual speed of 2-4% and the non-fossil power generation will stay in a high growth rate of 20%.”  If this forecast materializes, China will experience a  rapid transition towards low-carbon power sources that could even result in meeting its climate targets early.

NDRC is demonstrating strong commitment to reducing coal-fired energy and has threatened strict punishments including denying operator licences and blocking finance for construction that proceeds without authorisation. It remains to be seen if China is able to effectively implement these deterrents through its local governments to enable China to effectively manage the supply and demand of coal.

It is anticipated that similar top-down efforts to reduce reliance on coal and to rebalance the power generation market will emerge. China’s ambitious green-economy plans have been welcomed across the globe. China now faces the challenge of implementing its low-carbon policies with the world watching.

This post was prepared with the assistance of Glen Jeffries in the New York office of Latham & Watkins.

Read more on the development of China’s environmental policy:

China One of First Countries to Sign Paris Agreement

China’s 13th Five-Year Plan – Planning for a Greener Economy

China Revises Hazardous Substances Restriction Laws

China’s NDRC Issues New Carbon Trading Guidance

China Progresses with Increased Environmental Accountability for Industry and Government Authorities

China Gives Green Light for Green Bonds

What Multinationals Need to Know About China’s Amended Environmental Protection Law