China, India shift back to coal-fired power as energy security trumps climate worries

China and India, two of the world's three largest GHG emitters, have introduced policies to promote coal-fired power generation in recent weeks amid energy security worries following Russia's invasion of Ukraine.

The moves, which are expected to trigger greater use of the most carbon-intensive fuel in the short term and possibly beyond, come despite repeated warnings from many scientists that coal consumption must be phased out as soon as possible to avoid climate disaster.

China's central bank—the People's Bank of China (PBOC)—increased 4 May the size of a special relending facility to CNY 300 billion ($44.6 billion) from CNY 200 billion for "clean, efficient coal use."

Under the facility, Chinese financiers can provide preferential loans to eligible coal projects at the prevailing loan prime rate or lower if the borrowers' credit profiles permit, and the PBOC would lend the full amounts to the financiers.

The money can be used to fund working capital loans for purchases of thermal coal for power generation, expand coal reserve capacity, apply "green and efficient" coal technologies, construct "modern" and "smart" coal mines, among other purposes, the central bank said in a statement without elaborating.

"The world is undergoing complex changes and global energy prices are fluctuating at high levels, posing greater uncertainties and challenges to China's energy security and economic stability," said the PBOC, adding that the increased quota "could help the country fully tap into the rich endowment of coal resources, secure a stable supply of energy, sustain the stability of industrial and supply chains, and support China's economy to perform within a reasonable range."

The announcement was made after China's State Council removed tariffs on coal imports, citing energy security as the reason.

No tariff is to be applied to unformed anthracite, coking coal, unformed lignite, and briquette lignite between 1 May 2022 and 31 March 2023, compared with 3% previously. Tariffs for other bituminous coal, other unbridged coal, and similar solid fuels made from coal were also reduced to zero from 6%, 5%, and 5%, respectively.

International coal prices have been near multi-year highs in recent months, partly due to supply disruptions after Russia, the world's third-largest coal exporter, launched military attacks on Ukraine in February.

According to S&P Global Commodity Insights data, the 5,500 kcal/kg thermal coal price for cost-and-freight delivery into South China was assessed at $201.78 per metric ton (mt) last month, more than double the same month in 2021's $92.40/mt.

With China's economy facing strong headwinds amid renewed lockdowns due to its zero-COVID-19 policy, government officials have prioritized short-term energy security and economic stability over decarbonization.

The country commissioned 25.2 GW of coal-fired power capacity in 2021, or 56% of the world's new capacity, according to a recent study by Global Energy Monitor, E3G, Sierra Club, and eight other nonprofits.

Construction started on 33 GW of new coal plant in China last year, the most since 2016 and almost three times as much as the rest of the world combined, the study revealed.

China, the world's largest emitter and coal consumer, accounted for 52% of the 176 GW of coal capacity under construction globally as of the end of 2021.

India wants more coal power

In India, the world's No. 3 emitter that relies on coal for 70% of its electricity generation, the government also wants to boost coal use to solve an ongoing power crisis.

Last week, the Ministry of Power asked state governments to import more coal while ordering all imported coal-based power generators to increase utilization and run at full capacity until 31 October by invoking the Electricity Act.

Of the 17.6 GW of installed coal-fired capacity designed to be fueled by overseas coal, 10 GW is currently operational, according to government figures.

"The supply of domestic coal has increased, but the increase in the supply is not sufficient to meet the increased demand for power," said the ministry, explaining the reason for turning to coal imports.

In a parallel move, the coal ministry said India aims to boost domestic coal production to 1.2 billion mt in fiscal 2023-24 from 777 million mt in fiscal 2021-22, partly by reopening closed mines.

The efforts to boost coal supplies come as India's coal stocks dwindle, following months of high usage from the power sector and low imports amid high international prices.

As a result of heatwaves, dry spells, and a post-pandemic economic rebound, India's electricity consumption has soared in recent weeks and touched a record high of 207 GW on 29 April.

The surging demand has led to power rationing in the Punjab, Haryana, Uttar Pradesh, Rajasthan, Madhya Pradesh, Jharkhand, Bihar, Goa, Telangana, Andhra Pradesh, and Karnataka states, with residential, industrial, and farming areas all affected. The situation could worsen—the summer peak demand season has yet to arrive.

Looking forward, some players are signaling a shift back to coal to avoid chronic power shortages. State-run NTPC, India's largest electricity supplier, will reportedly award a contract to build a 1.32-GW coal plant in Odisha in eastern India later this month.

If confirmed, this would be NTPC's first coal expansion project in six years. The company might also seek to revive two stalled projects in Lara and Singrauli, according to media reports.

NTPC did not respond to multiple Net-Zero Business Daily by S&P Global Commodity Insights requests for comments.

Peak coal?

Aside from China and India, some European countries—including Poland—may also increase coal-fired generation as they move away from Russian gas.

Many analysts, including those at the International Energy Agency, have voiced concerns over the emissions impact.

Based on data from the UN's Intergovernmental Panel on Climate Change, thinktank Ember estimates that global coal use needs to fall by 75% relative to 2019 by 2030 to cap global warming at 1.5 degrees Celsius.

"We estimate that in 2021 overall coal use was already 2% higher than in 2019. We are going in the wrong direction," said Dave Jones, global program lead at Ember.

Ember believes use of coal for power generation needs to fall even quicker than overall coal use. Unabated coal power must decrease from 10,059 TWh in 2021 to 1,153 TWh in 2030 for the 1.5-degree goal, according to its estimates.

"It should be obvious there is no room for new coal power plants," Jones said.

In terms of CO2 emissions from the power sector, S&P Global data shows Asia Pacific utilities accounted for 62% of the global total in 2020. Coal-fired generators were responsible for 90% of the Asian utilities' emissions.

China and India lead the region in power generation from coal, installed coal-fired capacity, and planned capacity. Analysts said they will eventually need to move away from coal if they are to meet their climate goals.

With a goal of peak CO2 emissions by 2030, China wants to start phasing down coal consumption between 2026 and 2030. S&P Global forecasts that installed coal-based capacity in mainland China will peak in 2027 at 1,188 GW, while power generation may peak slightly earlier.

India has pledged to achieve net-zero emissions by 2070 but made no commitments on a peak in its coal consumption. S&P Global estimates that installed coal-fired capacity needs to peak by 2035 for its net-zero goal to be reached.

For the region as a whole, S&P Global expects coal-fired power capacity in Asia Pacific to peak in 2027 at 1,697 GW before to dropping gradually to 961 GW in 2050.

"Owing to the slowdown in capacity additions, coal-fired generation will peak around the same period as installed capacity," said Chengyao Peng, ENR director for Greater China power and renewables at S&P Global. "Coal-fired generation will taper year over year as more and more operating fleets will likely be pushed from baseload supply, to mid-merit or peaking, and eventually capacity reserve."

Posted 10 May 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.