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China seeks to perform balancing act with latest national energy plans amid climate, supply risks

01 April 2022 Max Tingyao Lin

China, the world's largest fossil fuel user and importer, is attempting a delicate balancing act in simultaneous pursuit of decarbonization and energy security, according to recently filed government plans.

On one hand, the country faced power shortages and an economic slowdown in recent quarters, while its import bill is rising due to elevated coal, oil and natural gas prices amid the Russia-Ukraine war.

On the other, President Xi Jinping has committed China—the world's largest GHG emitter—to phasing down coal consumption after 2025, peak carbon emissions by 2030, and carbon neutrality by 2060 in the fight against climate change.

In the latest national energy plans, of which one is for 2022 and the other for 2021-2025, the country's policymakers take an "all-of-the-above" approach: rapid electrification, strong renewables expansion, but continued coal usage and higher domestic crude, gas production as well.

The National Energy Administration and the National Development and Reform Commission aim to reach 2,600 GW in total power generation capacity by the end of December and 3,000 GW by 2025, compared with 2,394 GW at the end of February.

The two central government departments want the share of non-fossil fuel power generation to reach 39% by 2025, versus 34.6% at the end of 2021, according to data from China Electricity Council, a trade body. Another goal is for electricity for account for 30% of final energy consumption by 2025, up from 26.5% at the end of 2020.

China has also targeted for a 17.3% share for non-fossil fuels in its primary energy mix this year and 20% by 2025, compared with 15.9% in 2020.

"The plans show that China remains committed to growing its clean energy systems," said Byford Tsang, a senior policy advisor at thinktank E3G. "But it does not give us any new clues as to how China intends to strictly control the most emission-intensive power source—coal."

"The elevated focus on energy security since the power crunch late last year means policymakers in Beijing are more likely to refrain from making policy choices that would [hamper] China's ability to secure and deploy fossil energy," Tsang told Net-Zero Business Daily by S&P Global Commodity Insights.

Non-fossil power expansion

China aims to raise its annual energy supply from 4.08 billion metric tons of standard coal equivalent (mtce) in 2020 to 4.41 billion mtce this year and 4.6 billion mtce by 2025. Of the growth between 2020 and 2025, 350 million mtce will come from non-fossil fuel expansion in western China, and 150 million mtce from eastern and central China.

The country wants to increase nuclear capacity from 53.3 GW at the end of February to 70 GW by 2025. It is also targeting expanding conventional hydropower from 355 GW at the end of December to 380 GW by 2025, and sees pumped storage hydropower—which can enhance the grid's flexibility—rising from 36 GW to 62 GW.

Based on one of the energy plans, the combined share of wind and solar photovoltaic power in total electricity generation should increase from 11.8% last year to 12.2% this year.

The government didn't state other quantified targets for wind and solar targets. But Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air, said Beijing's plan implies at least 500 GW of additional wind and solar capacity in 2021-2025, based on all the targets mentioned. Government figures showed combined wind and solar capacity reached 650 GW as of the end of February.

"The energy five-year plan has very specific, and ambitious, targets for the clean energy bases" which include wind and solar projects, Myllyvirta said. "Whether these clean energy additions are sufficient to peak emissions will depend entirely on energy demand growth, which in turn depends above all on economic policy."

Lara Dong, ENR research and analysis director at S&P Global, said nuclear power accounts for a small share of capacity additions and hydropower growth is "fairly incremental" in 2021-2025. "Renewables additions and integration remain the key approach in China's energy transition," Dong said.

According to estimates from S&P Global ENR analysts, wind and solar additions in China will reach 110-120 GW per year in 2021-2025, at least 50% higher than the annual average in 2016-2020.

"To accommodate the growth of renewables, [Beijing] unprecedentedly emphasizes the balancing capacity of the power system, with new targets assigned to pumped hydro, demand response, and coal retrofits" in the five-year energy plan, they said in a research note last month.

King Coal is alive

China plans to retrofit 200 GW of coal-fired power plants between 2021 and 2025 to increase the flexibility of their output. This is to enhance the grid's ability to absorb intermittent power sources, such as renewables.

The move comes as the existing power system in China, built upon large-scale, centralized power plants, has become increasingly incompatible with rising wind and solar generation, thinktank Ember's Electricity Policy Analyst Muyi Yang said.

"Coal power transformation is an integral aspect of the system reconfiguration, before hydrogen and energy storage become mature," Yang said. "This transformation is set to gradually demote coal power to playing a supportive role in facilitating wind and solar uptake, by providing both flexibility and backup capacity to the grids."

In a public speech last April, Xi said China will "strictly control" coal usage in 2021-2025 and phase it down in 2026-2030.

But Chinese policymakers in the latest energy plans named coal as "the backstop of supply security" and vowed to "accelerate outstanding coal mine investments," saying the top priority would be to ensure "stable energy supply."

"China plans major ramp up of coal mining to reduce reliance on imports in the wake of the high prices. This will deal a blow to its near-term climate performance, and is not a sustainable solution for energy security," climate analytics firm TransitionZero tweeted.

"Phasing down coal is the single most important determiner of China achieving its climate targets … The silver lining is that these measures are likely to be short-term and seem unlikely to derail long-term climate ambitions in China," it said.

The ENR analysts expect most Chinese industries to reach peak CO2 emissions in 2026-2030, including the power sector. Emissions from coal-fired power plants are also expected to peak in the same timespan.

"The reduction in coal-fired power generation will be determined by the growth of all the other power generation technologies, including renewables, gas, hydro, and nuclear," they said. "There is very low probability that the government will reduce coal and coal-fired power at the expense of enhancing supply security risk, especially when economic stability is threatened."

In the five-year plan, China pledges to phase out 30 GW of old, inefficient coal capacity in 2021-2025. The country had 1,080 GW in coal capacity as of the end of 2020.

However, the government did not establish caps for coal consumption and coal-fired power generation. According to Global Energy Monitor, 92.3 GW of coal generation capacity was under construction and another 158 GW being planned as of January.

"The amount of coal-fired power capacity added is driven by the outdated way that China's power system is being planned and operated," Myllyvirta said. "Every province is building enough coal-fired power capacity to meet peak loads domestically, while exporting provinces are building enough power capacity to keep exporting at full tilt even when local demand is at its peak."

"This leads to multiple layers of redundancy. The outcome will be declining utilization of coal-fired power capacity. All these newly built, under-utilized coal power plants are going to be a concern because their operators could have a vested interest to slow down the transition to clean energy," he added.

More oil and gas

Aside from the lack of limits on coal usage, the energy plans also suggest China wants to increase annual domestic crude output from 199 million metric tons (mt) last year to 200 million mt from 2022 through 2025, and gas production from 205 billion cubic meters (Bcm) last year to 214 Bcm in 2022 and 230 Bcm by 2025.

China's state-owned energy majors, taking their cue from the policymakers, have announced proposals to ramp up production.

PetroChina plans to produce 131 Bcm of marketable gas in 2022, up 4.6% from 2021. Sinopec aims to lift gas output to 35.6 Bcm in 2022 from 34 Bcm last year. CNOOC is targeting producing up to 1.67 million barrels per day of oil equivalent (boe/d) in 2022, compared with 1.57 million boe/d in 2021.

The policymakers have placed "great emphasis on energy security and one of the key focusses of that strategy is to raise domestic production of oil and gas," Tsang said.

Separately, China aims to have 55-60 Bcm of gas storage capacity by 2025, or 13% of total domestic demand. In its previous five-year plan, the country targeted 21 Bcm of storage or 6% of total consumption by 2020.

With high, volatile international gas prices, the ENR analysts said more storage can improve peak supply in China.

"Gas-fired power is … identified as a power peaking resource, but gas supply will face more constraints compared with retrofitted coal-fired power," they said. "Future demand growth in this sector will be targeted to areas with sufficient supply and affordability."

Posted 01 April 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.


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