Commentary on Political Economy

Wednesday 24 May 2023


China Risks Another Debt Crisis to Keep the Lights On

Adding excess coal generation raises the prospect of a climate and a financial disaster.

Keeping the lights on.
Keeping the lights on.Photographer: Qilai Shen/Bloomberg

Builders of electricity grids find themselves constantly navigating between crises.

Construct too few generators, and blackouts will spread whenever demand peaks. Construct too many, and you have a financial crunch, as an oversupply of electricity pushes prices below what investors expected. Add to that the risk of a climate catastrophe if you depend on fossil fuels rather than renewables and nuclear, and the road to success is a narrow one.

Right now, China seems to be worried only about the first problem. The country approved 20.45 gigawatts of new coal-fired power in the first three months of this year, more than it did during the entirety of 2021, according to a review last month by Greenpeace East Asia. Combined with the 90.72 GW given the green light last year, that’s equivalent to adding all the coal-fired generation in Japan, Germany and Poland — three of the biggest users of the fuel — in just 15 months. 

Taking the shortest route to keeping the lights on in a dysfunctional grid is being prioritized above financial and environmental concerns. Those latter issues won’t go away, however, and threaten to come back to bite Beijing’s economic planners. 

The problem for China is that it’s treating coal-fired power the way the US and Europe treat gas. Electricity demand tends to rise and fall throughout the day. To accommodate this variability, grids were traditionally structured around always-on, so-called “baseload” power plants, plus a fleet of “peaker” plants that could be switched on and off to follow the morning and evening surges in demand.

Firm Decision

Even renewables backed up with four hours of storage are cheaper than coal in China this year

Source: BloombergNEF

Note: Figures are for December 2023. "+ storage" options are for a four-hour battery.

As anyone who’s tried cooking with both a gas and charcoal-fired grill will know, solid fuel is ill-suited to this sort of operation. Coal plants, like charcoal barbecues, take a long time to be coaxed to and from their operating temperatures. On top of that, the brute machinery needed to shuttle sooty rocks around means that they’re simply more expensive to build — around $505 per kilowatt of capacity in China at present, according to BloombergNEF estimates, compared to $290/kW for gas.

That makes it challenging to use coal to provide peaking power the way US and European grids use gas turbines. Their slow ramp-up and ramp-down means you’re more likely to be generating outside the peak and below your operating costs. The strain that the temperature cycles place on the structure of the plant shortens its operating life, too.

Those high expenses per kilowatt aren’t a problem if you’re operating 60% of the time, but Chinese coal plants hardly ever hit those levels. Generation costs go up as utilization goes down, so that a technology priced at $69 per kilowatt-hour in baseload operation may be several times more expensive when run as a peaker. Faced with a shortage of domestic gas supplies and an excess of coal, Chinese engineers have been working hard to design coal plants that can be switched up and down like gas plants. (Read this fascinating Twitter thread by Lantau Group analyst David Fishman for an example.) Still, the laws of physics and economics are unyielding.

It’s the latter that may prove most damaging. Those $505 per kilowatt costs mean that every gigawatt of coal adds half a billion dollars to China’s teetering $23 trillion mountain of debt.

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Indeed, in many places it’s the stimulus provided by that lump of cash, rather than any fundamental need for fresh generation, that appears to be driving development. “Of the 25 coal power projects in development in Guangdong last year, 19 were in part intended to help boost local economies,” especially in undeveloped parts of the province, according to a study this month by Zhang Xiaoli, a consultant at the Beijing-based Green Development Program.

Coal Dust

It's been a decade since China's thermal power plants met the utilization levels of around 60% at which they're likely to be profitable

Source: China National Energy Administration, Bloomberg Opinion calculations

Worse still, excess capacity doesn’t just damage its own profitability, but that of the entire remaining fleet which must sell power into the same oversupplied market. More than half of China’s coal-fired power plants lost money in the first half of 2022, according to the China Electricity Council, an industry group. Losses in 2021 came to 101.7 billion yuan ($14.5 billion), based on official data.

Even after depreciation, China’s 1,129 gigawatts of coal plants represent hundreds of billions of dollars of assets, whose ability to create cashflow and pay off their debts is damaged every time a fresh generator is connected. There’s as much as 200 gigawatts of renewables coming online this year as well — power that’s usually cheaper and cleaner to run than even the lowest-cost coal plants.

The pockets of China’s state-owned enterprises seem so deep that it’s tempting to think losses simply don’t matter. But the fate of India’s indebted, state-owned electricity distributors shows that’s not the case. Their chronically late payments to utilities are one reason that generators have been keeping dangerously low coal stocks in recent years, since they lack the cash to buy more.

China’s provincial governments hope that adding excess coal will help save them from a power crisis — but in doing so, they’re raising the prospect of both a climate crisis, and a financial one. 

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