The Future of Coal: Why China’s appetite remains

In the 18^th and 19^th centuries coal was used extensively to propel nations forward into industrial modernity. The inorganic mineral catalysed Promethean advancements: it powered the steamship and locomotive, and it enabled the construction of gravity-defying bridges with iron and the use of ‘dark satanic mills’ to accelerate cotton manufacture. In many ways it symbolised humanity’s ability to harness the power of nature for its own economic ends.

While new technologies have since allowed us to turn to cleaner energy sources, comprehensive demand for coal continues. In 2022, global coal demand reached an all-time high of 8.42 billion tonnes as Russia’s invasion of Ukraine prompted an exodus from gas. According to the latest figures for 2023, coal consumption dropped by 20% in the US and EU but increased by 5% and 8% in China and India respectively, last year. The International Energy Agency (IEA) estimates that coal-fired power generation grew by 1.5% (158TWh) in 2023, with coal use in the power sector increasing by 1.4% (81 million tonnes).

China is the keystone of the global coal market. The Asian nation made up 54% of global consumption in 2022, with the main driver being thermal coal for power generation. The IEA estimates that China’s coal-fired power generation increased by almost 7% in 2023. Nevertheless, the agency suggests this increase was caused by temporary factors, such as a drought that reduced the availability of hydropower and a post-Covid lockdown bounce back in economic growth. It suggests coal use in Chinese power generation will fall by 6% through to 2026, as renewable energies continue to gather pace.

However, there is little evidence to suggest this reality will play out. Instead, several factors suggest China will continue to rely on coal-fired power generation, with energy security a key priority for the Chinese Communist Party (CCP) in the midst of global geopolitical instability. There are also issues with the nation’s grid that will make the transition away from coal to more distributed, volatile renewables more difficult than is sometimes assumed.

China’s focus on coal is tied to energy sovereignty

Since 2022, the CCP has approved the construction of more than 100GW of coal-fired power generation capacity. In the first half of 2023, the nation finished building 17GW, started constructing 37GW, and approved 52GW. According to US think tank Global Energy Monitor (GEM), construction in China made up more than 95% of new coal-fired power capacity under development in the world last year. Yet the IEA predicts the beginning of a structural decline in coal consumption in 2024. It says recent build-outs are “a risk that may cause lock-in effects, weighing on future efforts to cut emissions”. Its latest report appears to ignore a role for coal in achieving the energy sovereignty that is at the heart of CCP policy.

Christopher de Vere Walker, head of power and utilities research at non-profit Carbon Tracker, says “China’s market is driven by energy sovereignty” and in a world of geopolitical instability “they will continue to put sovereignty over anything else”.

The nation’s climate envoy Xie Zhenhua told diplomats last September that energy security concerns meant phasing out fossil fuels remained “unrealistic”. China was also spooked by a crippling domestic coal and power shortage in 2021. As long as system stability and energy sovereignty remain a priority, it is unlikely renewables will overtake coal as swiftly as the IEA predicts, according to de Vere Walker.

Renewables are not enough

According to Beijing’s ministry of emergency management, between winter 2022 and spring 2023, most of southwest China experienced significantly less precipitation and higher temperatures than in a normal year. This helped lead to an 8.5% decline in global hydropower generation in the year to June 2023. Climate think tank Ember argued the drop was a “warning shot that hydro output could negatively affect the speed of the electricity transition”.

Coal-fired power generation increased by 190 million tonnes to fill the gap left by the fall in hydropower, according to the IEA. It expects a rebound in hydro generation after a two-year low to nudge coal-fired generation into a downward trend from 2024. GlobalData forecasts installed hydropower capacity in China to increase from 2022 to 2035, to about 10% of total power generation capacity, but this would still leave it far behind coal-fired power capacity.“Hydro is not really going to make a massive dent in coal-fired power production in China,” says De Vere Walker.

A sharp transition away from coal-fired power also requires grid flexibility and coordination, and de Vere Walker notes the challenges China faces on this front too. “The Chinese would be far more efficient with one overall grid operator,” he explains. “But they do not have that; the grid is operated on a regional level. This means that assets that sit in different grids don’t have a dynamic way of sharing [power] and this leads to inefficiencies. For instance, if there was an increase in hydro production in one region, in another region you would not [necessarily] see a [parallel] slowdown in the use of coal.”

Even if hydropower production does rebound in the coming years, it is unlikely to make a significant dent in coal-fired power production, if grid issues continue to cause spatial production inefficiencies. To combat the problem, a scheme has been developed to establish a nationwide spot market for electricity which ensures faster price discovery, reacting to demand and supply changes in real time, and enhancing coordination between regions. However, coal-fired plants will continue to provide standby capacity during demand peaks.

Nevertheless, de Vere Walker argues that we should not be blind to the development of renewable technologies in China, especially as policymakers seek to improve air quality.

“They do see the importance of coal and natural gas for stability of the system. But they also understand the need for other technologies to offset the build out of coal and natural gas,” he says.

Specifically, solar photovoltaic (PV) power and wind power are growing rapidly. Their combined installed capacity in China will be 1.3TW by the end of 2024, according to the latest annual report of the China Electricity Council, which represents China’s power companies and institutions. Still, de Vere Walker does not believe the build-out will be enough to replace coal, especially when factoring in heat market needs.

“Great swathes of cities use coal for heating, and then heat as a byproduct of power production. You’d have to build even more renewables to electrify the heating system. And then you would have to build out your grid considerably to enable those renewables to be connected to the grid,” he adds.  

While the IEA is confident that China’s coal consumption will begin its decline in 2024, falling to 2.8 billion tonnes by 2026, the energy security emphasis of government policy suggests a different reality. Additional coal-fired power production capacity continues to be built and it would not make sense for regional system operators, whose priority is system stability, not to use this. The build-out of renewables is impressive, but their overall capacity is still relatively small compared to China’s coal fired-power capacity. Finally, even if renewables continue to grow rapidly, inefficiencies with the regional grid system mean that coal use is unlikely to decline as fast as it perhaps could.

For de Vere Walker, the only way China will move away from coal is if it has a positive rather than negative reason for change. This positive reason could be environmental (air quality, climate change) or energy security (volatile fossil fuel prices). It could manifest itself through strong regulations and a market design that encourage investment in the grid: “Once you’ve got your grid in a strong, fit state, then you have got a lot more flexibility to add renewables to it.” As long as grid issues remain, coal is likely to remain the dominant source of power generation in a China where the main priority is energy sovereignty.