Coal power transition in China: A discussion paper

Electricity decarbonisation is a mainstay of China’s bid to attain carbon neutrality by mid century. A key aspect of China’s approach to electricity decarbonisation is demoting coal power to a supportive role, where it provides flexibility and backup capacity to the grids before energy storage technologies become mature and can be deployed at the scale considered adequate to replace coal power. This process, in the context of this report, is referred to as the coal power transition.

The main purpose of this report is to review the development of coal power in China during the 13th Five-Year Plan (FYP) period (2016-2020), focusing on its underlying drivers, as well as to identify possible policy entry points to shift the future trajectory of coal power development (i.e., mid-steps between goals and mixes of policy instruments for achieving the goals). This review is intended to form a ‘discussion paper’ to promote debates among energy experts and policy practitioners on how to better progress the coal power transition in China.

Key points from the report include:

• The expansion of coal power capacity in China continued during the 13th FYP period, though slower than initially planned.
• The coal expansion was reportedly to subserve four purposes: 1) alleviating local supply shortfalls; 2) improving the technical efficiency of coal fleet by replacing inefficient subcritical units with more efficient supercritical and ultra-supercritical ones; 3) providing heating services to both industrial and residential sectors, to reduce the use of more emissions-intensive dispersed coal （“散煤”） for that purpose; and 4) supporting the country’s West-East Electricity Transmission projects, aimed at transferring electricity from resource-rich western and southwestern provinces to the eastern coastal city-clusters, most notably Beijing-Tianjin-Hebei, Yangtze River Delta, and Pearl River Delta.
• The following factors have also made important contributions to the expansion of coal capacity: local governments’ fervour for coal power projects, the quota-based dispatching mechanisms for coal power, inefficiencies in the carbon market (for example, excessive and sometimes free allocation of emissions permits), negative externalities associated with overinvestment in coal power (i.e., lower revenues caused by overinvestment are distributed across all coal power plants), and inertia in the thinking of power system operators.
• China has recently signalled its intention to expedite electricity decarbonisation, where coal power will step down into a supportive role in providing flexibility and backup capacity to the grids – essential for attaining higher levels of wind and solar penetration while ensuring supply security and reliability.

The report identifies four entry points for policy interventions to steer the transition of coal power to a supportive role:

Unlock coal power from its current development pathways

This requires limiting the impact of lock-in factors that have created a strong path-dependence for coal power development. Some of these factors are: local governments’ fervour for coal power projects; large sunk costs in the existing coal fleet that may become stranded if retired earlier than its technical life; and socio-economic concerns about coal power phase-out, especially in coal-dependent regions.

Market reforms

Transitioning from electricity generation towards the provision of flexibility and backup services to the grids would lead to fewer operating hours of coal capacity. Market reforms would be required to better incentivise coal power to provide these services. These reforms may involve strengthening the ancillary services market by: introducing new services required to manage challenges (for example, more frequent short-term supply-demand imbalances and a loss of inertia) imposed by rising renewable generation; and streamlining ancillary products (i.e., reducing the number of products associated with a specific ancillary service) to improve market liquidity. Capacity payments mechanisms may also be introduced to better compensate coal capacity for providing backup services.

Better coordination between coal and electricity policies

Sufficient coal supply is essential for coal power to fulfil its supportive role in the electricity system. The power crisis in 2021 seems to have vindicated the viewpoint that to ensure this supply, better coordination between coal and electricity policies is needed. In 2021, the occurrence of extreme weather conditions significantly affected hydro and wind generation. Meanwhile, a very hot summer and strong industrial growth pushed up the demand for electricity. Coal power was called upon to fill the supply shortfalls, but its ability to meet this demand was affected by the coal supply shortages and associated high coal prices. The coal supply shortages were an outcome of measures to constrain coal production on various grounds, such as mine safety, environmental protection, and corruption. Despite being well-intentioned, these measures seem to have been implemented without due regard for their consequences for the electricity system.

A shift in governance towards a learning-based, reflexive process

The above-noted changes required for facilitating coal power transition engender a proliferation of complexity, cutting across diverse policy domains including energy security, economic development, and social wellbeing. How this complexity is perceived and the potential solutions that are offered could also vary from actor to actor, depending on individual viewpoints, perspectives, and interests. All these, effectively, make coal power transition a ‘wicked problem’ that is not expected to have one single, optimal solution. This means that the coal power transition cannot be effectively governed through conventional linear processes, in which policymakers first define the problem precisely and then identify and implement the most effective solutions to it. Rather, it requires a shift in transition governance from the existing linear process towards increased reliance on a learning-based, reflexive process. A key feature of this governance process is that it involves iterative ways of knowledge production and learning-while-implementing.

While the discussion about policy entry points provides useful insights, questions remain as to how to facilitate coal power transition through these entry points. Some such questions are:

• How to dampen local enthusiasm for coal power?
  How to distinguish ‘necessary’ from ‘unnecessary’ coal capacity expansion? And how to prevent unnecessary expansion of coal capacity?
  To what extent would coal power satisfy the growing need for flexibility and backup capacity created by higher levels of wind and solar penetration?
  Is the market itself sufficient to incentivise innovations in technologies that could gradually replace coal power in addressing the intermittency of wind and solar power?
  How to promote economic restructuring in coal-dependent regions?
  How to better manage the coal-electricity nexus? Are the recent policy changes sufficient
  How to improve the capacity of the existing energy governance process to deal with complex policy issues, like the coal power transition?

Insights into these questions are central to devising ways to ensure that the coal power transition will not deviate from its intended direction as China seeks to reorganise its electricity complexes to achieve carbon-neutral electricity while ensuring supply security and affordability. A first essential step to develop such insights, we contend, is to broaden the scope of the debate on electricity transition to system-socio-economic-governance realms, not merely confined to the techno-economic domains of the electricity industry.

Supporting materials