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12 December 2019

China’s coal pursuit to fall off, as solar set for golden decade

Carbon emissions are set to rise by 0.6% in 2019, according to an analysis from the Global Carbon Project. A huge chunk of the blame for this will be placed at the feet of China, where CO2 output increased by 0.26 gigatons. As the rest of the world actually reduced emissions by 0.02 gigatons, China’s climate policy is facing a wealth of new scrutiny, mostly focused on its continued coal addiction. This isn’t necessarily the red flag that the press has latched on to, and the blip in 2019 statistics is more likely to be the calm before the storm as solar looks to surge into the 2020s.

Since the start of last year China has built 42.9 GW of new coal-fired capacity, with another 121 GW under current construction. While no official figures are available yet, the rate of increased capacity has yet to show signs of falling from the 35 GW added in 2017 or the 38 GW added in 2016.

China can give the impression that it is still hell-bent on being an economic powerhouse. The country has been experiencing an economic slowdown, with a growth of only 6% in 2019 – its lowest in over 25 years. Amid the panic, China has stuck with what’s worked in the past by building out coal-fired capacity. Bloomberg New Energy Finance has highlighted that investment in China’s renewable energy fell by 40% in the first half of 2019 compared to the same period in the previous year. So does this give us cause for concern?

Part of the reason behind this investment in coal is the decline in solar installations. China’s domestic installed capacity is expected to fall from 44 GW last year to between 25 and 30 GW in 2019, with solar firms turning their focus abroad.

Solar manufacturers exported 58 GW of solar capacity in the first three quarters of 2019, with earnings from international sales expected to rise by 25%. Europe accounted for 34.9% of this export, while the tariff-ridden US only took 0.2% of these sales. The dip in domestic installations is largely due to subsidies being cut, as solar PV starts to reach cost parity with other forms of electricity generation.

Going subsidy free has forced Chinese solar manufacturers to increase their drive to cost reduction, with almost unprecedented success. China’s manufacturers are now able to every competitor, with the US requiring 30% trade tariffs to keep domestic businesses, like First Solar, afloat. While this cost reduction will help China’s industry in the long run, with the top four solar manufacturers all based in China, solar energy in the country has so far struggled to reach parity with coal. More to the point a coal plant can be set up with lower Capex, though not lower LCOE.

However, with studies showing that 22% of cities are now able to build solar systems with an LCOE cheaper than coal, China’s annual installed solar capacity looks set to bounce back to the 40 GW range next year and explode to significantly higher numbers into the 2020s.

Solar manufacturers in China are ramping up their production capacity at full speed – output is set to double between 2018 and 2021. With a 30% trade tariff in the US soon to be extended to include bifacial modules, solar manufacturers will start to follow their unwritten obligation to fulfill the rising demand in their own country, especially as profitability increases with economies of scale, and the coal industry will shoulder the consequences.

Research about China’s coal industry varies in opinion: The State Grid Corporation has said that up to 1,400 GW of coal-fired power will be needed for energy security, where the US’s Natural Resources Defense Council has suggested that no new plants will be required in China if electricity demand grows less than 4.5% annually. The latter is far more likely to be the case if the rise in solar installations materializes, capitalizing on the country’s massive 75 GW production capacity. But European players are still worried.

Complaints about the European Union’s proposed “carbon border tax” appears to be a sign of China’s reluctance to give up on coal, as the scheme addresses the carbon emissions from foreign firms. While an advisor to China’s negotiating team criticized this proposal, claiming that it would bring “uncertain and harmful factors” to climate negotiations, this is more likely to be an attempt to stop a framework which would see the price of Chinese carbon-based products rise in Europe. In October Premier Li Kequiang urged officials to promote clean mining and coal-fired power, which would see proposals of a CO2 or coal production cap fall by the wayside.

Statements like these are what has other international players worried about China, which has previously promised its “energy revolution” to include slashing its coal dependence. Coal’s share in the country’s energy mix has fallen from 68% in 2012 to 59% last year. This reduction is significantly weaker than seen throughout the rest of the world, with new policy movements lacking ambition. But, as solar becomes ever-more competitive, coal investment will almost certainly collapse in the next five years, leaving a vacuum for renewables to fill.

One of they key challenges China faces in this regard is how to enforce a transition away from coal across the country, and how to convince coal-workers that it’s a good idea to up-sticks on a business that has helped economic growth for the past 30 years. Less developed provinces like Shanxi are responsible for a large chunk of the country’s electricity generation. With these all independently governed to a certain extent, it has been reported that the national governments orders to suspend construction on coal plants has been ignored in several cases.

The 0.6% growth in emissions is in fact the lowest in recent memory, but a new UN report has stated that an annual reduction of CO2 emissions of 7.6% is required over the next decade to limit temperature rises. For the sake of speed to net-zero emissions, China should stop focusing on the annual metric of ‘CO2 generated per unit of economic growth’ and focus on each aspect individually. This will mean that the country will have to promote the fact that the economic benefits from developing its solar industry are likely to be far more sustainable than the short term prospects of promoting coal, which is bound to leave unprecedented volumes of stranded assets in the long run. Other countries, however, should stop focusing on Chinas as the ‘Boogeyman’ in the fight on climate change and learn from the country’s cost-cutting methods in renewable technology, to develop their own technology programs.

Other markets are also looking promising in the demise of coal, with our upcoming forecast for offshore wind predicting that installed capacity in China could exceed 83 GW by 2040.