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Essential Energy Insights - October 2021

China's pivot from overseas coal sends strong signal, but experts await details

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Chinese President Xi Jinping addresses the annual gathering for the 76th session of the United Nations General Assembly on Sept. 21 in New York City. During the address, the president said the country would no longer build coal-fired power plants abroad.
Source: Mary Altaffer/Pool via Getty Images

China's pledge to stop building coal plants overseas deals another blow to an increasingly challenged sector, but just how much damage it inflicts will depend on several unknowns around implementing the pledge.

During a speech at the United Nations General Assembly on Sept. 21, Chinese President Xi Jinping announced that the country would no longer build coal-fired power plants abroad and will instead focus on an accelerated transition to a low-carbon economy. However, Xi did not mention a timeline, explain whether building new coal plants abroad would explicitly mean an end to overseas coal financing or if the policy would apply to plants that are not yet under construction but have financing in place. It is also unclear if China will try to restrict private financing of coal-fired power plants or if the announcement would include equipment and construction services.

Thom Woodroofe, a former climate diplomat and a fellow at the Asia Society Policy Institute, said the announcement drew a "massive line in the sand" that sends a market signal to the rest of the world.

"The real stress test now will be how that is carried through, and how robustly that is carried through, but also what China's prepared to do domestically, including with respect to their own consumption of coal," Woodroofe said in an interview.

China is by far the largest public financier of coal plants being built in other countries. According to a July policy brief from the Global Development Policy Center at Boston University, the Export-Import Bank of China and the China Development Bank provided $15.6 billion, or about half of the world's public finance commitments, to overseas coal plants that reached financial closure between 2013 and 2018. European think tank E3G estimated earlier this year that China is the last major provider of public finance to coal plants and has 40 GW under construction in 20 countries in the preconstruction pipeline.

'Only a matter of time'

China now joins other major economies in ending its support for overseas coal power. Leaders of the G-7 countries — Canada, France, Germany, Italy, Japan, the U.K. and the U.S. — pledged in a June 13 statement to end new direct government support for unabated international thermal coal generation. South Korea also vowed to end the practice earlier this year.

"It was only a matter of time until China needed to take a similar step," Woodroofe said.

China was "really the last major part of the puzzle," and the climate community has awaited such an announcement for a decade, said Cecilia Springer, a senior researcher at the Global China Initiative at the Global Development Policy Center. With the signal coming "straight from the very top," Springer said the move is a significant turning point in China's support for coal overseas.

"It's really a matter of convincing these institutions — the policy banks and the state-owned enterprises to go all-in on renewables — instead of walking away entirely from energy development," Springer said.

Even before the announcement, China was showing signs of backing away from coal financing abroad. According to a report on the country's Belt and Road Initiative from the International Institute of Green Finance in Beijing, coal plants did not receive any financing or investments from China's Belt and Road Initiative in the first half of 2021, and no Chinese-financed coal-fired power plants were announced in 2020.

Notably, while China is the largest public financier of coal, about 87% of the financing for overseas coal plants that were operational or under development between 2013 and mid-2019 came from public and private sources outside China, according to the Global Development Policy Center. However, Tim Buckley, director of energy finance studies for Australia and South Asia at the Institute for Energy Economics and Financial Analysis, said that with the largest public funders of coal out of the picture, there are few large entities likely to maintain an interest in building a new coal-fired power plant.

"Absent that government-guaranteed capital and the political status it brings, you won't see the private capital coming in," Buckley predicted.

More bad news for coal

China is the world's largest producer of coal and one of its largest consumers. According to the International Energy Agency, China's coal power plant fleet is responsible for about one-third of the coal consumed around the globe. Wood Mackenzie Principal Analyst Shirley Zhang noted that the announcement could impact both demand and supply of coal in the seaborne market and put pressure on long-term prices. Coal plant projects that are not yet financially committed and are relying heavily on foreign investment would be most likely affected, the analyst added.

Xi's statement also raises questions about whether China will take more stringent action on coal used within its borders. Durand D'souza, a data scientist for Carbon Tracker's power and utility team, said China's plans to build coal plants overseas are small compared to its domestic fleet plans.

"The obvious question, if this is a genuine commitment designed to reduce emissions, is what to do with the 187 GW of planned and under-construction coal plants in China and the massive coal fleet already in operation, much of which is already being crowded out by cheaper renewables," D'souza said. "When will China start to cut its domestic fleet?"

The Institute for Energy Economics and Financial Analysis' Buckley said the construction of coal plants is often an integrated process and interpreted Xi's announcement to mean China would not build, operate, finance or provide labor for coal plants, though that was not said explicitly. With Xi's announcement, Buckley expects China's state-owned entities will act quickly to implement the leader's direction.

"If you don't have China, Japan and Korea providing massive government capital subsidies to coal, it's going to level the playing field and let the best technology win," Buckley said in an interview. "I'm pretty sure in 2021, the best technology is going to be domestic renewables over imported coal."

With coal off the table, Buckley said China's development banks will not "just shrink," but instead they are likely to turn that large flow of capital toward renewable projects.

"I think they see a very clear technology race with America," said Buckley. "I see them ahead of America at the moment, and I see them absolutely intent on winning that race. ... We know American ingenuity is great. So bring it on. The world will be a winner of that technology race."