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China may have overinvested in coal power in 2015, says IEA

Arecent report from the International Energy Agency shows that China may haveoverinvested in coal power in 2015, with 52 GW of new plants coming online thatyear.

Althoughdemand for power consumption fell over the past two years due in large part toeconomic slowdown and renewables expansion, signs of overinvestment in coalpower persisted through the first half of 2016, according to the IEA.

In2015, more than 70 GW of new coal projects were under construction, despite itsutilization rate collapsing to 50%. This capacity grew to about 200 GW through thefirst half of 2016, with its utilization falling to a further 46%, according tothe IEA.

"Withnearly 200 GW of coal-fired plants under construction and with electricitydemand slowing abruptly, it is becoming apparent that China has overinvested innew fossil fuel capacity," said the Paris-based institution.

The IEAattributed the phenomenon to a number of factors. One is project profitability."Regulated electricity tariffs have not followed down costs, makinggeneration very profitable," said the IEA. "Electricity offtakeprices for generators are two-thirds higher than average European wholesaleprices."

Inaddition, the rapid expansion in credit experienced by China's economy hasallowed state-owned enterprises to borrow money to maintain investment levels.

Districtheating networks have also helped bolster utilization rates and protect returnson investment, being recipients of coal power from more than a quarter of newcoal-fired plants built in the past decade, according to the IEA.

Coalinvestment is projected to slow amid new permitting restrictions, a push forrenewables and changes in coal power pricing. According to the report, theNational Development and Reform Commission recently unveiled a rule securingpurchase hours for wind and solar PV from 2016. It also noted the proposedshift to wholesale pricing, as well as administrative changes to regulatedtariffs.

"Togetherwith these factors, measures on permitting, renewables and the pricing ofcoal-fired power could make it more difficult for generators to recover thecapital costs of coal plants," it said.

The IEAupholds a bearish outlook for coal markets, citing overinvestment in coalmining not just in China, but also in Indonesia and Australia, along with theweakening Chinese demand. "A rebalancing of coal markets would requirepainful supply adjustments and several years of low investment in miningfacilities," said the IEA. "Investment in inefficient subcriticalcoal plants, at USD 22 billion in 2015, remains excessive and threatens to lockin carbon emissions in the future."