China’s Power Plant Problem – 8/30/16

New coal power plant construction is exacerbating China’s power oversupply problem.

Even as China’s heads of state call for cuts in the nation’s bloated industrial sector, local officials are reluctant to follow through for fear of social unrest and loss of tax revenue. Beijing projects the need to layoff 1.8 million coal and steel sectors workers, but relies on regional and local officials to actually follow though on cuts.

Combined with the slow reforms and the ease of accessing cheap financing, the low price of coal has encouraged building of plants. China has already banned approvals for new coal-fired power projects in oversupplied regions, but many projects are still in progress thanks to the relative cheapness of their fuel. Many fear the plants will become stranded assets given plans to move towards a consumer spending and reigning pollution.

Without the industrial sector’s demand for electricity set to decline, the continued growth of China’s power capacity seems like a mismanagement of capital, favoring short-term stability over the long-term.

China Power excess

And the return on investment for all power plants will fall as more plants come online. Utilization rates at power plants are falling as they go idle for longer and struggle to make back the costs of construction. Officials have claimed that new plants are needed to replace older, less efficient ones. But those excuses are falling flat as capacity growth outpaces decommissioning of older units.

There are several ways that the party could end. Rising coal prices could kill the trend since low prices are the only thing keeping many projects profitable. Alternatively, competition from other power sources or a follow through on reform in power supply agreements could pressure coal developers into pulling out. Cleaner power sources are getting more and more preferential treatment as the Beijing seeks to meet environmental commitments making it likely that  coal plants will be forced to go offline to make room on the grid for various nuclear, hydro, and natural gas projects.

China energy mix

Print Friendly, PDF & Email

Comments are closed.