By Julian Wong Oct.9.2008
In: coal, policy, supply chain

China’s Coal Industry--MIT Report Challenges the Myths

Coal-fired power plants account for some 70 to 80% of China’s total power generation. A group of MIT researchers have released a preliminary report on a comprehensive survey of China’s coal power plant industry entitled “Greener Plants, Grayer Skies: A Report from the Front Lines of China’s Energy Sector” (press release here; full report here), revealing surprising conclusions that make the report a must-read for any China energy analyst. In short, their findings, based on a survey of 85 power plants consisting of 299 separate generating units across 14 provinces, accounting for some 5% of China’s coal-fired generating capacity, challenges certain long-held assumptions that outside observers have harbored about China’s coal power industry.

In fact, the report’s findings illustrate very well a theme that The Green Leap Forward has been promoting through the lens of various sustainability and cleantech topics—disruptive technology by itself is not enough, what is needed are disruptive systems. Put another way, technology alone will not get us to the promised land of sustainability. Rather, such novel clean technologies must be part of an integrated and holistic solutions that take the whole system and whole supply chain into account, including interactions with not only other technologies, but also with people, market and social institutions, and even policies in other sectors.

The Conventional Wisdom

The traditional understanding of China’s coal power industry is uniformly doom-and-gloom and reads something like this: (1) China’s rapidly growing energy infrastructure consists of numerous small coal plants equipped with cheap,retrograde and inefficient technology; (2) the main fuel for such infrastructure consist of heavily subsidized and low quality coal, a lot of which is hauled over long distances from the coal-rich interior provinces to the power-hungry coastal regions; and (3) the regulatory capacity to move away from a resource intensive and environmentally destructive energy path is sorely inadequate.

The punchline, the report puts in blunt terms, is that “China builds crap, it burns crap, and it doesn’t give a crap.”

MIT’s Surprising Findings

The reality, is that the China’s coal industry is much more complex. What the report’s authors found was that

1. There is indeed a fair degree of variation in the scale of new power plants coming online from 2002 through 2007, the most rapid phase of energy infrastructure expansion. While small-scale units (less than 50 MW in capacity) account for the majority of new units in absolute numbers, large-scale units (over 300 MW) account for most of new generating capacity added to the system.

2. There has been a significant uptake in more expensive, advanced and efficient combustion and turbine technologies. Fluidized bed combustion (FBC) is the technology of choice in small-scale units while pulverized coal combustion (PCC) dominate large-scale units. Both FBC and PCC offer significant environmental benefits over antiquated chain grate stoker boilers, which technology FBC and PCC have gradually replaced. This trend, as we shall see, makes good business sense because over over the life-cycle of the plant, burning coal (the most significant variable cost of a plant) more efficiently can help offset rising coal prices (see point #4), even after taking into account the cost of investing in these advanced technologies.

3. Post-combustion environmental cleanup technologies such as flue-gas desulfurization (FGD) systems have also experienced substantial uptake, thanks to new regulations starting in 2004 requiring such “scrubbing” technologies, with 67 of 82 plants that responded reporting the implementation of FGD systems in at least one of their units. Of those 67 plants, 50 have continuous emissions monitoring systems while the rest have systems that perform more periodic monitoring.

4. Subsidized coal and state allocation channels are being increasingly phased out in favor of market-determined prices, either on the spot market or through supply contracts of up to, typically, one year. In fact, the report notes that in 2007, coal prices in China ranged more widely, anywhere from 250 to 600 RMB/ton, and are higher compared to that in the U.S. average of under 300 RMB/ton-equivalent!  This summer, Chinese coal prices have soared to as high as 800 to 1000 RMB/ton, as Caijing indicates. (The NDRC has responsed to coal price inflation by announcing in June as part of the nation-wide fuel and electricity price hike that coal prices will be capped as of December 31 this year, a policy decision whose consequences wil be closely followed.  See previous post under subheader “Coal Also Getting More Expensive“.)

5. Although a wide range of coal types are used by plants, plants report to be purchasing coal of relatively low sulfur content (less than 2%) even though they cost more than lower quality coal, again evidencing some sort of regulatory pressure.

6. A substantial proportion of coal is sourced locally and transported by truck from relatively nearby mines rather than transported over long distances by rail. This has important environmental ramifications, as we shall soon see.

These findings are startling because, in isolation, they paint a much rosier picture about China’s coal industry than conventional wisdom affords. Indeed, a Harvard study released this past summer makes similar observations about the uptake of advanced technologies like PCC and FGD and the existence of policies and regulations promoting higher environmental performance in the coal power sector.

Despite these positive findings, the fact of the matter, the MIT report goes on to say, is that the environmental performance of the surveyed power plants, measured in terms of SO2 emissions, still fare far worse than their US and European counterparts, and even egregiously exceed local regulations. The finding of inferior environmental performance would not be considered a “surprising finding”, but it does not seem consistent with the six numbered findings above. There is clearly something else that is going on.

What’s Really Going On

This is where it gets really interesting. The “something else that is going on” apparently takes place further upstream in the supply chain.

As (a) physical coal supplies tighten because of soaring demand driven by China’s economic engine and (b) coal shifts from being subsidized and state-allocated towards being distributed through more market-like channels, a doubly-whammy upward pressure on coal prices is created. Moreover, fuel costs can be highly volatile for these power plants. The wide range of coal prices alluded to earlier (finding #4) reflect the different types of coal available on the market. However, because of the chaotic scramble for coal, coal quality standards are not well specified or enforced and buyers do not have the time to verify if they are getting what they pay for. Instead, in a situation of scarcity, coal suppliers have every incentive to make up the numbers with inferior quality coal while power plants are forced to buy coal of varying quality and prices even if it is not their preferred type, resulting in much volatility in fuel costs, an unwillingness to stockpile inventory (which can lead to a blackout situation that Southern China witnessed earlier this year when coal transportation links to power plants were suddenly disrupted by severe storms).  The result is that running a variety of (sometimes inferior) coal types in a unit can overwhelm its environmental technologies and compromise physical plant integrity.

Because retail power is capped by the NDRC (although a gradual energy price reform is underway; see previous post) and ongoing fuel costs are easily the most significant portion of a power plant’s variable costs, it is easy to see that these power plants are getting squeezed pretty badly. The plants, the report says, are forced to respond in one of two (or both) ways. They can either (i) stop operating costly post-combustion environmental technology such as the FGD systems ( the operation of which may account for up to a third of operating costs), or (ii) resort to buying cheaper, lower quality, high sulfur content coal, which often times means coal sourced from small independent local mines (see finding #6 above) due to reduced transportation costs. Such locally source coal are not pre-washed to lower sulfur and ash levels before combustion as they are in the are in the larger state-owned mines in the Northeast. It is also conceivable that even if plants are operating FGD systems, the sub-standard coal sources from these local mines simply overwhelm the cleanup systems. The result in any case is the same and bears out in reality—increased SO2 emissions.

Implications for Policy

The MIT report challenges the simplistic assumption that rising fossil fuel costs will create the right incentives for adopting cleaner alternatives . We see above that coal prices are indeed rising, and in China they have caught up to U.S. prices, yet given the complex interactions of China’s coal industry, this has ironically led to poorer environmental performance. “On the environmental front.” the reports says, “policies designed to achieve change in one dimension frequently lead to undesired changes in others.” The China coal industry is kinda like the Transformers—there’s more than meets the eye.

What these preliminary findings suggest is that any policy which seeks to clean up the coal not only has to scrutinize the operations of power plants, but also look upstream to consider the dynamics of how coal is sourced, the types and quality of coal available on the market, the kinds of coal quality standards and verification procedures available, and what kind of information asymmetries exist between coal suppliers and buyers, just to highlight a few areas. It is also the opinion of The Green Leap Forward that electricity price reform, which the central government is undertaking, remains a key strategy in order to ease situation where power plants find themselves squeezed between high, variable coal costs and capped retail electricity prices.

The MIT report goes on to emphasize that the above analysis is merely preliminary as the authors have not yet had a chance to discuss other data they collected that may reveal insight to other issues, including how patterns of plant ownership affect decisions on technology investment and environmental compliance, how different modes of financing affects operations and technology choice, how the presence of foreign suppliers and technologies influence plant performance, and others. In other words, there remains to be a lot done.

Whatever the full picture is, this much is clear. Cleaning up China’s power industry is not a simple matter of creating a massive international technology transfer mechanism to arm China’s plants with state-of-the-art technology; these plants are already taking up such technology by themselves. It also isn’t the case that coal prices are artificially suppressed, or whatever environmental regulations that exist are having no effect. Coal prices are increasingly determined by market forces, and environmental regulations have encouraged the uptake of advanced technology. The dynamics of the coal industry, rather, is much more nuanced and requires a thorough understanding of the complexities inherent at all levels of the coal power supply chain, and how all those levels and links interact.

Thus, a technology-focused approach to clean China coal will simply fall short. Rather a systemic, supply-chain-wide examination of the existing incentives and disincentives to improve environmental performance is what is required create an impact. The hopeful message that the MIT report conveys is that things with China’s energy sector are not as hopeless as people think. The increasing prevalence of cleaner combustion and cleanup technologies, market-pricing and basic environmental regulation are important elements that set the stage for making important environmental gains through appropriate policy tweaks in other dimensions of the industry.

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