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Introducing "Dark Clouds"

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Student Energy is proud to feature the latest insights on China's coal landscape from Calvin Quek, Head of Sustainable Finance at Greenpeace East Asia. Calvin Quek authors "Dark Clouds", a regular publication about the ins and outs of China's war on pollution and its energy issues. He can be reached at calvin.quek@greenpeace.org. Learn more about Greenpeace Asia's programs at http://www.greenpeace.org/eastasia/.

Below is the 22nd and latest issue of "Dark Clouds 22: China's Coal Power Bubble II".

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Perhaps I should rename "Dark Clouds" to "Dark Coal Power Bubbles", to describe what we are seeing in China's power sector, as cleaner Beijing skiesgives way to other troubling developments in the energy sector. Newly released data suggest that this "Coal Power Bubble" has only worsened.

China's energy consumption continued to slow in Oct 2015. According to the latest industrial production statistics released on 11th Nov, thermal power generation (65% of generation) in Oct 2015 fell 6.6% year-on-year (YOY), corresponding to weakness seen in China's energy intensive heavy industrial sectors (Coal, Cement, Glass, Steel all down 9.4%, 3.5%, 9.6%, 0.2% YOY respectively. See below).

graph 1.gif

Source: National Bureau of Statistics. http://www.stats.gov.cn/english/PressRelease/201511/t20151111_1271430.html
 

However, even as thermal power generation fall, thermal power assets continue to increase, as power companies expanded capacity (See below). 

graph 2.gif

Source: China National Energy Administration (NEA), http://www.nea.gov.cn/2015-10/19/c_134727170.htm

This issue has stated to gain more media coverage. According to a Nov 6th 2015 Reuters report, the China Electricity Council said that there was a boom in coal power plant construction, which had increased 55% YOY in the 1st half of 2015, A growing number of influential Chinese experts (seehere and here) have voiced concern over the issue in the public media, such as the China Electricity CouncilNorthstar Electricity Network, and Sina Energy News.

However, exactly how many projects have been approved this year? Where are they located? What are the underlying causes for this trend? And what are the financial implications?

Diving deeper into the bubble

Last week, Greenpeace sought to answer these question in a new report released Nov 11th. Analyzing Environmental Impact Assessment (EIA) applications and approvals from the central and provincial Ministry of Environmental Protection (MEP) websites, Greenpeace found that from January 2015 - September 2015, 155 coal-fired power plants with a total capacity of 123GW had been approved, far exceeding the number and capacity approved in previous years (See below)

graph 4.gif

​Source: Greenpeace analysis of MEP data, http://www.greenpeace.org/eastasia/publications/reports/climate-energy/climate-energy-2015/doubling-down/

Most of the projects are located in the key control areas, and in the central areas of the country (See below).

graph 5.gif

By province, Shanxi has both the most plants, (24) and the largest capacity (21.3GW) approved this year. Xinjiang, comes second, in terms of capacity approved (See below). 

graph 6.jpg

Several reasons explain this large increase in coal power plant approvals in 2015

First, the increase is linked to the State Council's 2013 "Reduce government, Delegate authority" initiative (简政放权), which aimed to improve to reduce red tape and bureaucracy (see here: 国务院关于取消和下放一批行政审批项目等事项的决》), by devolving central level project approval authority to the provinces. Note below how the number of provincial-level approvals of coal plants expanded dramatically, while central-level approvals reduced. ​Over 2013 - 2015, central NEA (Jan 2014), NDRC (Nov 2014) and the MEP (Mar 2015) began to allow their provincial counterparts to directly approve coal power projects. This was contentious development; on one hand, this was well received by the power sector which wanted to expand capacity quickly, but on the other hand, this was criticized by various environmental lawyers and officials, who believed that the sector would expand irrationally with reduced oversight.

graph 7.gif

Second, the number of coal power plant grew as Chinese mining companies, decimated by years of falling coal prices, started to diversify into the power generation business, and set up joint ventures with established power companies or went into the business all by themselves. According to Bloomberg analysis, driven by huge margin differentials (mining: 11% versus power: 42%), miners boosted their power capacity to 140GW, a 17% gain over the past two years. This was especially the case in Shanxi, the top coal power bubble province this year, and home to many mining companies. One company example of this mining-to-power diversification trend is Shenhua, the world's largest coal company, which started in 2011 to increase investment in the power business. In 2014, Shenhua's gross profits from its power business grew to 41% from 23% in 2012, while coal mining profits fell from 75% to 56% over the same period (See below).
graph 8.gif
Second, the number of coal power plant grew as Chinese mining companies, decimated by years of falling coal prices, started to diversify into the power generation business, and set up joint ventures with established power companies or went into the business all by themselves. According to Bloomberg analysis, driven by huge margin differentials (mining: 11% versus power: 42%), miners boosted their power capacity to 140GW, a 17% gain over the past two years. This was especially the case in Shanxi, the top coal power bubble province this year, and home to many mining companies. One company example of this mining-to-power diversification trend is Shenhua, the world's largest coal company, which started in 2011 to increase investment in the power business. In 2014, Shenhua's gross profits from its power business grew to 41% from 23% in 2012, while coal mining profits fell from 75% to 56% over the same period (See below).
graph 9.gif
Source: Greenpeace analysis of MEP project approval data
Please note: 
Guodian is not a listed company.
China Coal is listed (HK: 1898, SH: 601898), but it is mainly a mining business, and does not list its power assets.

Ultimately though, the financial consequences of these underutilized coal plant assets may not completely fall on the companies, given that there is animplicit guarantee that provincial governments will bail out unprofitable state owned company projects. At the same time, power plant utilization rates is only one of several other factors (such as power tariffs, interest rates, input costs) that determine profits and shareholder value. Thus, even as utilization rates have fallen precipitously, the share prices of China's IPPs have all been generally flat in second half of 2015 (See below).

Listed IPP performance on Shanghai Stock Exchange
graph 10.gif
Source: Bloomberg 

However, there is still an economic costs to be reckoned with over the long term: the lost potential of putting these financial resources into more productive sectors of China's economy, and the structural costs of labour markets (workers not being retrained, new jobs not being created in alternative sectors) not reforming to evolving market needs.

In this view, perhaps China's coal power bubble is the proverbial "canary in the coal mine", a warning of what might happen, when corporate and planning developments are out of sync with broader trends. As China struggles with bad investments in other sectors as well, policymakers might do well to avoid recreating other sector bubbles in their bid maintain GDP growth. And for investors looking for where to park their money, all eyes should be on whether Chinese policy makers offer prudent long-term policies (cue 13th Five Year Plan) to China's changing economic dynamics.

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Further reading: 
For more information about these reports, as well as study methodologies and source data, please feel to contact me. Below are a sample of other articles for your reference.
 
November 18 2015: Greenpeace Report: Coal Power Overcapacity and the Investment Bubble in China

China's decentralization of authority
背压热电:2013年6月28日,根据《国务院关于取消和下放一批行政审批项目等事项的决定》,国家发展改革委取消和下放管理层级行政审批项目26项(取消行政审批项目14项,下放管理层级行政审批项目12项),其中,“企业投资燃煤背压热电项目核准”下放省级投资主管部门。这被业内认为是继5月1日施行的《国家发展改革委关于修改有关条款的决定》将“采用背压(抽背)型热电联产”列入鼓励类之后,热电行业迎来的又一重大利好。
 
能源局:2014年1月,为贯彻落实国务院关于转变职能、简政放权的要求,国家能源局在下放分布式燃气发电、燃气热电及燃煤背压热电等能效高、污染少的火电项目审批权限后,进一步改进常规燃煤火电项目的审批管理机制。
 
发改委:2014年11月,国家发展改革委员会于2014年11月18日召开“政府核准的投资项目目录(2014年本)”新闻发布会,这次《目录》里将火电项目的核准下放到了省级政府。
 
环保部:2015年3月,省级环境保护部门应根据本公告,及时调整公告目录以外的建设项目环境影响评价文件审批权限,报省级人民政府批准并公告实施。其中,火电站、热电站炼铁炼钢、有色冶炼、国家高速公路、汽车、大型主题公园等项目的环境影响评价文件由省级环境保护部门审批。