On September 21, at the United Nations General Assembly in New York, Chinese President Xi Jinping announced that China would cease financing coal-fired power plants overseas. In today’s column, we’ll look at why this announcement is at the same time both less and more important than it sounds.
Let’s start with what the UN announcement does not do. The big item, of course, is that this is about support for coal-fired generation outside of China, not inside of China. Capacity and emissions from coal-fired plants supported overseas by China account for less than 5% of those of the country’s domestic fleet. China’s 1,000 Gigawatts (GW) of domestic coal-fired power production accounts for more than 50% of the world’s total, and the emissions from this sector are the largest contributor to rising greenhouse gases today. In 2020 alone, China commissioned 38.4 GW of new coal plants, 76% of the global total of new coal-fired power plants, according to the non-profit organization Global Energy Monitor – roughly equal to its overseas pipeline. Emissions savings pale in comparison to China’s domestic coal use.
The announcement, as is often the case from China’s leadership, is short on details. While it seems fairly clear this will apply to support for new projects at the planning stages, it is not yet clear whether it will also apply to financial support for projects under construction, which at some 15 GW is a very large number by itself.
The announcement also, clearly, does not apply to the 65+GW supported by China and already in operation. A recent report by Boston University estimates that coal-fired plants financed overseas from 2000 to 2018 will generate 11.8 Gigatons of carbon dioxide. Efforts to keep global emissions below a 1.5 degree pathway will likely require the early closure of some of this capacity, a topic only now receiving attention.
Or pretty cool?
These substantive concerns aside, let’s look at what makes the UN announcement a big deal. Starting with the fact that China is, by far and away and increasingly, the world’s largest financier of coal-fired generation. This is in line with China’s increasingly dominant position in financing emerging market infrastructure, with its capital flows far larger than that of the international development community since 2000 (see “Where did all the Chinese money go?”). From 2000 to 2018, China financed an estimated 14% of all the coal-fired plant built outside of the country; in 2020, an estimate by Nature found that 85% of all cross-border financing for coal power flowed from China – 42 GW. China has been, in the words of another Boston University study, “the new coal champion of the world.”
As noted earlier, the UN announcement is short on detail, so understanding exact numbers implied is tricky. All the estimates, however, involve very large numbers. Global Energy Monitor (GEM), a U.S. think tank, believes the announcement could affect 44 coal plants earmarked for Chinese state financing, with capital costs of $50 billion, and with the potential to reduce future carbon dioxide emissions by 200 million tons a year. That’s equivalent to about 15% of 2020 GHG emissions from the entire US coal fleet, or more than the annual GHG emissions of some 150 countries.
The numbers and impact are even bigger when we consider that China’s announcement is the tail end of multiple major announcements related to coal financing in 2020 and 2021. These have included (a) the US’ announcement that it would oppose coal financing from the multilateral development banks in which it is the largest (or one of the largest) shareholders – a symbolically important announcement, even though MDBs have steered away from the sector, (b) JBIC’s April 2020 commitment to end new coal power plant financing, and (c) South Korea’s April 2021 pledge to cease export coal power finance for the Export–Import Bank of Korea, the Korea Trade Insurance Corporation and the Korea Development Bank. As the Institute for Energy Economics and Financial Economics (IEEFA) notes, it was government capital subsidies from China, along with Japan and South Korea, that underwrote almost every new coal power plant built globally in the last five years.
The announcement is an even bigger deal in the Asian countries which have depended on Chinese coal financing as a lynchpin of their power sector strategies. As Infrastructure Ideas has previously written, essentially all the countries contemplating large new coal-fired capacity investments are in the middle of critical energy transitions, and wrestling with several factors as to whether to implement coal-fired generation plans, or whether to turn instead to renewables and/or natural gas for their growing needs. For Indonesia, Pakistan, Bangladesh, and Vietnam, the disappearance of Chinese financial support is likely to be a deciding factor in their decision-making on energy sector policy, and likely to significantly hasten the pace of their decarbonization. Along with Turkey, and China itself, these four countries account for more than 80% of the global pipeline of new coal-fired power generation.
Indonesia has the largest coal power pre-construction pipeline, according to IEEFA, at over 10 GW, with another 8 GW planned based on either Japanese or domestic financing. Indonesia also has large hydropower, geothermal, wind and solar potential, but its energy transition has stalled due to a combination of vested interests, large domestic coal reserves, and reluctance from its conservative, vertically integrated state power utility, PLN (for more, see “Asia’s Energy Transformation: Indonesia”). With crying needs to increase infrastructure investment across many sectors, diverting capital to replace Chinese financing of new coal-fired plants would have high political costs. Pakistan is probably the largest recipient of coal-fired financing since the start of China’s Belt and Road Initiative (BRI), and is at once home to large deposits of low-quality coal and the country with one of the highest electricity tariffs in Asia. A significant internal constituency in Pakistan would like to keep developing more coal and associated power plants, yet the country is struggling with the costs of recently built coal-fired stations – for which it is seeking debt relief from China – and with a current excess supply of power (for more, see “Asia’s Energy Transformation: Pakistan”). Cessation of Chinese financial support makes it highly unlikely that additional coal plants will be built. Bangladesh was the largest recipient of Chinese financing for coal in 2020, for 10.5 GW. The country has been in the midst of an internal policy struggle about building further coal-fired plants, between the rapid development of natural gas and solar power alternatives and its own vulnerability to the impacts of climate change (for more, see “Asia’s Energy Transformation: Bangladesh”). It was already likely that the plants financed in 2020 would not go forward, and China’s UN announcement makes this almost certain. Vietnam has the largest pre-construction coal-fired pipeline, of 19 GW according to IEEFA, although only about 1/3 was contemplated to be financed by China. Here, the decision by Japan not to support further overseas coal facilities, and the reluctance of both private sector banks and multilaterals – notably the Asian Development Bank (ADB) — to take the reputational risks associated with coal financing, may both have greater impact than China’s own decision. China’s announcement however makes it even more difficult for any private sector banks or multilaterals to propose new coal financing. Vietnam’s state-owned utility, EVN, does have interests in further coal development, and the country has the internal resources to possibly finance one or two new plants. The absence of external financing for coal does however make it much more likely that Vietnam instead expands both its world-class offshore and onshore wind resources, and natural gas-fired power generation (for more, see “Asia’s Energy Transformation: Vietnam”).
While China’s announcement may make the greatest overall impact through these four countries, there are several others whose potential coal plans are likely to be changed. Turkey and Zimbabwe, for example, have between them plans for another 15 GW of new coal plants, but no reasonable prospects of either external or domestic finance for these.
The Big Picture
In 2015, the world-wide pipeline of planned new coal-fired plants was estimated at over 1,500 Gigawatts – equal to almost ¾ of existing global coal-fired capacity. Construction and operation of all these new plants would have practically guaranteed a scenario of global warming of over 3 degrees or more. With a combination of domestic policy changes in many countries, and the withdrawal of essentially all but China from coal financing, that pipeline had shrunk to a much smaller but still considerable about 300 GW by mid-2021, according to the NGO Carbon Tracker. Close to 1,200 GW, or 75% of the 2015 pipeline, has been cancelled since 2015. With China’s UN announcement, at least 15% or 50 GW, and possibly more, of the remaining coal-fired pipeline is likely to disappear. This does not solve the global problem of meeting emission reduction targets, but it is a sizeable step in the right direction. Next up? Efforts to reduce the coal pipeline further, with an increasingly narrowed focus on India and China domestically. And efforts to take offline existing coal-fired capacity faster (see “Money is Coming for Coal.”).
Much of China’s substantial overseas infrastructure financing over the last two decades has gone to support coal-fired generation: in 2015, almost half of all the BRI’s energy financing went to coal, according to the International Institute for Green Finance, a Beijing-based think tank. As Infrastructure Ideas earlier noted in our “Ten Infrastructure Predictions for 2021: the BRI Gets a Facelift”, this support for coal was creating increasing tension with President Xi Jinping’s desire to for China to seen as a global leader on climate change issues. China’s flagship international initiative, the BRI, has seen increased criticism of its environmental and climate impacts. Announcing some sort of “greening” of the BRI going forward was clearly low hanging fruit for Xi. Already in April Liu Guiping, deputy governor of the People’s Bank of China, told a press conference that China would implement green investment principles for the Belt and Road Initiative. Yet the UN announcement is not the end of Chinese overseas support for energy in emerging markets. China will be seeking to replace coal financing with “green infrastructure” financing, a set of sectors in which it is already often the world’s leader. Going forward, look if anything for a new “bubble” of financing support for renewable energy projects in emerging markets, as China joins an already crowded bandwagon.
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