As Financial Risks Rise, China Can’t Afford to Keep Backing Coal Power

illustration: coal smokestacks obscure view of sunset
May 7 2021

China cannot afford to keep supporting coal power and must consider ceasing to financially back coal power abroad, said Professor of Economics and Co-director of the Volatility Institute at NYU Shanghai Wang Jian-ye. The former economic counselor and chief economist at the Export-Import Bank of China (China Exim Bank) shared this startling conclusion that could reshape the world’s power generation industry in a talk titled “Financing Green Belt and Road” at NYU Shanghai on April 28.  

Synthesizing data compiled by research organizations around the world as well as by his own research team, Wang laid out a clear economic imperative for China to stop further financing for new coal power, and potentially divest from projects that are already underway. This would represent a fundamental change to China’s strategy of investing in coal power generation projects abroad as part of the Belt and Road Initiative, but it’s a change that Wang says is essential to avoid both major financial losses and a deep dent in China’s reputation as a global leader.

“If you invest $500 million or $1 billion for a large coal-fired power plant, its life will be 40 or maybe 50 years. But after a few years, it may not even be economical to run it. So it means that asset will become a stranded asset, just like a big ship in the Suez Canal,” Wang said, referencing the recent accident involving the freighter Ever Given. “It’s still there, but it cannot move, so you have an asset that is not performing, not generating income. If you are thinking that way, making drastic changes now is actually saving a lot of money.”

Why? Because, quite simply, within China itself and in many low- and middle-income Belt and Road countries where China is financing coal power projects, electricity from renewable energy sources like wind and solar is becoming cheaper than electricity generated from coal.

Wang and his team looked at Levelized Cost of Electricity (LCOE), which considers all costs over the life cycle of a power generation project, from initial construction and supporting infrastructure, to operational costs, to decommissioning costs. According to the International Energy Agency, the worldwide median LCOE per megawatt-hour (MWh) for coal generated power was roughly $88, while for onshore wind power it was only $50, and for utility-scale solar power it was $56. Organizations ranging from non-profit Carbon Tracker to private consulting firm Wood Mackenzie estimated that in all of South Asia and several key countries in Southeast Asia, the LCOE for renewable-generated power was already lower than that of coal in 2020, or it will be before the end of 2021. And within China, guidance pricing for renewable power was already lower than the benchmark price for coal power in every province and region except Qinghai.

That’s a substantial differential cost that many countries are finding hard to ignore, Wang said. Tightening energy planning and regulation policies in South Asia, Southeast Asia, and parts of Africa are coinciding with a drop in demand for electricity due to COVID-19 and with increasing popular concern about pollution and climate change. This combination of factors has already led several countries to halt or completely cancel Chinese-financed coal power projects, including Gazaria in Bangladesh, Port Qasim in Pakistan, Hamrawein in Egypt, and Lamu in Kenya. And in Vietnam in 2019, over 50 percent of coal-power related projects were delayed due to environmental and other impediments.

This raises huge financial risks to funding coal power: the risk of losing initial investments when plants fail to come online, and the risk that recipient countries might not be able to make capacity payments to operate coal-fired plants when demand is down and cheaper power alternatives are available. 

“Until there’s enough benefit and incentive for the people or for a country to change, change won’t happen,” Wang said. “Over the last two years, many things have happened around the world, and Chinese financing abroad must adapt to these changes.”

Wang offered several recommendations for Chinese financial policymakers, urging governmental actors to reassess the risks and costs of financing for new coal power projects and to adjust plans accordingly, potentially halting the backing of new coal power without appropriate carbon capture and storage capacity. Wang also stressed the need to issue clear limitations on coal power financing  for all officially-supported financial institutions and major domestic commercial banks, insurance corporations, and investment funds. At the same time, Wang advocated for increased incentives and funding for renewable energy technology, particularly solutions that will mitigate renewables’ weaknesses, such as the problem of intermittent power supply. China must also address overcapacity in its domestic coal power development industry, providing incentives to facilitate domestic enterprises’ transition away from coal, Wang advised.

“The concept of sustainability applies to many different fields, including finance and the environment. If we look at these aspects together, we can see that there is little room for new coal power without adequate carbon capture and storage in the market in many key Belt and Road countries,” Wang said.