Peak coal in China may happen in the medium term, but don’t count on it
A sneak preview at Medium-Term Coal Market Report 2014's outlook for Chinese demand
3 November 2014
For decades, Chinese coal consumption has known only one direction: upwards. During the last 30 years, annual coal use in China decreased only twice, most recently in 1997. Given the orientation of Chinese policy to diversify the power system beyond coal and the big emphasis on air quality, the question is whether the trend will stop soon, resulting in a peak in coal demand during the IEA Medium-Term Coal Market Report (MTCMR) horizon, which for the 2014 edition runs through 2019.
The MTCMR 2014, published on 15 December, bases its outlook for Chinese coal demand on annual gross domestic product (GDP) growth averaging 7%. But GDP decouples from, or outpaces, electricity growth by 1.4 percentage points per year. At the same time, demand rises 2.3% per year in the non-power sector and gas use nearly doubles. The outlook also counts on 1 200 terawatt hours (TWh) of new non-coal power generation from gas, nuclear and renewables through 2019 – thus assuming 110 gigawatts (GW) of new hydro capacity, or roughly one Three Gorges Dam per year; 110 GW of new wind, about the currently installed capacity in Europe; and 80 GW of new solar photovoltaic (PV), more than Europe’s present installed capacity.
What would it take to stall demand growth?
But can coal peak within the 2019 horizon? To cover all the bases, the MTCMR 2014 looks at that possibility, and the answer is … yes, it is possible – but only if one of these happens:
• GDP growth slows to 3% from 2015 onwards, i.e. less than half of the assumed 7% per year. Since 1978, the lowest growth rate in China was 3.8% in 1990.
• Or GDP and electricity growth decouple by 4.5 percentage points per year. But from 1980 to 2010 the maximum five-year annual average for this rate was 1.4 points in Japan. In China the annual average over the last five years was 0.4 points.
• Or China produces 2 500 TWh of additional power generation from gas, nuclear or renewables. This extra output is equivalent to four times global wind generation or 18 times global solar PV generation in 2013. To generate 2 500 TWh with modern gas power plants, China would have to raise natural gas consumption by 250%. Alternatively, China would have to commission 300 nuclear reactors in addition to the about 30 already expected in the MTCMR 2014 outlook.
• Or China cuts non-power coal demand at a 2.9% annual rate. This would be equivalent to reducing non-power coal demand in 2019 by 360 megatonnes (Mt) from 2013, and does not consider China’s plans to expand its coal-to-gas conversion programme. Substituting 360 Mt of coal with natural gas would more than double current Chinese gas demand.
Of course, a combination of more moderate versions of these scenarios would also produce peak coal. For instance:
• Either non-power coal demand remains constant but China adds 1 900 TWh of additional power generation from gas, nuclear or renewables.
• Or GDP and electricity growth decouple by three percentage points per year with an additional 1 900 TWh of power generation from gas, nuclear or renewables.
• Or GDP grows 5% per year from 2015 combined with constant non-power coal demand, while GDP and electricity growth decouple by a 1.7% annual rate.
• Or 5% GDP growth from 2015 combines instead with an additional 1 500 TWh of power generation from gas, nuclear or renewables – plus GDP and electricity growth decouple by 2.5 percentage points per year.
Because this calculation is a static analysis, it does not consider the effect of variations on other factors – which makes the prerequisites for coal demand to peak in China even harder to achieve. If, for example, GDP growth were to decrease significantly, it is not clear whether the assumed primary energy diversification of power generation through renewables, nuclear or gas would still be achieved. Experience in Europe shows that in a crisis, subsidies to renewables are among the choices for cuts in spending.
History offers little likelihood of a collapse
This exercise shows that peaking coal demand in China within this decade necessitates either a significantly lower GDP growth or dramatic changes concerning power generation or energy intensity in the economy. While of course past performance is no guarantee of future results, neither development has been observed, not even closely, in recent history.
This article by Carlos Fernández Alvarez, Senior Coal Analyst at the IEA, originally appeared in IEA Energy: The Journal of the International Energy Agency. Through the end of 2014, the IEA regularly produced IEA Energy, but analysis and views contained in the journal are those of individual IEA analysts and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation. Click here to view past issues of IEA Energy.
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