Declines in Consumption and Production Show an Economy Decoupling From Energy Demand
With official word this week from the China National Bureau of Statistics that the world’s biggest user of coal reduced its consumption in 2016 by 4.7 percent comes another signal that the Chinese electricity transformation continues apace.
The trend has three years of history to it now, which is to say China is three years past peak coal.
China’s coal production also declined again in 2016, also for the third consecutive year.
These statistics speak volumes and indicate a remarkable decoupling between energy demand and economic activity. When this coal data is combined with record annual renewable energy installations, it’s proof positive that China is diversifying its energy mix faster than anyone expected.
The pace of growth and the decline in the cost of renewables across China are extraordinary.
China installed 17.3GW of wind generation in 2016, down from a record 29GW in 2015, but still an expansion of 19 percent, to 211TWh. In offshore wind, China’s Shanghai Electric Wind Power Equipment (Sewind) was the largest developer globally in 2015, commissioning 489MW of new capacity.
When combined with the 18GW per annum of new hydro and the 5GW per annum of nuclear capacity installed across China in the past four years, zero carbon emissions electricity generation has delivered 70 percent of China’s total electricity demand growth since 2013.
China installed a world record 33.2 gigawatts (GW) of solar in 2016, double its record 15GW in 2015, which itself was double the highest ever annual record, set when German installed 7.6GW in 2012. On-grid utility solar in China grew 34 percent year over year to 39TWh in 2016.
Much of China’s renewable energy industry is being driven by demand from abroad, a trend that supports the country’s rapid advances in technology. Our January report “China’s Global Renewable Energy Expansion” details a 60 percent year-over-year expansion to US$32 billion in Chinese foreign renewables and grid investment over 2016.
It’s a trend we expect to continue. China plans to invest US$360 billion in new renewable energy capacity by 2020, driving further employment and technology growth.
COAL IS THE BIGGEST LOSER IN THE CHINESE ENERGY MARKET, and 2017 is set to be another bleak year for China’s coal sector with the government announcing further expansion curtailments already in January and February.
Some detail on that front:
China’s coal production declined an unexpected record 9 percent year over year to 3,410 million tonnes (Mt) in 2016. This brought the three-year average decline to 4.9 percent per annum, a decline of 564Mt in total. (This reversal led the International Energy Agency (IEA) in November of last year to concede that China’s coal consumption most likely peaked back in 2013—this after the IEA said in 2014 that Chinese coal consumption would grow through to 2030.)
China’s 4.7 year-on-year drop in coal consumption with its 3.6 percent growth in thermal power generation and its natural gas consumption up 8 percent suggests a dramatic reduction in direct coal burning for self-use residential and industrial purposes.
Over 2013-2016 China added a total of 200GW of new, effectively idle coal-fired power generation, a 6.0 percent annual expansion to reach an estimated 982GW of installed coal-fired powered capacity by December 2016. The consequence has been a collapse to a record low 47.5 percent capacity utilisation rate for the coal-fired power sector in 2016, down from a near term peak of 79 percent as recently as 2011.
This new coal-fired plants represent about US$200 billion in effectively stranded assets, with thermal efficiency and economic returns far below those anticipated at the time planning was commenced.
China’s move from 330 days per year of coal mining to 276 days in May 2016, followed by a reversal of that order in October 2016, caused havoc in the seaborne coal market. China’s net coal imports in 2016 were 255Mt, down 72Mt net on the 327Mt peak reached in 2013, reflecting an 11 percent decline in 2014 and then a 31 percent decline in 2015, followed by a short-term policy-induced increase of 2 percent in 2016.
The move to restrict coal mining to 276 days was made to cut production and tighten pricing in hopes of preventing a financial collapse of Chinese coal firms after Peabody Energy’s move into Chapter 11 bankruptcy in April. This caused spot thermal coal prices to more than double from US$50/t in January 2016 to US$114/t by November 2016, before retreating to US$80/t today. The forward market shows price expectations moderating to US$71/t out to 2020-22.
AND FINALLY, IN THE DOMESTIC ECONOMY BIG PICTURE, China reported 5.6 percent annual electricity consumption growth in 2016 above its three-year average growth of 4.3 percent. Electricity demand is tracking at 0.6 times the three-year average of 7 percent of GDP growth, a significant drop from the 1.0x GDP growth reported over the preceding decade.
This is a very clear decoupling of total energy consumption from economic activity, as total 2016 energy consumption grew by just 1.4 percent versus 6.7 percent GDP growth.
China’s energy economy, in a word, is changing.
Tim Buckley is IEEFA’s director of energy finance studies, Australasia.