China: land of solar panels AND coal

Renewable energy boom

Things are moving fast for the renewable energy sector. In 2023, the growth in annual renewable energy capacity worldwide increased by 64%, to 560 gigawatts¹, the fastest increase in the past two decades. Expansion of renewable energy capacity went to record highs in Europe, the U.S. and Brazil, but the absolute outlier, i.e. winner, was China.

Additional global investment effort in renewables is also expected in the coming years. At last year's COP28 in Dubai, more than 130 countries agreed to triple total global renewable energy generation capacity (vs. 2022 levels) to at least 11,000 gigawatts by 2030. Two major drawbacks of this agreement, however, are the absence of China among the signatories and the unenforceable nature of the agreement (see Economic Opinion: COP28: no landslide deal but a symbolic win on fossil fuels).

China to lead in renewable energy...

China may have decided not to sign the Global Renewables and Energy Efficiency Pledge, this does not mean that the country is not investing in renewables. On the contrary, China has been the world's largest investor in renewable energy for years. In 2022, the country installed about as many solar installations as the rest of the world combined, and a year later, solar installation growth even doubled². The growth of wind capacity also increased sharply, by 66% in 2023.

There are many reasons for the astronomical expansion of renewable capacity in China. A first one is the pledge made by the Chinese government in 2020 to pursue carbon neutrality by 2060. To achieve this, the government set a target to increase the country’s solar and wind capacity to 1,200 gigawatts by 2030, a doubling of the 2020 capacity. A recent analysis by Global Energy Monitor (an NGO) shows that China is expected to reach this target already this year, some six years faster than promised³. The Chinese ETS (Emissions Trading System), which became operational in 2021 and targets emissions in the power sector, likely contributed to this. One motivation behind China’s climate pledge is growing dissatisfaction among its population after several crises linked to air, soil and water pollution⁴. According to a 2022 study by Yao Yao et. al., air pollution affects confidence in local governments in China⁵ and the latter is important for regime stability.

In addition to fulfilling climate promises, investing in renewables also makes sense from a strategic point of view because it can help to improve a country's energy independence, which is especially relevant in the context of rising geopolitical tensions. China is self-sufficient in terms of thermal coal (a grade of coal used in electric power plants >< metallurgical coal used for iron and steel-making), but oil and gas have to be imported. A recent example of the importance of securing energy supplies came after the Russian invasion of Ukraine in 2022. The resulting conflict compromised the EU's energy security, resulting in a sharp increase in energy costs and concerns about supply shortages. In response, the EU launched the REPowerEU plan, which was to accelerate the green transition but at the same time, due to time constraints, facilitate the import of LNG.

An additional strategic reason for China to invest heavily in renewables for its own energy generation is to further strengthen its competitive advantage in the renewables sector. With the construction sector still in troubled water, renewables have become an even more important engine of economic growth for China.

... but also as king of coal

The Chinese figures on the approval and construction of renewable energy installations are impressive but there is a caveat. China may have invested heavily in renewables in recent years, but at the same time it also installed many new fossil fuel plants. The bulk of these investments were made to expand coal capacity, the most polluting fossil fuel. According to the Global Energy Monitor, China built around 40 gigawatts of new coal capacity in 2023 or 95% of all new coal-powered energy capacity worldwide⁶. These new plants came on top of the sizeable existing capacity in a country that is already the largest emitter of greenhouse gases (in annual volume of CO2e, see figure). Moreover, the number of permits to build additional capacity also rose sharply following electricity supply problems in 2021. Over the past two years, 218 gigawatts of new coal capacity have been licensed, enough to supply all of Brazil with electricity.

The choice of coal over other fossil fuels is largely a result of past decisions. As a relatively "cheap" (excluding social and environmental costs) fossil fuel, coal, along with cheap labour and land, was at the root of China's economic rise that started in the late 1970s and earned China the title "manufacturing factory of the world”. This long coal tradition of China still leaves its mark today. For example, the electricity grid is still almost exclusively geared to coal.

The continuing expansion of coal capacity raises concerns as it could lead to a lock-in of fossil fuels. Some nuance is warranted, however. The continued expansion of coal capacity has been accompanied by a decline in the average utilisation of coal plants in recent years and this despite strong increases in energy demand. The decision to build new capacity even when utilisation rates are declining is explained by the fact that coal plants increasingly serve as energy providers during demand peaks or when electricity generation from renewable sources falls sharply due to a lack of sun, wind or because of prolonged droughts (hydro plants). In many other countries, this fallback function is performed by (less polluting) natural gas, but, as indicated above, China chooses coal because of its existing infrastructure and because of energy security reasons.

The strong growth of coal-fired power plants is also a consequence of a 2014 decision to shift approval for the construction of new plants to the local level⁷. Local governments make their decisions independently of the situation in other regions, which often results in inefficient decisions and consequently too many new plants being licensed. Moreover, transfers of electricity between regions with surpluses and shortages are held back by the dated electricity grid and inflexible policies⁸.

Because of the above-mentioned reasons, the growth in new coal capacity needs to be taken with a pinch of salt. At least some of the new capacity will likely not be (fully) used.

Turning point for coal nearby?

For now, the sharp increase in coal capacity continues into 2024. According to the Global Energy Monitor, China started building 41GW of new coal capacity in the first half of the year.⁹ More so than over the whole of 2023. Yet there is also a bright spot: it approved only 10 new coal plants, or 9 GW of additional capacity, during the same period. This is down 83% from the same period a year earlier. Moreover, China also decided not to approve any new steel plants powered by coal in the first half of 2024.

Another indication that China is serious about increasing its reliance on renewables can be found in the investments it made in the installation of batteries that are connected to the electricity grid. These can eventually replace coal plants as a fallback option when renewable energy generation is low. The government increased these investments to 11 billion euros in 2023 (a 364% increase over 2022)¹⁰.

Conclusion

Based on renewable energy investments, China's track record suggests that the country has turned the corner towards renewable energy supply. Simultaneous investment in coal-fired power plants sends a contradictory message at first glance, although the contradiction can be explained at least in part by the need to accommodate fluctuations in renewable energy generation. The choice for the highly polluting coal for this purpose is dictated by the country's history, infrastructure constraints and geopolitical considerations.

There are ways to reduce the reliance on coal as a backup for renewable energy but these adjustments require time and additional investments. China is making the necessary investments but for now, China’s coal capacity continues to expand, leaving the risk of additional fossil greenhouse gas emissions and/or underutilized and prematurely scrapped investments (stranded assets). It is therefore in China's best interest that the coal capacity expansion comes to a complete halt as soon as possible.  

¹COP28 Tripling Renewable Capacity Pledge: Tracking countries’ ambitions and (iea.blob.core.windows.net)

²How China Became the World’s Leader on Renewable Energy - Yale E360

³ MONTHLY CHINA ENERGY UPDATE | China to Achieve its 2030 Energy Target in July 2024 (climateenergyfinance.org)

⁴China’s Dirty Secret: The Boom Poisoned Its Soil and Crops - Yale E360

⁵ Air pollution and political trust in local government: Evidence from China - ScienceDirect

⁶China responsible for 95% of new coal power construction in 2023, report says - Carbon Brief

⁷China is building more coal plants but might burn less coal (sustainabilitybynumbers.com)

⁸ Unfinished paperwork is kneecapping solar’s potential in China (climatechangenews.com)

⁹Global Coal Plant Tracker - Global Energy Monitor

¹⁰ China building two-thirds of world’s wind and solar projects | China | The Guardian