“China… will not build new coal-fired power plant projects abroad.” The implications of these words uttered by Xi Jinping at the UN General Assembly on 21 September cannot be overstated.
The one sentence brings about an end to China’s position as the world’s largest and last major public financial backer and builder of coal fired power plants overseas, and is a major win for the climate agenda. Advocates have been doing everything they can for years to stop the construction of new coal power plants, which have the effect of “locking in” emissions for decades once built.
The announcement has particularly dramatic implications for Belt and Road countries who are still officially planning to expand coal power capacity over the coming decade. With Chinese support now out of the question, energy sector planners will presumably have to go back to the drawing board. The announcement also marks a step change in China’s own narrative about the Belt and Road. Until just a few weeks ago the BRI was an infrastructure initiative led by the development needs and demand of partner countries, based on their “national conditions”. Now, at least in the energy sector, Beijing sets certain standards as to what demand it will answer.
Coal power plants on the line
The exact scope of Xi’s pledge is as yet unclear. What is meant by “will not build” has prompted questions about whether this includes financing and loan arrangements as well as construction services. What exactly “new” will mean is also up for some debate. Will this include all plants that have not yet entered construction or not yet reached financial close? Or will we see plants for which MOUs have been signed classified as already agreed upon, and therefore not “new”?
Interest groups – banks and EPC contractors involved in projects, as well as plant developers in host countries, to name a few – will no doubt try to find room for interpretation and hermeneutics around the exact scope of Xi’s pledge. With details lacking, however, an expectation is emerging among civil society energy watchers that planned coal power plants with Chinese backing that have not yet reached financial close or entered construction will now not go forward in their current format. A scramble for new financial backers and EPC construction companies will emerge for a number of them, but with the world’s historic second and third biggest public backers of coal power overseas, Japan and Korea, both having made their own commitments to end support for coal power, this will be very hard to find.
New data from Global Energy Monitor’s (GEM) Global Coal Public Finance Tracker released this week shows that up to 44 coal fired power plants across 20 countries, representing 42.2 gigawatts (GW) of capacity, are now potentially on the line, assuming that plants that have not entered construction and not reached financial close come within the scope of Xi’s announcement. To put that in perspective, the 42.2GW on the line amounts to almost the entire operating capacity of Russia.
GEM’s database provides an overview of the coal power projects now on the line:
In their analysis released this week, GEM estimated that the cancellation of all 44 plants would see cumulative lifetime savings of over USD 130 billion, USD 50 billion of which would come from construction costs and over USD 80 billion from fuel and operational costs over the lifetime of the plants. They argue that the USD 130 billion saved should be redirected into renewable energy investments.
Lastly, GEM estimated that cancellation of the plants would reduce global coal demand by 30 million tonnes per year. Over the plants’ lifetime that would equal 1,100 million tonnes, which would prevent an estimated 8,000 million tonnes of carbon dioxide being emitted into the earth’s atmosphere. That’s great news for the climate, but awful news for coal miners.
A widely read commentary on the international reaction to Xi’s announcement by Tan Hao of Australia’s University of Newcastle critiqued GEM data as overstating Chinese involvement in overseas coal power. He pointed out that GEM’s database only includes overseas coal power plants with foreign financial backing. When including plants backed by financial institutions in their host countries, Chinese financial support amounts to only around 10% of financial support or, at its highest, around 20% in 2018 and 2020. Others argue, however, that such an argument overlooks the “derisking” impact Chinese public finance has had on coal power projects around the world, which has enabled other sources of capital to flood into the sector for projects which may otherwise never have gotten off the ground.
Implications for host countries
The impact of the potential cancellations are spread unevenly across different countries. For a number of countries in Africa, the cancellations would all but end the development of coal power. In Asia, Bangladesh and Mongolia would be hit hardest, with over 90% of in-development coal power capacity now under question
The implications are also large for Vietnam, where six coal power plants under development could now be at a loss for financial backing. In addition, the country is in the process of drawing up its next decade-long power sector development plan – the PDP8 – the latest draft of which includes plans for the further expansion of coal power by 3GW by 2030 and an additional 10GW up to 2035. Who is going to provide the financial backing and construction services to realise these installation targets that go so clearly against the market trend is a mystery. Vietnamese power sector planners will, in one way or another, have to go back to the drawing board and find other ways of meeting the country’s rapidly growing power demand. Some analysts are arguing for the country to bring back the ambitious 6GW wind power installation targets, which had been included in earlier PDP8 drafts.
The end to Chinese backing for new coal power plants overseas brings up some more complex questions for these emerging markets too. Commentators in Chinese energy investment circles have already begun asking, if not coal, what will form the baseload power for these rapidly growing economies? Answers will take some months to emerge, as host country energy sector planners reconfigure their plans, but for much of Asia it is likely that gas may start to fill the gap left by the collapse of the coal power sector, as it is already in countries such as Bangladesh.
This raises two major issues, however. Firstly, as a fellow fossil fuel, burning gas to meet power demand will do little to address the climate crisis or, if Chinese investment is involved, “green” the Belt and Road. The fuel is a major emitter of methane, a particularly potent greenhouse gas. Building out gas infrastructure in place of coal infrastructure simply creates another form of fossil fuel lock in. Secondly, the majority of Belt and Road countries are depending on imports for their gas consumption. As this year is proving, extreme price volatility of the fuel opens up major questions about energy security. Pakistan and Bangladesh have both already seen crises of gas supply this year as a result of the global surge in gas prices.
If not gas, could other forms of power generation see a boom in demand over the coming years? Some Chinese commentators have speculated that hydro power and even nuclear could see boom years ahead after the collapse of the coal power industry. Chinese companies and banks have indeed been involved in a number of hydropower projects across the Belt and Road. They are extremely dependent on local geographic and hydrological conditions, however, making them unsuitable for many BRI countries. They have also proven extremely controversial. Nuclear, on the other hand, despite much bluster from the industry, has still yet to take off along the Belt and Road, with only a handful of projects in the pipeline in just two markets – Pakistan and the UK.
Implications for the Belt and Road Initiative
For eight years since the inception of the BRI, when asked about the “double standards” of China’s clamping down on polluting industries at home while freely investing in these areas abroad, government officials have responded that Chinese investors simply respond to market demand and abide by local regulations, regardless of how they compare with Chinese standards. The bar was set low. Chinese companies helped build a number of subcritical coal power plants in Belt and Road countries which would be unacceptable in China today.
As recently as February 2021, foreign ministry spokesperson Hua Chunying responded to a question on Chinese investments in coal power plants overseas, “some countries opt for coal-fired power generation first in light of their national conditions and available resources so that they could at least manage to have access to affordable electricity. Chinese companies, based on the needs and requirements of cooperative partners as well as market principles, offered clean, reliable and safe energy supply solutions.”
With Xi’s speech, this has changed. China and the Belt and Road no longer respond only to host country demand based on “national conditions”, but have begun to dictate what types of investments are kosher and which are not. China’s narrative of the Belt and Road will now change. The rhetoric of a green and high tech BRI that has emerged over the past couple of years will no doubt form the foundation of the new narrative, but in the new narrative the relationship between China and its Belt and Road country partners has substantially altered. With Beijing now making decisions on what types of infrastructure it is willing to support, a number of new countries may see their agency within the initiative diminished.
The implications of Xi’s announcement are massive and will play out for months to come within China and across the Belt and Road. Not only does the announcement potentially affect over 42GW of proposed coal power plants with Chinese backing, it also presents a quandary to a number of emerging economies’ economic planners and marks a clear break in China’s conception of its relations with BRI countries and fellow developing nations. The conversations on these issues have only just begun.