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Climate Change Hangs on China’s Embrace of Markets

David Fickling
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Climate Change Hangs on China’s Embrace of Markets

(Bloomberg Opinion) -- For all the good intentions of the governments gathered in Madrid, a humbling reality hangs over the latest climate change conference. The effectiveness of what is agreed and done will ultimately stand or fall on the actions of just one country: China.

It was the rise of China and to a lesser extent India, with their associated energy demands, that has overwhelmed the emissions reductions chalked up by richer nations. Yet China’s headlong development of renewables has also helped make wind and in particular solar power the lowest-cost generating technologies almost everywhere.

Tackling pollution and environmental degradation is one of the “three tough battles” the country must fight alongside financial risks and poverty, President Xi Jinping said in a speech delivered last year. On the other hand, Premier Li Keqiang went out of his way to sing the praises of coal power in a recent meeting of energy bureaucrats.

There’s probably no more important uncertainty for the fate of the planet right now than the question of which faction wins out as China develops an energy policy for its 14th Five-Year Plan, which begins in 2021. With as much coal-fired power in the development pipeline as is operating in all of Europe, initial indications don’t look good.

Underneath those high-level plans, though, a more positive reality may be unfolding. The one major change to China’s power sector that’s already under way is a switch from a heavily regulated system where prices and generation capacity are mapped out by the government, to a more market-oriented one where the price of electricity is determined by supply and demand and generators compete to provide the lowest cost.

Renewable options have some significant advantages. They’re already the cheapest way of building fresh generation across China. In many areas, new onshore wind is lower than the benchmark power price given to existing coal generators, according to Jonathan Luan, an analyst at BloombergNEF. In such places, the most profitable option for utilities could be to switch off thermal power stations and replace them with wind farms. 

This is by no means a fringe phenomenon: According to Luan’s analysis, regions where new wind currently costs less than the coal benchmark include the prosperous coastal provinces from Liaoning and Hebei in the north down to Guangdong and Guangxi in the south, with the sole exception of the cities of Beijing and Tianjin. Solar wasn’t included in Luan’s province-level analysis, but on a national level its development costs are even lower than wind.

Unfortunately, that doesn’t mean coal-fired power stations are going to shut down right away.

For one thing, developers don’t just build generators wherever they think they can make a profit. The people who get to decide whether to hold a power auction will typically be local authorities, who may have a vested interest in propping up stations in which they have a stake. Where coal-fired power is loss-making or fully depreciated, renewables may have an opening. Elsewhere, debt-laden governments may prefer to keep existing generators operating if it means they can avoid writing them off, even if the cost to users is higher — unless Beijing forces their hands.

There’s another problem. Those benchmark coal prices — the bedrock of electricity pricing in China — may also start moving as China’s power market is deregulated. Many are well above the levels that thermal plants need to turn a profit and should fall over time, squeezing the margin gap for renewables projects.

Further complicating matters will be a shift toward prices that aren’t fixed through the day but rise and fall according to the state of demand. That dynamic tends to reduce the profitability of renewables, with traditional solar generation (for instance) flooding the market in the middle of the day and unable to “switch on” to take advantage of profitable periods in the evening when demand is particularly strong.

For all the worrying numbers on China’s coal development pipeline, the uncertainty over how this policy shakeup plays out is probably the greater risk to global climate targets. Building more fossil-fired generators won’t result in more emissions unless generators can operate profitably — something that’s happening less than half of the time as it is, judging by the low operating rates of Chinese thermal plants.

The bigger problem is that China needs to be building renewables at a blistering rate over the next five years if the world is to avoid more than 2 degrees Celsius of warming. It would mean putting in more than twice as much solar and three times as much wind as was installed over the previous five years. The falling costs of renewables may yet put that outcome within reach, but China’s sclerotic regulatory set-up represents a heavy ball and chain — and there’s no time left to waste.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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