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CRU: Coal Demand Continues to Rise Despite China's Greener Drive

 

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Despite its ambitions for a greener environment, China's growing demand for power means that coal will remain an important source of fuel for many years to come.  

Coal's share in power is expected to gradually fall as the government's desire to shift to gas increases. This Insight explores how soaring gas import prices and insufficient infrastructure are limiting the extent to which gas can replace coal in the medium term.

Environmental policies stricter and more expansive

China is having to find the right balance between its traditional mantra of strong economic growth with its more recent quest for a growth that is more environmentally and financially stable. It appears China is willing to sacrifice domestic production and trade for cleaner air.

In early 2016, the National People's Congress of China ratified its 13th 5-year plan. It included more stringent environmental policies designed to reduce air pollution by promoting the use of natural gas. The largest step taken to meet these targets is the '2+26 cities policy'. This policy targets pollution in the winter months (October – March), by monitoring the biggest polluting industries in the 2 provinces and 26 cities most inundated with smog. The strict targets are met by shutting down heavy industry that cannot operate below a certain emission threshold in winter – when the demand for residential heating naturally rises. These policies also encourage industry to use cleaner fuels, as a way of ensuring they can stay open throughout the year.

How China's quest for blue skies is progressing

China's power demand has been rising rapidly. During the first five months of 2018, power demand grew by 8.5%, up from 6% in 2017. We attribute this rise to the growing demand for power from the residential sector, which increased by 13% y/y since the start of 2017. We also believe that improving environmental efficiencies has forced industry to become more power intensive to meet specific requirements. As such, we expect total power generation to continue to rise at a similar rate, with coal power generation also increasing from current levels however, its share in the power mix is expected to fall over time.

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