The talk of China abandoning traditional energy is premature

9 march 2017 | IA REGNUM

“Reducing the excess coal production capacity in China poses a social challenge. However, the Chinese authorities are doing everything they can to minimize the negative social impacts resulting from changes in the energy sector,” the Deputy Head of the Department for the Fuel and Energy Sector of the Analytical Center Irina Pominova told an IA REGNUM correspondent.

Irina Pominova
Irina Pominova
Department for Fuel and Energy Sector

According to the expert, the reforms in the coal industry are a must for China, dictated by both environmental and economic factors. In addition, coal production in China is still characterized by relatively high frequency of accidents, a factor that also has to be taken into account when assessing social impacts.

However, the energy sector is intertwined with other sectors of the economy and reducing coal production is bound to have both social and economic consequences. Regarding the economy, Ms. Pominova says that the efforts to optimize coal production capacity are perfectly aligned with the structural reform of the supply side that China announced in late 2015. The basic idea of the reform is to reduce the amount of inefficient capacity while promoting the development of more efficient capacity and increasing the flexibility of supply so it can better respond to changes in demand.

“In terms of social consequences, reducing excess coal production capacity really does pose a major challenge. At the same time, China’s allocating significant resources to transfer jobs out of the inefficient segment by transferring people to more advanced coal production companies, retraining them or offering them early retirement,” the expert said. “The Minister for Labor Resources and Social Development of China estimates that in 2017 the country’s coal and steel industries stand to lose up to 500 thousand jobs, but that is less than in 2016 when it did not experience any major difficulties moving labor force from company to company. In addition, without reforms, unprofitable coal companies may just go bust, because of the continued glut of coal in the global coal market where China has a 45% share and where prices remain low.”

Ms. Pominova also noted that expert estimates of China’s coal production capacity vary a great deal from 1 to 2 billion tons (an eighth to a fourth of the global coal output). On the one hand, China earlier announced it was intending to cut back inefficient coal capacity by 1 billion tons by 2020. On the other hand, the development priorities for China’s coal industry announced in late 2016 have it that 800 million tons of inefficient capacity is to be taken offline every year between 2016 and 2020, which means that if at the same time China will be putting into operation 500 million tons of new capacity every year, the annual reduction in capacity will be just 300 million tons.

With all these considerations taken into account, Beijing’s plans for 2017 do not look that ambitious, the analyst points out. On top of that, the implementation of reforms in the coal industry demands constant attention and adjustments in response to changing circumstances, so it is hard to estimate how long it is going to take. As an example, the expert cited last year’s events when a cap of 276 work days per year for miners resulted in the price of energy coal doubling in the spring both locally and globally. Energy sector experts had not expected the effect would be so substantial.

And yet, despite the fact that China has been cutting back coal production for several years now and plans to keep doing it for at least several more years, it is too early to talk about China moving away from traditional energy sources in general and from coal in particular. The recent developments in renewable energy sources in China also suggest that no major move away from traditional sources is to be expected any time soon.

“The continued global climate change restrictions are putting serious pressure primarily on the coal industry and for China specifically there is the issue of improving the environmental situation. But it would be premature to talk about China moving away from traditional energy sources in general and coal in particular, despite the fast paced development of renewable sources. As was already noted before, coal is going to continue to dominate the country’s energy sector until 2020. Neither is it clear when the country’s going to pass peak coal consumption. Some say it already passed it back in 2013, because coal consumption has been declining in China since then but other estimates suggest it will only be passed in 2020-2025,” Ms. Pominova concluded.