China’s Power Industry II – “Fire Electricity” (power-gen from fossil fuels)

Being the most important electricity source, here we take a look at “Huo-Dian” which means “Fire Electricity” in Chinese

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While the focus of this series is PV demand in China, it is still important to introduce all the power-gen forms as they are essential in understanding Chinese energy policies. Being the most important electricity source, here we take a look at “Huo-Dian” which means “Fire Electricity” in Chinese.

Unlike the U.S. and many European countries where natural gas is an important part of the power-gen portfolio, China’s “Huo-Dian” is dominantly from coal as coal is the most abundant fossil fuel in China. While the true coal reserve is hard to pinpoint, the easy-to-access reserves (usually less than 1000 meters deep) are said to be about 200 billion ton while the total reserve should well exceed 1 trillion ton. Given current production of 3.64 billion ton a year, the easy-to-access reserves may be able to last about 50-60 years. Relative to coal, China has much less crude oil and natural gas reserves. It is estimated that the coal makes 94% of China’s fossil fuel reserves. Currently, natural gas makes up less than 1% of the total “Huo-Dian”. Most of the NG demand comes from households.

Even though the coal production surged in recent years, from about 2.11 billion ton in 2005 to 3.64 billion ton in 2011, coal price (based on 5500 k-cal/kg coal) still rises from 420-450 RMB/ton in 2005 to about 800-880 RMB/ton in 2011 due to the economic growth. The highest price occurred in summer 2008, reaching 1100 RMB/ton. After the global financial crisis in 2008, coal price dropped to below 700 RMB/ton in 2009. It gradually recovered since then to reach a high of ~880 RMB/ton in fall 2011.

The high coal price, strict environmental requirements and the slow-rising electricity price in recent years seriously damped the profitability of the electricity power companies. The so called big-5 power-gen companies (largest in China) lost a combined of 6.7 billion RMB in power-gen business in the first half of 2011, comparing to a combined loss of 1.6 billion RMB in 2010. Only the diversification into other areas such as coal-chemicals saved them from a full year loss. Despite a wide shortage of electricity, the power-gen companies are reluctant to build more coal-fire power plants in 2010 and 2011. The increased coal-fire power-gen capacities in 2010 and 2011 are among the lowest in years. Compared to other industries such as coal/oil production, the profit margin for the power-gen companies are among the lowest in China. They regularly complained but the China Development & Reform Committee (CDRC) is more concerned about the economy and reluctant to raise the electricity price fast. Since early 2005, the electricity price has been adjusted upward 5 times (2005-05, 2006-06, 2008-08, 2011-04 and 2011-12), but still it is not enough to offset the increase of coal price. The predicament in coal power-gen for the power-gen companies actually worked in favor for the growth of renewable energy in the past few years. The surge in PV installation last year after the introduction of solar FIT partially reflected the eagerness of the power-gen companies to diversify from their bread-and-butter business.

The coal power industry has worked quite hard in the past 10 years to increase the efficiency and lower the emissions. The transition from small to mid-sized power plant to large ones, and the technology innovations such as Integrated Gasification Combined Cycle (IGCC) have lowered the average per kwh coal consumption to 330 gram, better than the 350 gram in the U.S.. The increasing adoption of the Clean Coal Technology (CCT) also helps lowered the pollutants such as SO2, NOx and CO2. To comply with the air quality requirements, desulfurization at coal-fired plants became mandatory in 2007. In November 2011, CRDC announced a 0.8 cent/KWH incentive for power plants to install NOx removal equipments. Still industry insiders said the incentive does not fully cover the cost of NOx removal.

Entering 2012, however, the prospect for coal power brightens as the coal price is down over 15% from the 2011 highs. There is an expectation of sustained lower coal price in 2012 due to the increased production capacity and a cooling electricity demand. Recently the stockpile of coal at QinHuangDao has reached close to 8 million ton, a high level in history. The electricity price hike in 2011-11 also helped the spirit of power-gen companies. On the other hand, the problems and accidents emerged from the wind farms and the quality issues from the PV farms in 2011 will negatively impact their enthusiasm for the renewable energy in 2012.