China's Coal Power Pollution

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Through China's use of coal, it is the largest greenhouse gases emitter in the world. The negative pollution impacts from coal on China's farming could increase the demand for agricultural imports and hinder Chinese foodstuff exports. The energy demand from China's continued rapid industrialization augurs no end in sight to this trend, however this may create market opportunities for manufacturers of cleaner power generation equipment and vehicles.

China's rapid industrialization can be felt not only in changing trade balances around the world, but also in the quality of its air and water. This may create several investing opportunities. Companies offering technology to clean China's power plants, reduce the emissions of its cars, or offer alternative, cleaner sources of fuel may see a bright future in China if they can hit the right price-point. Investing in China's economic growth, through indexes and companies connected to the power industry, might need to be tempered by an understanding of the environmental costs of such growth and when such costs may need to be internalized. Meanwhile, those investing in importers of foodstuffs from China, or exporting respiratory-related medicines to China need to stay up-to-date on these developments as well.

What Does This Mean for Companies?

Remediation

Mitigating Coal's Impact

  • General Electric and Westinghouse are equipment manufacturers that are developing more efficient and upgraded equipment. There are various technologies developed such as integrated gasification-combined cycle coal plants which capture the CO2 before it escapes; although given China's abundance of low quality coal, other technologies could be more suitable such as pulverized coal plants or steam powered turbines.
  • Fuel Tech is a remediation company that has installed their air pollution control systems on over 400 combustion units globally.
  • Yanzhou Coal could potentially see flattening demand for coal with the push for alternative energies, yet coal remains the dominant source of energy. Instead more government attention may go towards coal scrubbing technologies.

Carbon Credits

A CO2 trading system allowing power plant operators to purchase a credit for the amount of CO2 emitted is growing in Europe. China could be encouraged towards cleaner energy production with the opportunity to sell excess credits, which they could receive as a reward for cutting emissions. Trading Emissions and Climate Exchange would be positioned to benefit from this.

Alternative Energy Sources

New laws and initatives proposed by the Chinese government offer opportunities for many manufacturers of alternative energy especially renewables.

  • Suntech Power Holdings is attractively positioned as a manufacturer of photovoltaic (PV) cells and modules and also provides systems integration services in China of these products.
  • Nuclear Energy has high potential. China will be spending $50 billion to fund nuclear power capacity from 8.7 million kilowatts in 2005 to 40 million kilowatts in 2020. Westinghouse, General Electric and France's Coface,amongst others, have bid for future nuclear reactor production. 16 provinces have announced their plans for nuclear power in the next 12th Five Year Plan.

Agricultural Impact

If greenhouse gases and acid rain were to impact China's basic food staples production, this could support firmer food prices and require larger product imports.

  • Archer-Daniels-Midland and privately held Cargill which are both North American food staple producers that could benefit from higher demand and potentially firmer worldwide prices.
  • Conversely, agricultural exports out of China would be limited. Tyson Foods, Inc. has recently announced its ban of food ingredients from China which could translate into higher ingredient and feed costs.

Domestic Health Issues

  • GlaxoSmithKline's Advair, or Schering Plough and Novartis' jointly-marketed Foradil are popular asthma drugs which could be used the rising respiratory ailment problems in China. Drugs for treating non-small cell lung cancer could see higher demand.

Automotive Sector

The Chinese government is calling for stricter emissions standards and hybrid technology for its rapidly growing automotive sector.

  • Volkswagen's green diesel or Toyota's hybrid cars, amongst others, would benefit.
  • Sanyo Electric, which manufactures hybrid car batteries, would also benefit from this.

Coal-Power Spreads Soot Throughout China's Economy

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Figure 1
Source: UEA WEO 2006, China Energy Report by David Rosen

By late 2007, China will be the world’s leading emitter of greenhouse gases, surpassing the United States. The primary source of these emissions are China's coal power plants. In becoming the world’s industrial production center, economic ambition has dwarfed environmental concerns. Already, China has 622 GW of capacity, of which about 80% is from coal which generate much higher levels of pollutants than oil or gas plants. Industry-lead power demand is 70% of China's energy consumption compared with residential and transportation usage at 10% and 7%, respectively. See Figure 1. Notably, pollution rates are slowing elsewhere in the world as China’s industrial growth is replacing their domestic manufacturing and energy demand. See Table 1.


Fossil Fuel-related CO2 Emissions in China, 1998-2003 (in millions of metric tons of CO2)
  1998 1999 2000 2001 2002 2003
CO2 from coal2,3632,2872,3392,4722,5182,731
CO2 from natural gas475157646972
CO2 from petroleum531566636653686737
Total CO2 from all fossil fuels2,9402,9053,0333,1903,2733,541
Source: DOE/EIA

Table 1

China’s pollution problems are monumental. Acid rain falls in roughly one-third of China’s land mass, which further exacerbates the country's water problem. Particulates generated from China’s pollution are detectable as far away as the Western United States. The effects are huge: the Chinese government recently issued a report estimating wheat, corn, and rice production could drop 37% over the next 50 years. This scenario could impact demand for overseas food imports from Australia, which is closer yet has had drought problems, but also from North America. Companies such as Archer Daniels Midland and Bunge Ltd., large players in the North American agriculture and commodity food businesses, could see increased demand for their products or at least firmer global prices.

Penalties on industry thus far demonstrate a reluctance to slow current economic growth for environmental reasons. In March 2007, Premier Wen Jiabao did note China's missing its energy intensity goals during his annual address to the National People's Congress. However, regulatory change for future development is supporting installation of cleaner energy capacity, remediation efforts at existing plants, and fuel and size guidelines for the rapidly growing vehicle/transportation sector. Notably, by 2030, China is expected to have more vehicles than the United States currently has. This offers opportunities for remediation companies offering cleaner coal technologies such as General Electric's coal gasification, wind power companies such as Vestas, Gamesa, and for nuclear power plant equipment from Westinghouse.

This emissions problem and acid rain increasingly hurts China's domestic agricultural development and food demand, as well as rising respiratory health issues. Regulations impact remediation efforts for cleaner coal plants, demand for alternative energy sources, and even guidelines for size and fuel for vehicles.

Becoming the World’s Largest Industrial Manufacturer Drives Coal Demand

July shaft accident calls attention to lack of safety standards in coal mines

Almost 40 miners were killed in three different accidents in China's coal mines in July 2010. As the story receives national press, China's dangerous coal mines are becoming more apparent. According to official figures, 2,631 coal miners died in accidents in China in 2009, which is a 18% drop from 2008 levels. The main causes of accident appear to be lack of required ventilation and fire control equipment.[1] While the owner of one of the mines was arrested after the accident in July 2010, it is unclear what these accidents mean China's long-term production of coal.[2]


Government caps on coal prices have potential of curbing future profits and production

After prices rose 30% for the first six months in 2010 compared to the same period 2009, the Chinese government has taken measures to cap coal prices. In June 2010, the Chinese government ordered coal companies to keep prices agreed in annual supply contracts stable as the government tries to manage inflation. In May 2010, consumer prices rose 3.1% as the economy rebounded, the fastest pace in 19 months. The Chinese government also wants to help reduce costs at state-owned companies, which rely on coal-derived power as a source of cheap, efficient energy. Although Chinese coal companies are expected to make profits, there is a high degree of uncertainty surrounding the duration of the price caps. Long-term price caps have the potential of squeezing margins for Chinese coal companies.[3]

Methane Capture Systems have the potential of increasing safety, efficiency, and costs

With the help of the Chinese government, Chinese coal producers are modernizing their mines by containing emissions of methane and turning the toxic gas into a source of energy. A byproduct of coal production, methane gas has led to several deadly blasts in China's coal mines. New systems capture and store methane gas and recycle it to produce energy. However, installing these systems is expensive, and many smaller producers have opted out due to costs. To alleviate some of the costs, the Chinese government grants $300 million dollars in subsidies to producers that install these systems. However, many producers are likely to increase installations of CSS systems and methane capture systems as the industry and government face increasing pressure abroad to improve safety and curtail emissions.[4]

Weather and economic rebound have significantly impacted coal consumption in 2009 and early 2010

In August 2009, China’s largest coal producer by output, China Shenhua Energy, reported half-yearly profit that was 14.2% higher when compared to last year. Both revenue and profit rose in the first half of 2009 as a result of domestic sales that were 7% higher and average selling prices that were 10% higher.[5] Because households and plants use air conditioning systems to cool off during the summer, the season is considered the peak season for power consumption. Industrial manufacturers and producers also increased their power consumption during the first half of 2009 as the Chinese economy began to rebound from the global recession beginning in 2007. Although power consumption in China consistently increased for the first six months of 2009, coal consumption remained low for many other countries still experiencing slow economic growth. Sales to Shenhua’s overseas customers declined 43% year-over-year during the first half of 2009 as a result of slower industrial activity.[6]

During the winter of 2009/2010, severe weather conditions have led to coal shortages nationwide in China. During the first few weeks of 2010, coal reserves in 598 major power plants were only enough to last for nine days. Additionally, coal storage in 205 power plants have the potential of lasting for seven days. The cold weather has not only increased demand for electric heat, but severe weather conditions have slowed the production and transportation of coal to power plants. While in the short term coal imports is attempt to remedy these coal shortages, these problems illustrate China's need to expand to energy sources outside of coal-derived electricity.[7]

China's Economic Stimulus Spending Aims to Reduce Carbon Emissions by reducing Coal-Derived Electricity

Through government spending, the Chinese government has committed to getting 6% of its power from non-hydroelectric renewable energy sources by 2020. In particular, the government plans to subsidize its solar industry to increase domestic use. Many local governments of "sunshine regions" such as Gansu, Qinghai and Inner Mongolia are providing economic incentives to companies like Suntech Power Holdings (STP) and Solarfun Power Holdings (SOLF) to produce more solar panels for local use. Additionally, China has raised the number of nuclear plants it plans on completing by 2020 to 100. However, analysts at the Wall Street Journal believe that China has the potential to remain dependent of coal-derived power, which accounted for 70% of the power generated in 2008. In May 2009, Chinese steel company Metallurgical Corp. agreed to provide $3 billion in financing to Australian coal producer, Waratah Coal Pty Ltd in exchange for guaranteed supplies of coal. The financing is for Waratah planned $5.15 billion thermal coal project in Queensland state.[8]

Facing pressure from other countries, the Chinese government has encouraged a relative reduction in greenhouse gas emissions

Before the U.N., China's President Hu Jintao promised to decrease the amount of carbon dioxide emitted per dollar of economic output. Although greenhouse gas emissions have the potential of rising if China's economy keeps growing quickly, Mr. Hu's said that he is focused on capping relative emission. China's reasons for reducing carbon emissions stem from environmental concerns as well as economic trade ones. The U.S. and many countries in Europe have proposed tariffs on imports from countries that do not have carbon capping laws. Both tariffs and domestic carbon taxes have the potential of raising the prices of China's exports, which have been essential to the country's economic growth. As of September 2009, China has enacted two main policies to reduce carbon emissions. The first was to force provincial leaders and the heads of corporations to show improvements in energy efficiency and disclose their carbon dixoide emission information. This policy led to a 10.1% cumulative drop since 2006, and China has the potential of reaching its 20% reduction in relative emissions goal by 2010. The Chinese government has also shown support for both the manufacturing and use of wind and solar energy through subsidies and other financial incentives. Backed by easy credit from the state-owned banks and quick regulatory approval, many of China's biggest companies in terms of revenue have begun new wind and solar projects to power their operations.[9]

In a visit to China, Energy Secretary David Chu pushed for greater action on climate on China's behalf. Mr. Chu warned that China has the potential of adding more greenhouse gas over the next few decades that the U.S. emitted since the Industrial Revolution. In response to Mr. Chu's remarks, Chinese officials said that efforts have been made to cut carbon emissions, but significantly caping its carbon emissions has the potential of stymieing economic growth. In particular, China has begun develop a carbon capture and storage to curtail its coal emissions.

In November 2009, President Obama and President Hu Jintao announced an agreement designed to improve clean energy in both the U.S. and China. The package includes initiatives designed to improve the efficiency of coal-derived electricity and curb carbon emissions. At the forefront of the agreement are several carbon capture and storage (CCS) projects. By bringing teams of U.S. and Chinese scientists and engineers together, both countries hope to reduce the cost of developing clean coal and CCS technologies. The plan is financed not only by the U.S. Trade and Development Agency and the Chinese government, but also incorporates several private energy companies. Peabody Energy, General Electric, Shenhua Corporation, AES and Songzao Coal have all agreed to invest in clean coal and CCS technology. However, the extent of investments from private companies has not been disclosed yet.[10]

China Coal Power Hurt by Weakened demand for Energy early in 2009

China's coal fired power plants made a profit of $196 million in the first two months of 2009, which was 32.6% down from year-over year. Power suppliers, who control power transmission lines and distribution grids, lost $356 million in January and February 2009. A year earlier, power supplies profited $798.8 million during the first two months. Several Chinese power generating firms expect or have reported losses for 2008 due to high coal prices for the first half of the year. Despite March 2009 coal prices that were 44% lower than their July 2008 highs, China Power Investment Corp., which is owned by the Chinese government, reported losses of $43.9 million to $58.5 million in first two months of January. Because the coal prices and the overall need for coal-powered electricity remain uncertain in 2009, many power suppliers in China have refused to sign contracts with coal miners, who are asking for higher prices due to rising production costs.[11] Instead of buying coal through domestic miners, power companies have started to import more coal from overseas. China imported approximately 4.88 million tons of coal in February 2009.[12] For the world's largest coal consumer and producer, coal imports have increased 63% percent since January and 73% since February 2009. Many analysts believe that increasing coal imports has the potential to make power suppliers dependent on coal imports, which would hurt domestic producer's sales and ability to renew contracts. However, China's energy needs are massive, and power suppliers will probably have to rely on coal domestically and internationally produced.

Industrialization and energy intensity

China’s energy demand and intensity has risen dramatically due to its industrialization. This energy demand largely been met with coal-fired power plants, which account for over 80% of domestic power generation capacity. However China’s growth is rapidly outstripping its domestic energy supplies. In 2001, China represented 10% of global energy demand, and met 96% of its demand with domestic energy supplies. By 2006, China represented 15% of world energy demand and is far more reliant on the importation of fuel, significantly affecting world market oil prices. The International Energy Agency (IEA) forecasts that by 2030, China will account for 20% of the world’s energy demand.

Huge Industrial manufacturing demand

Industry consumes a remarkable 71% of China’s energy. This is quite high by developing and developed country standards. In comparison, industry energy consumption is only 49% in India, 31% in Europe and 25% in the US. (See Figure 1). GDP by sector also shows China to highly reliant on industry at 48% as compared with only 27% in India and 20% in the US. Outpacing even the growth of China’s major manufacturing capacity is the growth in its energy demand. From 1978-2000, China’s economic growth was 9% while energy demand growth was 4%. But after 2001, energy demand grew to 13% per annum.

The growth of heavy industry in China is one explanation why energy demand growth is exceeding overall economic growth rates. Driven by both global and domestic demand, heavy industry’s profitability has surpassed that of light industry. In a recent survey conducted by David Dollar and Shang-jin Wei, since 2002 heavy industries such as iron and steel and basic chemicals have been more profitable than textiles and apparel. Heavy industry demand for iron and steel, for example, has been spurred by the urbanization shift in China with over 170 cities having over 1 million inhabitants. In 1995, 29% of China’s population lived in cities rising to 42% in 2004. From 2000-2005, residential housing space grew to 4.4 billion square kilometers to 10.8 billion square kilometers. This urbanization has driven heavy building, transportation, and roads construction.

Environmental Costs

China's future coal needs have the potential of providing incentives to coal companies and foreign governments to build expensive clean coal plants

According to the University of Queensland in Australia, China is likely to import more coal from Australia, Russia, and Indonesia as its supplies of thermal coal decline. However, the report argues that coal supplies from Russia and Indonesia are not sustainable over a long period of time, and China has the potential of resorting to lower-quality coal to power its country. Therefore, the authors suggest that it is in the best interest of countries like Australia, Russia, and Indonesia to develop more efficient, low emission coal power sources to supply China. According to a different report by the Global Carbon Capture and Storage Institute, clean-coal power stations are not financially viable until the carbon price reaches a minimum of $60/ tonne. The report by the University of Queensland argues that China's growing reliance on coal imports and government incentives are capable of making clean coal stations and coal seam gas stations more viable. Australia has allotted $18 billion to projects in the coal seam gas industry, and plans to continue developing carbon capture and storage coal plants.[13] Despite government spending, the success of coal-exporting countries have the potential of depending on new technologies as well as the future demand of coal-importers like China.

2008 Study Aims to Show Economic Costs of Coal Pollution

According to a report by Greenpeace, World Wildlife Fund, and The Energy Foundation, China’s dependence on coal as a cheap source of energy has numerous environmental, social, and economic costs. The report, entitled The True Cost of Coal, outlined the impact water pollution, air pollution, and mining accidents had on the Chinese economy. That pollution not only contaminates the water and air in China but also is the leading cause of death in China; more than a million die each year from pollution-related illnesses. The report estimated that the environmental and social costs associated with the Country’s uses of coal amounted to RMB1.7 trillion in 2007, about 7.1% of China’s GDP for that year. In response to those studies, Beijing is reforming several of its coal facilities to improve safety, quality and efficiency. The Chinese Government also plans to modernize its electric grid and coal transportation railways. Of the Country’s $585 billion stimulus package, $14.6 billion will be spent from 2009 through 2012 to implement ultrahigh voltage power networks. Although power consumption contracted in early 2009, the government plans to maintain investments of $43.86 billion to increase power-generation capacity.[14]

Powering Over 80% of China

China’s exceedingly high energy demand has pushed the demand for relatively cheap coal-fired power. Each week, another 2GW of coal-fired power is put online. While there are other sources of power generation available, China’s ready access to domestic coal reserves means it is significantly cheaper to extract and transport than other fuel. Thus, over 80% of China’s electricity comes from coal. Without filters and other clean-coal technologies, power generation through coal has significant environmental costs. In China’s battle between rapid economic development and profitability versus environmental quality, it is obvious that short-term economic growth and profitability reign. Accordingly, less than 15% of China’s coal plants have desulphurization systems. To install these systems in all coal plants would hike average electricity prices by an estimated 15%. The impact of such filtration systems would be dramatic, however. Some desulphurization systems would help convert sulphur dioxide into gypsum. It should be noted that the Chinese government has subjected heavy coal-burning industries to a sulphur tax, the tax rates are so low that they do not incentivize commercial change.

A Heavy Polluter

The impact from these coal plants worsens air quality, and creates acid rain which then hurts soil quality and food safety. Carbon dioxide emissions from power generation is highest with coal at 900 g/Kwh, gas at 400 g/Kwh, and nuclear at 4 g/Kwh. In 2005, over 25 million tons of sulphur dioxide were emitted from these coal-fired power and coking plants. Soot emissions were over 11.8 million tons and industrial powder emissions were over 9.1 million tons. It is estimated that over 90% of China's electricity sector emissions comes from coal-fired power plants. In North America, coal accounts for 68% of fossil fuel generated electricity but effects 86% of sulphur dioxide and 90% of nitrogen oxide emissions.

The Cost of the Particulate Cloud

There is a range of estimates as to the true economic cost of pollution in China. A World Bank study estimates that China loses about $170 billion per annum due to reduced productivity and healthcare costs, while China's State Environmental Protection Administration issued a report estimating it at $64 billion in 2004. Then, in 2006, the deputy chief of SEPA said that the pollution cost $200 billion per annum also emphasizing the need for environmental protection work on water pollution control and drinking water as well as urban protection. China's 11th Five Year Plan calls for a 4% reduction per annum in energy required per unit of GDP.

References

  1. BBC.com: China coal mine accidents 'kill at least 38', trap more, July 2010
  2. BBC.com: China coal mine accidents 'kill at least 38', trap more, July 2010
  3. businessweek.com: China Coal Stocks Decline on Government Order to Curb Prices, June 2010
  4. Associated Press: Coal-burning China invests in methane capture, November 2009
  5. WSJ: UPDATE: Shenhua Energy 1H Net Profit Up 14% At CNY16.92 Bln, August 2009
  6. WSJ: UPDATE: Shenhua Energy 1H Net Profit Up 14% At CNY16.92 Bln, August 2009
  7. China Daily: Coal supplies run low at power plants, January 2010
  8. China Firm, Ensuring Supply, to Finance Waratah Coal, May 2009
  9. WSJ:Where the Wind Blows on China’s Greenhouse Gases, September 2009
  10. U.S. Department of Energy, November 2009
  11. Reuters.com: China coal-fired power plants' profit down 33 pct, March 2009
  12. China Daily: Feb coal imports reach 22-month high, March 2009
  13. The Australian: China to expand coal vision, October 2009
  14. Green Peace: China's coal crisis, October 2008
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