Just over a year ago, Russia’s invasion of Ukraine and the onset of war sent energy markets into turmoil.
Rocketing prices in Europe, which had long been reliant on cheap Russian gas, impacted all parts of the economy and worsened the risk of recession as the continent emerged from the Covid-19 pandemic. In response, Germany, Austria, the Netherlands and Italy restarted coal-fired power plants, sending a signal that some found worrying. Would the European Union, a leader on the low-carbon transition, fail to stick to its commitments in time of crisis?
In fact, recent research has found that coal’s share of the European energy mix has not significantly increased. This is due to falling demand for electricity, and the rapid addition of solar and other renewable capacity. With the low-carbon transition gathering pace, some are predicting that Europe’s power generation from coal and natural gas will drop 20% this year.
China has also faced an energy dilemma. Two years of widespread electricity shortages have highlighted problems with its electricity systems, and driven a new wave of coal power construction. Some 50 gigawatts of new capacity were approved in 2022. That too has caused worries over the implications for the country’s climate commitments.
So, how should China’s expansion of coal power be understood? As its electricity system shifts from central planning to a market-led approach, what issues need to be addressed? And what can China learn from the EU’s accelerating transition?
The EU is using more coal, but less than expected
A recent report from thinktank Ember pointed out that, despite recourse to coal in some nations, its share of EU electricity generation in 2022 stood below the 2018 level, after which the bloc saw two years of sharp decline in coal-fired generation. And while such generation saw a 6.7% year-on-year increase in 2022, reaching 28 terawatt hours, that only meant a 1.5 percentage-point increase in share of the electricity mix, to 16%.
Meanwhile, an analysis by thinktank the Centre for Research on Energy and Clean Air (CREA) and environmental law charity ClientEarth showed that while coal use in the EU increased in the first half of 2022, it started to fall in September, and by November both coal and natural gas generation hit 30-year lows. Those figures were confirmed by Ember’s report.
The CREA and ClientEarth analysis also noted that while the EU reopened coal power plants and extended the lifespans of others earmarked for closure, this only involved 26 facilities, for use as reserves in key moments. The average utilisation rate for those plants is only 18%.
There are a number of reasons the EU’s coal-fired power generation did not see the jump many expected.
First is the demand-side impact of market-led pricing. The leap in energy prices had a knock-on effect on electricity costs and, despite the various subsidies put in place across Europe, most households cut back on electricity use. According to data from Electricity Maps, electricity consumption in Europe last year dropped 4% on 2021 levels.
Second, Europe had a mild winter, meaning lower demand for heating, and thus again electricity. Having reached comfortable levels of reserves, natural gas prices on the continent even fell to below 50 euros per megawatt hour (US$54) for the first time in 18 months. Compare that with the peak of 300 euros per megawatt hour (US$325) in August last year.
Third, solar and other renewables have seen rapid expansion over the last year, reducing Europe’s need for coal. In 2022, installed solar capacity reached 41.4 gigawatts, up 47% on 2021. Wind and solar now account for 22% of the EU’s electricity generation, more than natural gas at 20%. Hydro and nuclear power, meanwhile, contribute another 32%.
Ember estimates that coal and natural gas generation in Europe may drop by 20% in 2023, as the roll-out of wind and solar speeds up and nuclear and hydro generation return to normal. Last summer, Europe was hit by its worst drought in 500 years, causing hydro generation to plummet. Meanwhile, nuclear plants in France came offline for maintenance and other reasons.
2022: Solar’s year
The main factor driving Europe’s leap in renewable energy capacity – and solar in particular – is the REPowerEU plan, released by the European Commission in May 2022.
The plan has clear aims – “ending the EU’s dependence on Russian fossil fuels” and “tackling the climate crisis” – and three major measures: saving energy, diversifying energy supplies, and speeding up the deployment of renewables to replace fossil fuels.
As part of the renewables measures, the commission has called for a doubling of solar capacity by 2025, going on to reach 600 gigawatts in 2030, and launched a rooftop solar plan. It also aims to promote heat pump usage, to simplify approvals processes for renewables projects, and to develop green hydrogen production. This has pushed the target for renewable energy’s share of the overall energy mix by 2030 to 45%, from the previous goal of 40%.
These European targets are good news for China’s solar power industry. According to China Daily, figures from the China Photovoltaic Industry Association show the sector’s exports grew 80.3% last year, reaching US$51.2 billion. The EU was both the biggest and fastest growing market, with exports increasing by 114.9% year-on-year and accounting for about 46% of all solar exports by value.
That trend may continue. Cheng Xiaopeng, head of carbon neutrality strategy with the Shanghai government-owned Shenergy Group, told China Dialogue: “Increases in exports from Chinese solar manufacturers to the EU will continue for some time. Firstly, solar power is no longer so reliant on government subsidies and as costs continue to fall there is greater potential for the market. That’s a long-term positive. Also, the war in Ukraine caused high electricity prices, which prompted new EU policies making investments in solar power more profitable.”
But Cheng also warned of possible impacts from the EU’s Carbon Border Adjustment Mechanism (CBAM), which will come into effect in 2026 and charge an import tax on certain energy-intensive products. The mechanism, he said, “may have some impact on China’s solar manufacturers, as the energy-intensive process for manufacturing silicon [the most common semiconductor material in solar cells] creates considerable emissions. We’ll need to see the tariffs at the time and how competitive the EU’s own firms are.”
Why is coal back in China?
China, the world’s biggest manufacturer of wind and solar power equipment, also saw renewables expand rapidly in 2022.
The country added 152 gigawatts of renewable generation capacity in 2022 – 76.2% of all capacity added in the country during the year – while renewables accounted for 81% of all additional generation, according to recent National Energy Administration (NEA) figures.
But despite the dazzling data, China also started work on 50 gigawatts of coal power last year, a jump of more than 50% on 2021. And, as in Europe, that led to criticism and concern about weakened global efforts on climate change and the risk of missing national commitments.
Yang Muyi, associate director for renewable energy at the thinktank Asia Social Policy Institute, thinks China has practical reasons for building new coal power plants alongside renewables. “As a mature economic bloc, Europe has transitioned from an industrial economy to a service economy, and electricity demand is effectively stable,” he told China Dialogue. “But as an emerging economy, China is still seeing demand for electricity grow quite quickly. It would be hard to meet that rising demand purely through building more wind and solar.”
China has seen two years of major power shortages, meaning it had no choice but to build new coal powerYang Muyi, Asia Social Policy Institute
Yang offered some numbers: between 2015 and 2020, China saw demand for electricity grow by 1,900 terawatt hours (TWh) – more than India’s total generation in 2020 (1,533 TWh). And while green electricity has made major progress, additional green generation (805 TWh) is not much greater than Korea’s total annual power generation (606 TWh).
Another important reason is the electricity shortages China suffered in both 2021 and 2022. Maintaining electricity supplies has become the top priority for policymakers.
“China has seen two years of major power shortages, meaning it had no choice but to build new coal power,” Yang commented.
Despite the recent expansion, coal power’s share of capacity and generation is still falling. Data from the China Electricity Council (CEC) show that installed non-fossil-fuel generation capacity had risen to 49.6% of total capacity in 2022, while coal power had fallen by 2.9 percentage points, to 43.8%. Thermal power generation as a whole rose 0.9 percentage points, but its share of all generation fell by 1.7 percentage points, to 58.4%. One statistic worth watching is the average utilisation of coal-fired power plants: it fell slightly in 2022, to 4,594 hours, down eight hours on 2021.
Chinese outlet The Paper pointed out that increasing renewables capacity and generation is pushing down utilisation rates for coal power.
“Don’t look at how many coal power plants are being built – that’s not very important,” Yang Muyi said. “What’s important is how much of that capacity is being used and for how many hours.
“As in Europe, China’s new coal power plants are in large part there to complement renewables. When renewables can’t meet demand, or fluctuations in renewable generation need to be evened out, they are fired up.”
Combining national circumstances and market reforms
There is perhaps a more important issue here: is the electricity system as a whole flexible enough to keep up with the growth of renewables? Making it so will require reform to the system and more flexible markets.
China’s system is more centrally planned, while in Europe the market plays a larger role, and its grids are the most interconnected in the world. That makes Europe better able to deal with the fluctuations in renewable generation and provides more room for manoeuvre in time of crisis. Many have therefore suggested that the EU’s electricity markets can serve as a model for China’s reforms.
Simply trying to replicate the European approach is unlikely to be successful. Markets don’t operate in a vacuum.Yang Muyi, Asia Social Policy Institute
Yang Muyi stressed that reforming electricity markets takes time: “It’s not something that’s done overnight, particularly as there are political and social considerations. Europe has a strong tradition of free markets, with regulators playing some role, so their electricity market reforms have been quite successful. Without that social and cultural foundation, simply trying to replicate the European approach is unlikely to be successful. Markets don’t operate in a vacuum.”
Yang pointed out that some developing nations have focused on privatisation, without strengthening regulation or competition. That has improved efficiency, but not benefited the public. Electricity prices remain high, supplies unstable, and rural access to electricity limited.
Even the highly flexible European markets can be rocked by a black swan event like the war in Ukraine. Higher electricity prices affected all aspects of life, with many forced to cut back on other spending and electricity use. Some even returned to burning wood for heating. But it was those responses that helped Europe avoid a jump in coal use.
Shi Yi, a writer and researcher at Ecocycle, a Shanghai-based NGO focused on energy and circular economy, told China Dialogue that a crucial reason the EU’s green transition was able to withstand the short-term shock is a consensus on the need to speed up this transition.
“That makes the public more willing to pay the costs associated with the transition, so even if there are setbacks along the way, the overall process continues,” Shi explained. “And the EU puts a lot of emphasis on help for vulnerable groups.”
Yang Muyi thinks China needs to take its own circumstances into account, rather than adopting the European approach wholesale. China’s overall plan for the transition, the so-called “1+N” policy framework, is a good start, he said. “The situation, as I understand it, is that China is planning to limit coal power capacity and reduce generation from 2025, with both capacity and generation to reduce from 2030. The direction of travel is already clear.”
“However, it’s hard to say if the anticipated targets will be met,” Yang added. “The energy transition involves complex social and economic changes, and nobody can come up with a perfect plan on day one. The only option if we are to succeed is to learn as we go, enriching and improving previous plans.”