China's Big 5 power producers face uphill battle in meeting peak emissions targets

China's five largest independent power producers, or IPPs, who account for around 44% of the country's power generation capacity, have set ambitious targets to peak carbon emissions by 2025 or earlier, but face several obstacles in reaching this lofty goal.

While they need to maintain energy supply to support economic growth, the utilities also lack a dedicated roadmap for coal plant decommissioning, face high costs of renewable capacity additions and a nascent carbon trading market.

China's power producers will be key to the national target of peak carbon emissions by 2030, pledged by President Xi Jinping in his speech at the United Nations General Assembly in September 2020. Power utilities in Japan are already setting net zero targets for 2050, and Chinese IPPs may have to follow suit if Beijing's net zero 2060 objective is to be met.

Statistics from China's top energy planner, National Energy Administration, or NEA, show that the power sector alone accounts for 41% of China's CO2 emissions, which is one of the reasons that the nationwide carbon emissions trading system will first target the decarbonization of power.

China's IPPs include the Big 5 — Huaneng Group, Huadian Group, China Energy Investment Corp (CEIC), State Power Investment Corp (SPIC) and Datang Group — who are some of the world's largest power producers and accounted for 44% of China's total installed generating capacity of 2.2 TW by the end of 2020, official data showed.

The Big 5 were formed after power sector reforms designed to decentralize power generation and separate electricity production from transmission and distribution.

In addition to the Big 5, there are four smaller generation companies -- SDIC Huajing Power Holdings (SDIC Power), China Shenhua Group Guohua Power Branch (Guohua Power), China Resources Power Holdings and China General Nuclear Power Group -- and numerous provincial power producers, that together make China the world's largest electricity producer.

So far, the Big 5 have been ahead of the curve in aiming for peak emissions by 2025 even before national pledges were announced. They also announced targets for renewables capacity growth and a higher share of clean fuels in their energy mix by 2025, according to S&P Global Ratings data.

The companies define clean fuels as wind, solar, hydro, nuclear, biomass, geothermal and natural gas, but more than half of their capacity still comes from coal.

No clear plans for coal plant decommissioning

There are no signs for the Big 5 to accelerate their coal plant decommissioning, and the vast majority of coal-fired plants will not retire until 2040, according to S&P Global Ratings' report dated April 19 (titled Energy Transition in Asia-Pacific: A Marathon, Not a Sprint).

China's coal-fired generation capacity reached 1,080 GW by end-2020, accounting for 49.1% of total installed capacity, albeit falling below 50% for the first time, according to official data. In 2020, renewables grew faster than coal, with newly installed grid-connected wind and solar capacity reaching a record high at 71.67GW and 48.2GW respectively, official data showed.

China added about 40 GW of coal fired capacity, a year-on-year growth of around 3.8%, over the past one year alone, the highest annual gigawatt addition since 2016, according to Ratings.

There are several reasons for the lack of a decommissioning roadmap – the coal fleet is young, coal-fired capacity is vital as baseload and overarching energy security concerns. In fact, Premier Li Keqiang said on May 19 that China should take advantage of its rich coal resources and urge key coal companies to boost supply, while increasing renewables simultaneously.

"Current growth in coal capacity is mainly from previously approved projects. New capacity additions are in renewable energy for the top IPPs. In addition, China's coal fleet is quite young – majority below 15 years with SOx and NOx emission abatement technologies, leading to reduced environmental impact," Apple Li, Director and Lead analyst for Global Infrastructure Ratings at S&P Global Ratings, said.

Renewables costs and carbon trading

Ratings' associate director Yuehao Wu said system costs of renewable power supply remain high due to inevitable long-distance power transmission expenses and disturbance to grids induced by intermittency.

"East and southeast China have the fastest economic development and highest energy demand, while utility-scaled solar and wind are concentrated in the north and northwest with better resources," Li said.

Battling intermittency is also an issue for IPPs, especially with provinces like Hunan, Guangdong and Zhejiang all expecting peak load shortages this year, Yan Qin, lead carbon analyst with Refinitiv, said.

"Confronting such peak load shortage, when people assess from the economic perspective, building coal plant (for baseload) is then often preferred to fill the gap," Qin said.

To relieve the cost burdens green financing is becoming increasingly popular and green bond issuance is likely to break records this year -- Data showed four of the Big 5 (Huaneng, Huadian, CEIC and SPIC) have issued "carbon neutrality bonds" on Shanghai Stock Exchange worth Yuan 9 billion ($1.4 billion).

Still, around Yuan 60 trillion ($9.2 trillion) will be needed until 2060 to decarbonize China's power sector, according to a recent study by investment bank CICC.

The Big 5 utilities could not be reached for comment.

Meanwhile, Li said China's nationwide ETS that starts trading this year will have limited near-term impact. "The current allocation method for carbon allowances are quite loose, which is not difficult for majorities of the young coal fleet to meet," she added.

Table: Renewables and clean fuel targets of China's Big 5 independent power producers

Note: Clean fuels includes renewables, nuclear and natural gas

Source: S&P Global Ratings