China's coal phase out plan still unclear amid ample reserves: Oxford Institute

China's coal consumption is set to fall but the pace at which it will phase out coal is unclear amid a colossal surge in energy demand on the back of rapid economic growth, according to a research paper published at the Oxford Institute for Energy Studies June 25.

With abundant local reserves, coal offers China flexibility in its energy supplies and a significant hedge against energy insecurity, even as its use undermines emission reduction targets, the paper published by Michal Meidan, head of China energy research, noted.

Citing International Energy Agency, S&P Global Commodity Insights recently reported that about 40 GW of new coal plants were approved in 2022 -- the highest since 2016 -- with almost all of these being in China. Moreover, of the $150 billion investment in global coal production and supply expected in 2023, nearly 90% will likely be in the Asia-Pacific region, notably in China and India as they look to expand production and develop new coal mines.

"Fossil fuels are prevalent in many countries' energy supply structures, but China is heavily dependent on coal, a factor that contributes to the country's large emissions profile, but also enhances its energy independence," the paper noted. "Despite impressive growth in renewables since 2000, fossil fuels still accounted for 83% of China's primary energy mix in 2022, with coal accounting for 56%."

Imports may take a hit

Over time, growing pressure to phase out coal, as articulated in China's dual carbon pledge to peak CO2 emissions before 2030 and reach net-zero by 2060, means that China will cap coal capacity additions and gradually phase out coal usage, according to the paper.

China, the world's largest consumer and producer of coal, produced a record 4.5 billion mt coal in 2022, 9% higher than the output in 2021, while imports fell 9.21% from 2021 to 293.20 million mt amid increased domestic output as it was looking to lower its dependence on imports and meet most of its requirements through domestic production.

"Notwithstanding its environmental commitments, China's abundant domestic coal reserves provide a significant hedge against energy insecurity. China's reliance on imported coal is likely to remain limited and even to fall considerably," the paper stated. "Coal is therefore not a geopolitical vulnerability for China. On the contrary, it offers China optionality and supply security, even though this comes at an environmental cost."

China has largely been buying cautiously from the seaborne market for nearly 10 weeks amid robust domestic production and lower-than-expected industrial demand, leading to a decline in overall Asian coal values.

The Indonesian 4,200 kcal/kg GAR, the most liquid grade in the Asian thermal coal market and sourced in good quantity by China, was last assessed by Platts, part of S&P Global, at $52/mt, lowest so far this year. Platts also assessed the FOB Newcastle 5,500 kcal/kg NAR at $85.05/mt June 23, while Richards Bay 5,500 kcal/kg NAR was priced at $81.60/mt, both record lows year-to-date.

Coal consumption rises, fuel switch uncertain

Stating that the coal consumption declined in 2015 and 2016 due to the country's growing efforts to tackle local air pollution and rebalance the country's economic structure toward a more consumption-led development model, the paper said that since 2017, Chinese coal consumption has been rising again as energy-intensive manufacturing sectors rebounded and heavy construction activity grew.

"In the wake of the COVID-19 pandemic, China's economic expansion and subtle shifts in government policy, given renewed concerns about energy security, have led to a surge in coal consumption."

Meanwhile, as Beijing looks to phase out coal use, the need for gas in China will increase but the size and speed of fuel switching to gas is extremely uncertain, and will depend on a number of factors including the use of technology to offset emissions, the speed with which renewables are deployed and the availability and cost-competitiveness of gas.