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June 09, 2014

Coal Fired Power Consumption Slowing in China
    by Robert Kropp

Carbon Tracker and the Association for Sustainable and Responsible Investment in Asia report that investors need to consider the implications of significant stranded assets in China's coal sector. -- For years, coal has been the fuel of choice to power China's rapidly growing economy. The inevitable result has been severe environmental stress in the form of air pollution, to an extent that the nation's sustainability is threatened.

In a new report, Carbon Tracker and the Association for Sustainable and Responsible Investment in Asia (ASrIA) document the extent to which China has decoupled coal-fired power generation from it economic growth. The decoupling is pronounced enough, the report states, that as much as 40% of total installed coal-fired capacity could be stranded by the end of this decade.

Furthermore, the report continues, "thermal coal reserves and resources constitute significant future supply that could be at risk from an early-peaking demand future." The report urges investors to reassess "exposure to assets with the greatest value-at-risk as a result of stranding."

The reason for the current decoupling of coal power from economic growth are several, beginning with China's centralized government. In response to the nation's air pollution crisis, the government has established ambitious goals for reducing reliance on coal by 2020. "Further environmental regulatory developments are likely," the report states, "with the policy landscape continuing to shift against contributors to these environmental problems."

China’s shale gas reserves are the largest of any nation in the world, and the report details how the nation is turning to natural gas as an alternative to coal. Also, "Significant progress is being made with renewable energy sources, particularly solar and wind where the rate of installations is increasing at a record level."

The implications of such a scenario for investors are clear. Recent increases in domestic production leave exporters, which previously supplied the Chinese market, with excessive supplies of coal. And while Chinese companies have 20 years’ worth of proven reserves booked already, they spent $21 billion on further exploration in 2013.

The report concludes with recommendations for investors, policymakers, and companies. Most of the recommendations call for transparent reporting by companies of potentially stranded assets on their books.

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