China Inc has energy choices other than coal

The FT reports China’s new coal power plants are uneconomic (Report, FT.com, June 30). However, what may seem “uneconomic” under a traditional plant-level analysis is potentially attractive from the country-level economic perspective that is arguably more relevant for China, particularly given the prevalence of state-owned enterprises.

China’s power producers, as well as construction companies, coal suppliers and utilities, are generally affiliated SOEs within what can be described as “China Inc”. Prices for inputs and outputs faced by producers are principally determined through government regulations and “non-arms-length” transactions between two SOEs. And it is largely this government-driven pricing scheme which creates the FT-referenced “stranded assets” risk for SOEs on their new plants.

But, at its core, power generation is one activity within the broader effort of China Inc to grow the country’s economy and maintain government control over strategic assets. A preliminary analysis I co-authored (under a programme studying SOEs and climate action) indicates new coal plants can indeed generate an economic benefit for China given the value of electricity to consumers and assuming local environmental impacts are managed. However, the analysis also indicates that incorporating a moderate carbon price on plant emissions would eliminate this benefit, thereby rendering the project uneconomic from China’s perspective. Investing in renewables potentially provides a stronger economic return.

China may be overinvesting in new coal generation, but the key marker is less that these plants are unprofitable for the SOE owner, but rather that China Inc has better alternative power investments to make to advance the country’s economic interests.

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