Coal investments could relax in China amidst economic downturn

The planned coal power assets are tipped to face stranded-asset risk.

The economic downturn caused by the pandemic could risk further loosening the planning process for coal power investments in China, according to an article published in the World Economic Forum.

A circular issued by China's National Energy Administration (NEA) indicated that the government is prepared to relax coal power investments. Currently, China has 99.7GW of coal-fired capacity under construction and 106.1GW being planned.

According to Carbon Tracker analysis, this capacity has an estimated capital cost of $158b and could produce 23 billion tonnes of CO2 if built and operated for its useful life.

“Given this capacity will enter an already oversupplied market, it is inevitable these assets will face significant stranded-asset risk,” said Matt Gray, Carbon Tracker Initiative’s managing director and co-head of power and utilities.

He explained that pouring capital into underutilised assets will at some point cause the rate of return to become low enough that debt obligations can no longer be met. Further, if it dips lower than the cost of capital, the project becomes unviable.

If China pushes with these projects, their utilisation rates will likely be driven below the 4.35% lending rate of the People’s Bank of China, which could further pressure the country’s financial system from the risk of massive defaults, the article argued.

“China must seize this opportunity and act on the risk by deploying stimulus capital efficiently and avoid investing in coal power—which is economically redundant and environmentally disastrous,” Gray commented.