China Guarantees Payments to Coal Power Producers Amid Transition to Renewable Energy

Under the new policy, coal plants across most of China's regions will be able to recover approximately 30% of their capital costs between 2024 and 2025.

China’s state planner has announced a significant policy change aimed at supporting coal-fired power producers while the country transitions to renewable energy sources.

Starting on January 1, 2024, these producers will receive guaranteed payments based on their installed capacity, a move that was widely anticipated by analysts.

This development comes as China, the world’s largest coal consumer, faces increasing scrutiny for its expanding coal power capacity, just ahead of the COP28 summit scheduled for the end of the month.

Under the new policy, coal plants across most of China’s regions will be able to recover approximately 30% of their capital costs between 2024 and 2025.

The National Development and Reform Commission (NDRC), the state planner, explained that these payments would be made in the form of tariffs paid by grid companies to coal-fired power producers, with the costs ultimately collected from industrial and commercial end-users through a surcharge.

The capacity payments will be calculated based on a fixed cost of 330 yuan ($45.25) per kilowatt per year for coal plants.

Beginning in 2026, the capacity payment rate will increase to at least 50% in all regions, as outlined in the notice.

While the NDRC did not immediately respond to Reuters’ request for comment, this move is seen as crucial to ensuring the financial sustainability of backup coal power, which is essential for meeting demand peaks and addressing energy security concerns in times of insufficient renewable energy generation.

China has made significant strides in expanding its energy generation capacity in 2023, with a notable increase in solar capacity, followed by smaller gains in thermal, wind, and hydro power.

Despite the growth in renewables, the intermittent nature of these sources and concerns over energy security have kept coal power as a crucial part of the grid system, leading to continued construction of new coal-fired power plants.

Analysts view this policy shift as a way to enhance grid flexibility and accommodate intermittent renewable energy sources without compromising stability or security.

However, some observers caution that it could also perpetuate inefficient coal power in China’s energy system, potentially hindering the country’s rapid expansion of renewable energy generation capacity.

Chinese coal power producer stocks saw a rally in response to the announcement, with companies like Jinneng Holding Group, Jiangxi Ganneng, and Datang Huayin Electric Power Co experiencing significant increases in share prices.

While this policy aims to support coal power producers during the transition to renewable energy, it also raises concerns about market distortions and the incentive for state-owned enterprises to continue building new coal power projects in the short term. ]

Critics argue that capacity payments should be available to all power producers, not just those in the coal sector, to encourage a more balanced transition to cleaner energy sources.