Solar Power Can Help Solve China’s Coal Power Dilemma

China’s electricity demand rose by 14% in the first half of 2021, compared to the same period in 2019, when the pandemic had not yet affected the country, according to Ember’s analysis of electricity statistics published by the China Electricity Council (CEC).

The same period also witnessed a considerable rise in generation from ‘clean’ energy sources: 22% for nuclear, 44% for solar, and 45% for wind. This rise, though impressive, was only able to meet approximately 40% of the incremental electricity demand. This, together with a less-than-expected hydro generation, pushed up China’s coal generation, leading to higher operating hours of coal capacity (up 254 hours from the previous year) – a reverse of the declining trends in recent years.

China’s surge in coal power put many generators under growing financial pressure, as coal prices hit record highs this year. Currently, the country’s electricity prices are determined via a ‘base price + floating (up or down)’ mechanism, in which the floating range can either go 10% above or 15% below the base price. However, prices were not allowed to go above the base price in 2020, which was later extended into 2021 as a temporary measure to ensure price stability for commercial and industrial consumers. This means that generators (or energy retailers) will bear most of the costs associated with rising coal prices and cannot pass through these costs to the end-users.

The costs of purchasing coal for some large generating companies in China increased by 50.5% in June this year, a report by China Electricity Council has found. This cost hike put many generating companies under pressure to stay afloat. Wang Ke, a researcher at Renmin University of China, said in an interview with China Energy News that nearly 60.6% of the coal-fired power plants in China made a loss.

In some regions where wholesale markets for electricity trading have been established, the spot prices soared in the first half of 2021, reflecting the rising costs of coal power. However, energy retailers in the markets cannot pass through the high spot prices to the end-users due to the presence of price controls (i.e., no upward floating). This caused huge financial losses for these companies, and some were even on the verge of bankruptcy.

Of the 142 energy retailers in the Guangdong electricity market, only 19 made a profit in the first half of 2021, according to a report by the market operator, Guangdong Power Exchange Center. In June this year, several energy retailers jointly sent a letter to the Guangdong government, asking to suspend market trading under growing financial pressure. Similar phenomena have also been observed in other electricity markets across the country.