China’s power sector: risk of stranded assets and retirement pathways

[Press release - 14.11.2017]

Paris, November 14th – The Institute for Sustainable Development and International Relations (IDDRI) released today a ground-breaking new study on stranded assets in the Chinese coal-fired power sector, China’s power sector: A plant-level assessment of stranded assets and retirement pathways. The key findings of the report are:

  • The Chinese coal-fired power sector is already at high risk of stranded assets. Cumulative investment in coal-fired power of some 500 billion USD2015 since 2005 is estimated to generate a net present value of negative 14.2 billion USD2015, under a current policy trajectory. Combining policies to manage the existing coal-fired power capacity and accelerating the deployment of low-carbon electricity in line with the 2°C goal would reduce these stranded asset risks by 11.8 billion USD2015.

“The results surprised us: they show that higher climate ambition would actually reduce financial risks for the coal sector”, said study co-author Oliver Sartor, Energy and Climate Fellow at IDDRI.

  • The Chinese banking sector can manage the stranded asset risk of a well-designed 2°C pathway. In the Managed 2°C pathway (see the four scenarios in the Study), the banking sector exposure to stranded asset risks is estimated at 33.0 billion USD2015, compared with the loan-loss provisions of the Chinese banking sector in the order of 370 billion USD.

“We find this an encouraging result: it means that there is no financial reason to delay accelerating the low-carbon transition in China’s electricity sector”, commented study co-author Nicolas Berghmans.

  • State-owned enterprises (SOEs) can transition faster out of coal than purely commercial players. Lower costs of capital and profitability expectations can allow SOEs to transition faster out of coal, because their plants can be amortized much faster than purely commercial plants.

“The key question is whether the Chinese authorities can change incentives for SOEs to accelerate their transition out of coal power. A coal-sector ‘bad bank’ could be considered to house stranded assets”, argued study co-author Thomas Spencer, associated researcher at IDDRI.

  • Managing the transition out of existing coal should move to the forefront of global climate and energy policy. The situation of coal-sector stress in China will be faced by other countries, and they should prepare for managing transition in the coal power sector.

This study shows we need a change in mindset for climate policies: it is no longer enough to support low-carbon sectors; we need to manage transition out of high-carbon sectors, concludes IDDRI Director, Teresa Ribera. “Discussions at the global climate negotiations at the ongoing COP23 need to focus on the underlying levers of transformation as much as headline emissions targets” (see recent IDDRI’s Policy Brief on this topic).   

The Coal Transitions project

This report on stranded assets in China is an output of the “Coal Transitions Project: Research & Dialogue on the Future of Coal”, coordinated by the Institute for Sustainable Development and International Relations (IDDRI) and Climate Strategies.

Other recent publications:

- An Issue Brief presenting the project: Strengthening national coal transitions to raise climate ambition

- A synthesis report on the experience of mining regions (in Europe and United States) in transitioning away from coal, which can be downloaded here:  Lessons from previous Coal Transitions