The announcement by China’s National Energy Administration (NEA) in October to limit the construction of coal-fired power facilities across the country is underpinned by the government’s efforts to reduce pollution and overcapacity, amid stalling power demand and continued growth in renewables capacity.

Among the announcements by the NEA is to postpone the construction of some coal-fired plants that have already secured approval and to cap the capacity of some large coal projects under construction in some of the coal-heavy provinces in the country. As such, if the NEA is successful in the implementation of its policies, this will help to address the thermal overcapacity in the market and reduce coal consumption.

By extension, the reduction of coal-fired power generation will pave the way for alternative fuels to gain share in the power mix, including renewable energy — which has previously faced problems of idling, due to integration limitations in the grid system, but also due to coal being prioritised for power generation over new renewables capacity.

Despite the strong rhetoric from the NEA, we highlight that there is still an ongoing disconnect between the government's national energy policy and coal capacity additions at the provincial level — and this has the potential to undermine the NEA’s coal-curbing efforts. For example, centralised government policy is focused on reducing coal consumption, whilst at the same time boosting the clean-energy sector.

However, coal capacity has continued to come online over the last couple of years, as provincial governments capitalise on cheap coal prices, favourable tariffs and their authority to approve power plants in their own provinces.

That said, we expect the Chinese government to push on with its coal-reduction policies and apply more pressure on provincial leaders, despite high provincial-level resistance.

The government's centralised coal-reduction efforts, coupled with the increased adoption of renewable energy — and also “cleaner” fuels such as nuclear power — will lessen coal's dominance of the power mix over the coming decade.

We expect coal-fired power generation to contract in 2016 and 2017, with coal contributing around 55% to the total electricity mix by 2025 — from a contribution level of about 70% in 2015.

Georgina Hayden is head of energy and renewables at BMI Research

Wind

'China set to turn up heat on provinces over new coal'