China could face $90.4bn in stranded coal-fired power assets by 2030 if current investments are allowed to go ahead, a new report has found.

In its Coal transitions in China’s power sector report released this week, the Paris-based Institute for Sustainable Development and International Relations (IDDRI) said China’s goal to get 42 per cent of its power from renewable energy sources by 2030 could lead to the government needing to dispose of a glut of unprofitable coal power plants.

And as coal-fired plants face falling electricity demand, leading to lower margins and growing competition with renewable sources, current plans mean China is set to add another 120 GW of coal-fired capacity by 2020.  

According to the IDDRI, while the nation has added an average of 60 GW per year since 2013, with 50 GW added in 2016, load factors have fallen by 8.5 per cent.

China’s investment in coal-fired power to date has been undertaken “despite the manifest issue of overcapacity” and has been “tremendously wasteful”, the report said, leaving the sector “already at high risk of generating stranded assets, independently of future climate policy”. According to the report, just 20-25 per cent of existing coal-fired plants built after 2005 will be able to recoup their investments by 2030.

“From a pure political economy perspective, it may be difficult to continue to expand low carbon electricity at the rate required without parallel policies to manage the transition out of high-carbon forms of electricity generation,” the report said. “In this context, the issue of stranded assets is crucial.

“Furthermore, excessive capital impairment both on the utility and financial sector side may reduce the capital available to be invested in low-carbon sources.”

Since 61 per cent of installed coal-fired capacity is entirely state-owned and another 33 per cent is mostly state-owned, the report recommended that the government take steps to slow further investment in conjunction with phasing out coal power.

It said that since China’s state-owned firms can accept lower returns on investment than commercial players can, the government should use this advantage to engineer an earlier transition out of existing coal-fired generation while opening up state-owned firms to market incentives for new investment.

It also said China should implement further binding incentives to rein in the investment boom in coal-fired power. This year’s announcements of freezes on coal-fired plant investments “are a step in the right direction”, it said.  

And it added that “there is a strong financial case” to strengthen policy tools to retire old plant, such as setting 2030 targets for retirement of its older fleet and a reduction in installed coal plant capacity, which currently stands at 1027 GW.  

“We estimate that by 2030, around 22 per cent of capacity built since 2005 would be amortized and could be considered for retirement, after a reasonable return on investment,” IDDRI said.

In addition, investments need to be made to enable the coal-fired power sector to play a role, and be adequately remunerated for it, in balancing the grid in a high renewables system. Fiscal and/or financial support “may be required to support the flexibilization of the coal-fired power fleet”, the report said.

Without such measures, IDDRI warned that China’s “expansion of low-carbon electricity in line with a 2°C pathway … appears difficult”.