China's National Development and Reform Commission (NDRC) announced on Friday that coal-fired power producers will receive guaranteed payments based on their installed capacity starting January 1, 2024. The move is part of China's strategy to maintain supply stability while transitioning to variable renewable power sources, particularly as the country faces scrutiny for its expanding coal power capacity ahead of the COP28 summit later this month.
Coal plants across most regions in China will be able to recover approximately 30% of their capital costs between 2024 and 2025, according to the NDRC. These payments will be structured as tariffs paid to coal-fired power producers by grid companies, collected from industrial and commercial end-users through a surcharge.
The capacity payments will be calculated using fixed costs of 330 yuan ($45.25) per kilowatt per year for coal plants. Starting in 2026, the capacity payment rate will be increased to at least 50% in all regions.
China, the world's largest coal consumer, has added 226 gigawatts of additional generating capacity in 2023, with a significant increase in solar capacity (129 GW) and smaller increments in thermal (39 GW), wind (33 GW), and hydro (8 GW). Despite the growth in renewable capacity, policymakers continue to view coal as a crucial backup in the grid system due to the variability of power output from weather-dependent renewable sources and concerns over domestic energy security.
Analysts suggest that the move is essential to ensure the financial viability of seldom-utilized backup coal power, which is activated during demand peaks or insufficient renewable power generation.
While Chinese coal power producer stocks rallied on the news, some observers caution that the policy could risk entrenching inefficient coal power in the country's energy system, despite the rapid expansion of renewable power generation capacity. Critics argue that capacity mechanisms like this may distort market signals and incentivize the construction of new coal power projects.
“Capacity payments should be for all power producers, not only for coal power,” said Zhang Kai, Deputy Program Director for Greenpeace East Asia in Beijing, emphasizing the need for a comprehensive approach to incentivizing all forms of power production.