Bloomberg New Energy Finance was founded in 2004 to track the decades-long, multi-trillion dollar transition to a lower-carbon, more distributed energy system. Over the years we have added services to our core coverage of wind, solar, bioenergy and carbon markets, including “energy smart technologies” such as smart grids and energy efficiency, and power markets analysis. Our most recent addition is coverage of water markets and technologies. An examination of China’s power utilities and their water exposure shows why.
China’s “Big Five” state-owned power generators have more than 500 gigawatts (GW) of thermal (and mostly coal-fired) plants in their portfolios – and along with a massive push for new renewable energy, their coal-fired capacity is still rising rapidly. Last year, China added nearly 50GW of new thermal plants, out of a total new capacity addition of 80GW, or the same capacity as Australia’s total electricity system. China consumes nearly half of the coal burned in the world, 3.9bn tonnes per year. Its power needs are still growing, and it has more than a century of coal reserves left. Clearly, the climate impacts of China’s thermal power expansion are inescapable today.
Much of today’s analysis of the power sector focuses on how the power sector shapes the environment or climate. But what of the reverse – how does the environment and climate shape the power sector? When we look at China’s Big Five and their 500GW of thermal power assets, we see an enormous environmental impact on the power sector…and in the first order, that impact comes from water.
China’s coal-fired generation and coal mining withdrew 98bn m3 of water in 2010 or 15% of its total freshwater withdrawals. If the sector expands … “business as usual” scenario, the country will see 25% of its water going solely to power plants by 2030.
Chinese Utilities in Hot Water Report 2013, Bloomberg New Energy Finance
China’s power utilities are greatly at risk of production and revenue disruption due to their inescapable water requirements. Water is essential for the cooling systems of many coal plants, which usually rely on open or even “once-through” cooling systems which withdraw enormous amounts of water. Coal mining also requires water, and China’s coal-fired generation and coal mining combined withdrew 98bn cubic metres of water in 2010 or 15% of its total freshwater withdrawals. If the sector expands according to Bloomberg New Energy Finance’s “business as usual” scenario, the country will see 25% of its freshwater use go solely to power plants by 2030.
Compounding the importance of water is an inescapable fact of decades of power sector planning: power plants have been built where the population and industry are clustered, rather than where water resources are plentiful. This artifact of central planning means that North China, with 60% of the country’s thermal power capacity, has only 20% of its renewable freshwater supply.
The result for the country’s Big Five is no less striking. These companies are all heavily exposed to water supply disruptions. Huaneng and Datang each have 84% of their assets located in regions that are moderately to severely water-scarce. (Click here for key findings from BNEF’s ”Chinese Power Utilities in Hot Water”)
The least exposed of the Big Five, Guodian, still has 65% of its generating capacity at risk of water disruption. Water is a fundamental variable for these companies’ long-term operational and financial health. And the implications for these companies, and for China itself, are profound. So too are the three major strategic choices that could mitigate this risk:
- The best way to cope with the looming water crisis is geographical and technological diversification. Thermal plants in wet regions such as Guangxi, Fujian, and Jiangxi (all in China’s south) will be less susceptible to operational disruption than assets in the dry North. And renewables such as wind and solar do not depend on water and will become an increasingly attractive option for utilities for water reasons, in addition to economic and environmental reasons. However, building new capacity far from industrial and population centres requires billions of dollars of new infrastructure to wheel power to regions where it is needed – and wholesale population and industrial shifts towards wetter regions are unlikely.
- New plants can be built with closed-cycle and air-cooling systems, which withdraw much less water than once-through systems. However, these systems necessitate a trade-off in thermal efficiency (reducing overall plant efficiency by 3-10 percentage points) and result in higher greenhouse gas emissions per megawatt-hour of power. So, greater water efficiency would come at the expense of greater emissions and a net loss in power output for every unit installed.
- A final, more drastic option would be a forced conversion of existing once-through plants in severely water-stressed regions to closed-cycle cooling systems. This would impact 100GW of power plants, cost $20bn, and reduce total system capacity by 10GW due to lower efficiencies.
None of the choices above is ideal, and all have inescapable implications. And unlike the other aspects of power sector planning, water is the one variable that has so far resisted market pricing. Economically extractable coal reserves will fluctuate based on market price. The cost of power from renewable resources will decrease as the capital costs of wind and solar decrease, and their efficiencies increase. Water, however, has been underpriced for decades in China as a government subsidy to cities, farms, and power generators. This underpricing means that none of these three user groups have had adequate incentives for long-term planning. It also means that water stress continues, and that at some point in the future, something will have to give. One sector will have to yield its water usage to another. The question now, perhaps more pressing even than the three power sector alternatives above, is, “What will give first? Which user group will be the first to decrease its water withdrawals: cities, agriculture, or power?”
The question now, perhaps more pressing even than the three power sector alternatives above, is, “What will give first? Which user group will be the first to decrease its water withdrawals: cities, agriculture, or power?”
So much of the analysis and discussion of China’s extraordinary power sector expansion focuses on what hundreds of extra gigawatts of coal-fired power mean for emissions. But, it is time to focus too on what water, as an environmental constraint, means for these assets, their owners, and a fundamental allocation of resources in the world’s second-largest economy.
My colleagues and I have begun framing this question – and others like it – with a new way of looking at energy investment. Last month, Bloomberg New Energy Finance held its sixth annual Summit, gathering 800+ policymakers, financiers, power generators, and technologists to discuss and debate the future of our energy system. I am part of our annual Summit planning committee, and was the author (alongside our chief executive Michael Liebreich) of the Summit theme, “The New Energy ROI: Resilience, Optionality, Intelligence”. As Michael and I posited, a resilient energy system requires not business as usual or best-case scenario planning, but rather planning for the worst possible outcomes. It also means an energy system planned around future disruptions due to economic or resource constraints, not a system that collectively hopes that such disruptions will not occur. Hopefully, thinking about resources and power generation in China within this framework can help guide long-term planning, and perhaps even keep some of its biggest corporations and an essential driver of its growing economy out of hot water.
- Water for Coal: Thirsty Miners? With up to 83% of China’s coal reserves in water stressed & scarce regions, the recent CLSA report asks if there is enough water to grow coal production. If not, what are our options? Debra Tan expands
- China: No Water, No Power HSBC asks if China has enough water to fuel its power expansion as China plans to add more than the total installed power capacity of the US, UK & Australia by 2030
- Water: Shaping China’s Food & Energy Choices Debra talks about key issues & new trends surfacing from the Fortune Global Forum roundtable and why she thinks the 12FYP Strategic Emerging Industries are the real Magnificent Seven