By Rishikesh Ram Bhandary and Cecilia Han Springer
Although Chinese President Xi Jinping announced last year that China will no longer build new coal-fired power plants overseas, the Boston University Global Development Policy (GDP) Center’s China’s Global Power (CGP) Database shows 60 coal plants around the world with Chinese development finance or foreign direct investment are currently operational, representing 41 gigawatts (GW) of generating capacity.
To mitigate local air pollution and the global climate impacts of operating coal plants, several proposals for the early retirement of such plants have recently been issued. The Just Energy Transition Partnership with South Africa was announced at the 2021 United Nations Climate Change Conference (known as COP26) last year, wherein the UK and other developed countries pledged to help South Africa transition away from coal. The Asia Development Bank also announced at COP26 a new program to buy and retire coal plants in Southeast Asia, while Germany has indicated it may focus on a similar coal phase-down mechanism during its 2022 Group of 7 (G7) presidency.
Given its role as a major overseas energy financier, what role can China play in phasing-down coal in the Global South? In a recent World Development Perspectives special issue, we examined the possibilities for the coming coal phase-down in Belt and Road Initiative (BRI) host countries.
Understanding why and how policymakers incentivized coal-fired power generation is vital to identifying the policy options available for phasing down coal and increasing renewable energy. For example, in the case of Pakistan, the government initiated a set of incentives to attract finance for coal plants as part of efforts to address the country’s energy crisis in the early part of the 2010s. Concomitantly, China’s growing international presence via the BRI created a major opportunity for Pakistan to obtain finance to support coal plants.
Pakistan has received the second-greatest amount of China’s overseas development finance of any country since 2008, at nearly $40 billion, 30 percent of which has gone into the electric power sector. The China-Pakistan Economic Corridor (CPEC), jointly established in 2015, is also a strategic pillar of China’s Belt and Road Initiative (BRI). With most multilateral development banks already limiting support for coal, it is no surprise China emerged as the primary backer for coal-fired power plants in Pakistan.
The Pakistani government was able to increase coal-fired power generation with the help of Chinese financing from 148 GWh in 2015 to 15,930 GWh in 2018. However, the accelerated power plant construction has come at a steep cost. The Pakistani government-guaranteed very high rates of return to many power plants, adding to the strain the Pakistani energy sector was already experiencing. At the same time, the Pakistani government faces a major cash crunch and has been negotiating a rescue package with the International Monetary Fund (IMF).
Once Pakistan addresses its immediate financial challenges, it can engage more with China on a transition from coal to clean energy. China and Pakistan can build on existing efforts such as the Quaid-e-Azam Solar Power Park. In addition, the Pakistani government can encourage investment in clean energy within industrial zones, clusters of heavy industry that are becoming a focus of CPEC. Another idea could be for Pakistan to participate in debt-for-climate swaps with China, in which debt forgiveness would be exchanged for climate change mitigation efforts – such as clean energy generation.
In the wake of China’s announcement to not build new coal plants overseas, policy attention should now shift to early retirement. Coal plants typically have 30-to-40-year lifetimes, and nearly all the Chinese-funded coal plants tracked in our database are less than a decade old. While retirement of newer coal plants may not be financially feasible in the near term, exploration of mechanisms to do so should start now. A recent study published in Nature Communications found globally, coal plants may have to retire early or reduce their utilization rates substantially if the world is to limit global warming to 2 degrees Celsius.
Phasing down coal in the Global South will also require close attention to country contexts. In some countries, like Pakistan, the history of coal is relatively short, while in other countries like South Africa, India, and Indonesia, development trajectories have been intricately tied to coal. Any exploration of early retirement options for coal plants must be done with attention to the need for a just transition that maintains the energy and economic needs of local communities.
Rishikesh Ram Bhandary is the Assistant Director of the Global Economic Governance Initiative at the Boston University Global Development Policy Center and Cecilia Han Springer is the Assistant Director of the Global China Initiative also at the BU GDPC.
