In February of the year, the 4×600,000-kilowatt Hassyan clean coal power project in the United Arab Emirates, in which Harbin Electric International Engineering Company participated in financing, was canceled. At the same time, the project leader announced its transformation into a natural gas project, and the planned second phase of the project, involving 2×600,000-kilowatt coal-fired power units, is also facing the risk of cancellation.
This serves as a microcosm of China’s overseas coal power projects shifting direction following the announcement of overseas coal phase-out policy last year.
In September 2021, China declared that it would no longer build new overseas coal power projects. Subsequently, government departments such as the National Development and Reform Commission (NDRC) released important documents, including “Opinions on Promoting Green Development of the Belt and Road” and the “14th Five-Year Plan for Modern Energy System,” to provide guidance for China’s future overseas energy investments. However, there remains a difference in interpretation within the industry regarding the definition of “new construction” in the commitment. For example, there are debates on whether “new construction” exclusively refers to projects in which Chinese entities participate through financing and equity investment, whether unfinished existing projects or projects involving engineering, procurement, and construction (EPC) and equipment export are also considered “new construction,” and whether self-owned power plants in newly established industrial parks are categorized as “new construction.”
One year after the commitment of “no longer building overseas coal power projects” was made, we have conducted an analysis of the overall trend of China’s overseas coal power assets. Given the ongoing global energy crisis, we hope to provide reference and insights for Chinese investors involved in overseas coal power projects.
Since the commitment was made, at least 20 coal power units have been canceled.
According to the “China Overseas Electric Power Investment Database” by Greenpeace, there are currently a total of 809 overseas coal power unit construction projects involving Chinese participation. These projects can be categorized into seven stages based on their progress: preparation, under construction, operation, cancellation, suspension, retirement, and mothballing. After China announced the cessation of new overseas coal power projects, at least 20 overseas coal power units involving Chinese participation have been canceled. Most of these cancellations occurred in projects that were either suspended or in the preparation stage—11 units were previously in suspension, and 5 units were in the preparation stage. Overseas coal power projects mainly rely on equity investment and financial support, posing complex risks.
In recent years, Chinese participation in overseas energy investments can be primarily classified into four categories: equity investment, financial support, engineering, procurement, and construction (EPC), and equipment export. Each coal power project may involve one or more of these participation methods, and the predominant method determines the extent of Chinese enterprises or financial institutions’ involvement, decision-making power, and long-term economic benefits. It also dictates the complexity of risk management faced by Chinese investors.
Among the 20 overseas coal power projects that have been canceled, the majority of them had Chinese participation primarily through equity investment and financial support. Specifically:
- Equity Investment: There were 11 projects in which China participated primarily through equity investment, accounting for more than half of the canceled projects. These projects had a combined installed capacity of 6.6 million kilowatts.
- Financial Support: Seven projects had Chinese involvement primarily through financial support, constituting 35% of the canceled projects. These projects had a combined installed capacity of 2.27 million kilowatts.
In addition to the canceled projects, there are still 57 overseas coal power projects in the preparation and under construction stages in which China participates primarily through equity investment. These projects account for 51% of the total capacity of all projects in preparation and under construction. Furthermore, there are 48 overseas coal power projects in the preparation and under construction stages with Chinese participation primarily through financial support, representing 35% of the total capacity of all projects in these stages.
Chinese investors who still hold overseas coal power assets, particularly those who participated through equity investment and financial support, should carefully assess the risk of these projects being stranded. For projects that are still in the preparation stage, Chinese investors can look to successful cases of transitioning to renewable energy and conduct further assessments to maximize the mitigation of future cancellation risks.
Since the beginning of this year, the global energy crisis, coupled with the post-pandemic recovery, has further increased energy demands worldwide. Energy security and ensuring a stable power supply have become top priorities for governments when formulating energy plans. In the volatile global energy market, the power supply and demand situation in host countries, energy and power planning, and determination to transition to cleaner sources directly affect the fate of local coal-fired power projects.
Taking South Asia and Southeast Asia as examples, which are the key regions for China’s overseas energy investments, the persistent growth in electricity demand, coupled with systemic issues such as inadequate infrastructure and low grid connectivity, has exacerbated the contradictions between ensuring power supply and transitioning to cleaner energy sources in these regions. Energy policies in some host countries have also adjusted and shifted accordingly, with different nations adopting varying approaches. These shifts have had ripple effects on China’s overseas coal power projects. Some coal-fired power projects have been canceled, while others are considering transitioning to renewable energy sources. Some previously canceled coal projects have even been revived and are back under construction.
Exploring the Transition: The Musina-Makhado Power Station Project in South Africa
The Musina-Makhado project is a 1,320-3,300 MW coal-fired power station project in South Africa, in which China’s Power Construction Corporation (PowerChina) has invested. Reports from various media outlets had indicated uncertainty surrounding the future of this power station since China’s commitment to no longer finance overseas coal projects. In November 2021, the Chinese Ambassador to South Africa confirmed that China would not provide financing for the project. In March 2022, the project’s industrial park manager stated that they had abandoned the plan to build a coal-fired power station and were considering switching to a solar energy project. The Musina-Makhado project’s transition can be attributed to the combined efforts of China’s commitment to phase out overseas coal projects and South Africa’s changing energy policies.
Currently, over 80% of South Africa’s electricity supply still relies on coal power. The country has faced severe electricity shortages due to factors such as aging infrastructure and rising fuel prices. The power shortages have significantly constrained South Africa’s economic growth since the COVID-19 pandemic. In response, South Africa has implemented policies such as formally opening its electricity market to enhance its domestic power supply. Additionally, the South African government’s latest Integrated Resource Plan emphasizes increasing the share of renewable energy sources and plans to raise the installed capacity of renewables from 8% in 2019 to 34% by 2030. The government also intends to retire around 11 GW of coal-fired power generation capacity by 2030.
Reviving Against the Odds: The Patuakhali Coal Power Project in Bangladesh
Bangladesh is one of the countries with the highest planned coal power capacity globally. As the pace of energy transition accelerated, the Bangladeshi government sought lower-cost energy alternatives. In August 2020, the Minister of Power, Energy, and Mineral Resources announced that Bangladesh would retain only three coal-fired power stations under construction, while the remaining 26 coal power projects with a combined capacity of 28 GW were “under review.” The Patuakhali coal power station was one of these 26 projects, and its fate garnered significant attention. The project is jointly owned by the Bangladeshi state-owned enterprise Rural Power Company Limited (RPCL) and China National Machinery Import and Export Corporation (CMC). It comprises two phases, each with 1.32 GW of coal-fired power generation capacity. However, the official list of project cancellations did not include the Patuakhali power station, and it is currently back under construction. Bangladesh cited the need for additional effective power generation, including coal, oil, and gas, to meet rising electricity demand as the main reason for this policy shift.
Nonetheless, Bangladesh faces significant challenges due to the fluctuating energy market and its reliance on imported coal and gas resources. These factors have made it difficult for Bangladesh to afford the soaring fuel prices, exacerbating the power shortage issue. Bangladesh has also grappled with overcapacity, with official projections indicating that the country will maintain an excess electricity generation capacity of 44% by 2024-25, well above the threshold of 25%. Existing coal-fired power plants often remain idle, and in the 2020-21 fiscal year, power plants in Bangladesh operated for only 153 days, spending the rest of the time in idle mode. Under the “take-or-pay” principle, the Bangladeshi government still needs to pay capacity charges for these idle power plants, further straining its finances. The uncertainty in host countries’ energy planning due to the ongoing energy crisis presents a new challenge for overseas investors. From the perspective of Chinese investors, the Patuakhali project involves equity participation, which implies deeper involvement and more complex risk management. The policy risks stemming from Bangladesh’s power surplus are not to be underestimated. If the government decides to cancel capacity payments or even shut down power plants, Chinese project investors may struggle to recover their expected returns.
The Gray Area of Overseas Coal Phase-Out Commitment
The broad direction of no longer financing new overseas coal projects has become a consensus among Chinese enterprises. However, many companies believe that the current definition of “new construction” lacks clarity, especially regarding the participation methods of Chinese companies and the nature of projects. Due to the lack of clear policy definitions and subsequent regulatory systems, as well as the influence of host country energy and power policies, some Chinese investors have still participated in overseas coal projects after September 2021. Self-owned power plants in industrial parks, engineering, procurement, and construction (EPC) contracts, and equipment exports have become gray areas in overseas coal power investment.
For example, on August 12, 2022, China Energy Engineering Corporation’s North China Electric Power Design Institute (NCPE) won the bid for the Musina-Makhado clean energy project in Laos. This marks the company’s successful bid for an international clean and efficient power station project after signing the Huapan 1×350 MW clean and efficient power station construction project in Laos in April of the same year. The Musina-Makhado project is a clean coal power project located in the Champasak Province of the Lao People’s Democratic Republic. It plans to build 2×330,000 kW ultra-supercritical wet condensing steam turbine generator units and is scheduled to be completed and put into operation by the end of 2025.
On May 24, 2022, China Western Power Industrial Co., Ltd. signed the “Offshore Supply Contract for the Patuakhali Clean Energy Project in Laos” and the “Onshore Service Contract for the Patuakhali Clean Energy Project in Laos” with the Eastern Power Limited of Laos, with a total contract value of approximately RMB 2.758 billion. The project is located in Champasak Province, Laos, with an installed capacity of 660,000 kW. It is developed by Eastern Power Limited of Laos, and China Western Power is responsible for project design, equipment supply, installation, and commissioning. The project is planned to be completed in 45 months.
Since making the commitment, Chinese investors have made active efforts to stop investing in coal power and transition towards renewable energy sources. However, it is recognized that to advance the implementation of the overseas coal phase-out commitment, policy guidance and accompanying regulatory systems still need refinement.
The first part of China’s coal phase-out commitment is “strongly supporting the green and low-carbon development of energy in developing countries.” Developing overseas renewable energy power investments requires consensus between the host country and the investing country, with both parties making concerted efforts. The host country’s ambition and actions in energy transition are crucial for global energy transformation and addressing climate change collectively. Feasible and systematic energy planning and the development of supporting infrastructure not only enhance the understanding of overseas investors about the local power structure and investment policies but also attract more international capital participation.
China, Japan, and South Korea are among the countries with the highest participation of public funds in overseas coal power investments. With these three countries sequentially committing to phase out overseas coal investments, more attention has shifted towards the financial giants still involved in fossil energy investments, including coal. The “Banking on Climate Chaos 2022” report highlighted that in just 2021, the world’s 60 largest commercial and investment banks injected a staggering $742 billion into the fossil energy sector. JPMorgan Chase Bank, Citibank, Wells Fargo Bank, and Bank of America ranked as the top four institutions in terms of investment volume. Additionally, several banks from Canada, Japan, and the UK also featured among the top ten. To achieve the 1.5°C temperature control target, there is no time to waste in global energy transformation. It is also noted that advancing the implementation of the overseas coal phase-out commitment requires not only improved policy guidance and regulatory systems but also enhanced cooperation with host countries in areas such as renewable energy and infrastructure development to facilitate the transition. Apart from commitments by governments, major financial institutions are equally responsible for promptly formulating more mandatory and standardized financial policies to effectively curb the expansion of fossil energy, including coal, at its source.
