Department of War Studies strategy paper 11 paper strategy China’s Expanding Overseas Coal Power Industry: New Strategic Opportunities, Commercial Risks, Climate Challenges and Geopolitical Implications Dr Frank Umbach & Dr Ka-ho Yu 2 China’s Expanding Overseas Coal Power Industry EUCERS Advisory Board Marco Arcelli Executive Vice President, Upstream Gas, Frederick Kempe President and CEO, Atlantic Council, Enel, Rome Washington, D.C., USA Professor Dr Hüseyin Bagci Department Chair of International Ilya Kochevrin Executive Director of Gazprom Export Ltd. Relations, Middle East Technical University Inonu Bulvari, Thierry de Montbrial Founder and President of the Institute Ankara Français des Relations Internationales (IFRI), Paris Andrew Bartlett Managing Director, Bartlett Energy Advisers Chris Mottershead Vice Principal, King’s College London Volker Beckers Chairman, Spenceram Limited Dr Pierre Noël Sultan Hassanal Bolkiah Senior Fellow for Professor Dr Marc Oliver Bettzüge Chair of Energy Economics, Economic and Energy Security, IISS Asia Department of Economics and Director of the Institute of Dr Ligia Noronha Director Resources, Regulation and Global Energy Economics (EWI), University of Cologne Security, TERI, New Delhi Professor Dr Iulian Chifu Advisor to the Romanian President Janusz Reiter Center for International Relations, Warsaw for Strategic Affairs, Security and Foreign Policy and President of the Center for Conflict Prevention and Early Professor Dr Karl Rose Senior Fellow Scenarios, World Warning, Bucharest Energy Council, Vienna/Londo Dr John Chipman Director International Institute for Professor Dr Burkhard Schwenker Chairman of the Strategic Studies (IISS), London Supervisory Board, Roland Berger Strategy Consultants GmbH, Hamburg Professor Dr Dieter Helm University of Oxford Professor Dr Karl Kaiser Director of the Program on Transatlantic Relations of the Weatherhead Center for International Affairs, Harvard Kennedy School, Cambridge, USA Media Partners Impressum Design © 2016 EUCERS. All rights reserved. Brief excerpts Calverts may be reproduced or translated provided the source is www.calverts.coop stated. Please direct all enquiries to the publishers. Approved by [email protected] The opinions expressed in this publication are the August 2016 responsibility of the author(s). About the Publication 3 Published by The European Centre for Energy and Resource Security (EUCERS) was established in the Department of War Studies at King’s College London in October 2010. The research of EUCERS is focused on promoting an understanding of how our use of energy and resources affects International Relations, since energy security is not just a matter of economics, supply and technological change. In an era of globalization energy security is more than ever dependent on political conditions and strategies. Economic competition over energy resources, raw materials and water intensifies and an increasing number of questions and problems have to be solved using holistic approaches and wider national and international political frameworks. www.eucers.eu About the Authors Dr Frank Umbach is Research Director at EUCERS, King’s College London and the author of two EUCERS Strategy Papers on the future of coal in 2011 and 2015. Since 2011, he is also a (Non- Resident) Senior Fellow at the U.S. Atlantic Council in Washington D.C. and since 2008 a Senior Fellow at the Centre for European Security Strategies (CESS GmbH) in Munich. He also works as a consultant for the Gerson Lehrman Group (GLG) and Wikistrat.com as well as for governments, companies/industries, international organisations (i.e. NATO) and investors. His expertise is in energy, foreign and security policies in Russia, the Caspian region, Asia-Pacific, the EU and Germany in the areas of energy (supply) security, energy foreign policy, geopolitical risks, global energy challenges, critical energy infrastructure protection (i.e. cyber security) and maritime security. Dr Kaho Yu is a Research Associate with the Geopolitics of Energy Project at Harvard Kennedy School and EUCERS at King’s College London. Kaho’s research focuses on the China’s energy policy, energy cooperation in Belt and Road Initiative, Eurasian oil and gas geopolitics and global energy governance. Kaho obtained his Ph.D from King’s College London. He is also affiliated to the Chinese Academy of Social Science and Asia Energy Center in Hong Kong as Research Fellow. Editorial Senior Research Associates (Non-Resident) Prof. Dr. Friedbert Pflüger Director, EUCERS Dr Petra Dolata University of Calgary Carola Gegenbauer Operation Coordinator, EUCERS Androulla Kaminara European Commission European Centre for Energy and Resource Security (EUCERS) Department of War Studies, King’s College London, Research Associates Strand, London WC2R 2LS, UK Jan-Justus Andreas Dr Maximilian Kuhn Alexandra-Maria Bocse Dr Guy CK Leung About EUCERS Gus Constantinou Flavio Lira Julia Coym Philipp Nießen Professor Dr Michael Rainsborough Head of Department, Kalina Damianova Philipp Offenberg Department of War Studies, King’s College London, Arash Duero Marina Petroleka Chair of the EUCERS Advisory Board Moses Ekpolomo Dr Slawomir Raszewski Professor Dr Friedbert Pflüger Executive Director, EUCERS Lorena Gutierrez Aura Sabadus Dr Frank Umbach Research Director, EUCERS Lamya Harub Ka-Ho Yu Dr Adnan Vatansever Associate Director, EUCERS Sandu-Daniel Kopp Shwan Zulal Carola Gegenbauer Operations Coordinator, EUCERS Maria Kottari 4 China’s Expanding Overseas Coal Power Industry Contents Foreword 05 Summary 06 Introduction 13 Global Coal Markets: Shifts in Production and Demand Patterns 17 Global Coal Developments vis-à-vis Climate Protection Policies 17 U.S. Coal-to-Gas Transition and Emerging Role as a Global Export Leader 23 China’s Energy Mix, Coal Policies and Rising Coal Investments and Imports 26 China’s Energy Policies at a Crossroads 26 China’s Dependence on Coal and its Global Dimensions 26 Restructuring of Chinese Coal Sector and Industry 31 China’s New Climate and Environmental Protections Policies in the context of the Paris Climate Summit 34 Scenarios for a Peak in Coal Consumption by 2020 37 Growth of China’s Overseas Coal Investments 38 Context of China’s Rising Import Demand 40 The International Outlook for Chinese Energy Firms 43 Growth of China’s Coal Industry Abroad 43 Challenges: Operational Transparency, Corporate Social Responsibility (CSR), and Technical Equipment Issues 44 Opportunities in Reform and Geopolitical Repositioning 45 On-Going Socio-Political and Operational Risks 47 Examples on the Ground: Indonesia and Sri Lanka 48 Strategic Perspectives for China’s Overseas Coal and Energy Investments 50 China’s Grand Design Concept of ‘One Belt, One Road’ (OBOR) 50 Investment Instruments 53 Energy Dimensions and Investments 54 A Major Challenge for OBOR: Creating a Stable Security Environment 56 Conclusions and Perspectives 59 Annex 61 China’s Expanding Overseas Coal Power Industry 5 Foreword It is our pleasure to introduce the eleventh EUCERS Strategy Paper titled ‘China’s Expanding Overseas Coal Power Industry’. This is the third EUCERS strategy paper that focuses on the geopolitical dimensions of coal. Previous papers have assessed the future of clean coal, as well as long- term trends for the coal industry in light of international market realities and climate protection policies. The eleventh EUCERS Strategy Paper evaluates the strategic implications of China’s expanding overseas coal power industry. China is the world’s largest coal producer, providing more energy to the world’s economy than all of Middle Eastern oil production. It is also the largest energy and coal consumer, using nearly as much coal as the rest of the world combined. According to the 2015 BP Statistical Review, Chinese coal demand absorbs over 50 per cent of global coal consumption, which makes China the world’s largest coal importer. Against the backdrop of the December 2015 COP21 United Nations conference on climate change, this paper analyses China’s mostly overlooked overseas investments in coal mining and coal power projects. In particular, it examines new strategic business opportunities, commercial risks, climate challenges, and geopolitical implications for European and global energy markets. I would like to take the opportunity to thank our Research Director of the European Centre for Energy and Resource Security (EUCERS), Dr Frank Umbach, for writing this very important and insightful study and EUCERS’ Research Associate, Mr Kaho Yu, for his contribution. I would also like to thank Professor Michael Rainsborough, Head of the War Studies Department at King’s College London, for supporting our work at EUCERS. A special thank you goes to Alstom Power AG for financially supporting this research study. Professor Dr Friedbert Pflüger Director, EUCERS, King’s College London 6 China’s Expanding Overseas Coal Power Industry Summary China is the world’s largest energy consumer overall and Second, the weakening Chinese economic growth and the largest coal consumer in particular, using nearly as recent stock market meltdown has triggered considerations much coal as the rest of the world combined. It is also the to relocate foreign and Chinese production facilities largest coal producer, providing more energy to the world’s elsewhere. But this situation might also constrain future economy than the entire Middle Eastern oil production. investments at a time when the Chinese government has Since 2011, it has also become the world’s largest