(EnergyAsia, June 6 2013, Thursday) — China’s coal appetite will not let up, leading to demand to double to nearly seven billion tonnes per year by 2030, said consultant Wood Mackenzie.

In its report titled “China: The Illusion of Peak Coal”, the consultant said that despite official efforts to limit coal consumption and increase the use of alternative energy sources, China will continue to favour the fuel.

“It is very unlikely that demand for thermal coal in China will peak before 2030,” said William Durbin, Wood Mackenzie’s Beijing-based President of Global Markets.

“China’s aggressive investment program for nuclear, natural gas and renewables capacity is centred in the coastal region while coal-fired capacity grows in the central and western provinces. Indeed, there are also a plethora of coal-intensive conversion projects being built or planned that are significantly adding to demand.”

He said coal is an important natural resource for a number of provinces seeking investment, jobs and tax revenues. Already, there are government-approved coal conversion projects (coal-to-gas, coal-to-liquids, coal-to-petrochemicals) that account for over 250 million tonnes/year of thermal demand. Additionally, there are planned projects that will increase demand by another 600 million tonnes/year.

Md Durbin said: “Wood Mackenzie’s analysis already takes into account a rapid improvement in energy efficiency the likes of which have not been seen. We expect power demand per unit of GDP to fall by half in just 17 years, an extraordinary achievement for an economy experiencing such sustained growth.

“In spite of this efficiency improvement, power demand is still set to nearly triple to 15,000 Terawatt hours (TWh) by 2030. Indeed, if expected efficiency improvements do not materialise, then in the absence of alternatives, coal demand could increase further.”

Mr Durbin said Chinese industrial demand for thermal coal is expected to grow from 1.5 billion tonnes/year to nearly 2.1 billion tonnes/year by 2030. In comparison, the US, the world’s second largest coal market, consumes only one billion tonnes/year.

“If a cap on coal consumption in China is imposed, it will come at a cost to provincial economies,” he said.

For China to reduce power-driven demand for coal, Mr Durbin said a significant increase in the availability of natural gas for the power and industrial sectors is required. But natural gas supplies will not keep pace with demand growth due to modest investment in conventional reserves and the very slow development of domestic unconventional shale gas reserves. Additionally, the high cost of LNG and pipeline imports will render this fuel uncompetitive with low cost coal.

China’s gas price and power tariff regulations will have to be reformed to create incentives for the national oil companies (NOCs) to make expensive investments in unconventional gas.

Mr Durbin said: “Our analysis already assumes an intensive investment program in unconventionals post-2020. To ramp up shale gas developments and production faster to displace coal will require a near-doubling of investment. We expect coal to hold its cost advantage until shale gas breakeven costs fall by 40-50%.”

Aside from coal substitution by natural gas, China hopes to reduce coal usage in the coastal demand centres by building ultra high voltage (UHV) electricity transmission lines linking the country’s northwestern and southwestern regions.

Wood Mackenzie’s report concludes this will have a limited impact on coal demand. As the transmission lines from the northwest will transmit coal-fired generation, it will merely shift coal demand from the coast to the interior. The UHV lines from the southwest will transmit seasonal hydro, requiring base load coal when hydro output falls. The net effect of the UHV lines and the non-coal-fired capacity is a flattening in thermal coal demand in the coastal power region.

Mr Durbin said: “Government mandates to improve the environment by reducing coal use will require steep investments in alternatives, the use of emission control technology or reduce economic growth rate targets further—options which are not currently happening.

“What is noteworthy, however, is that there is greater potential for further demand growth beyond our expectations. Failure to meet an aggressive non-coal power capacity build, investment in more efficient technologies and the expansion of the UHV network will increase the dependence on and use of coal.

“In the end, China’s thermal coal demand will see persistent growth until 2030, rendering peak coal an illusion.”