November 2013 Greening the Chinese coal sector Business opportunities for the Netherlands

Transcription

1 November 2013 Greening the Chinese coal sector Business opportunities for the Netherlands

2 Beijing, November 2013 This report has been prepared for NL Agency, an executive branch of the Netherlands ministry of Economic Affairs Framework for the report is the MoU between China (National Energy Administration) and the Netherlands (ministry of Economic Affairs) on energy cooperation. For more information see (in Dutch) 1

3 Introduction to report The objective of this study Greening the Chinese Coal Sector, Business opportunities for the Netherlands is to map China s coal sector and its environmental issues, subsequently this study will identify business opportunities for companies, R&D institutes and Governmental organizations based in the Netherlands. With annual production of 3.7 billion tons 1 of coal and annual consumption of 4.1 billion tons of coal, China s coal sector is the largest in the world. It poses massive challenges for the environment and the sustainable use of resources such as water and air. China s coal sector is not only very large, it is also exceedingly complex. A myriad of Government organizations are involved in its planning. At the same time, a large number of large state-owned and private enterprises play a vital role in mining, processing, transport and consumption. In order to better understand where opportunities for further greening emerge, this report first discusses the subsequent four sectors in China s coal supply chain: mining, processing, transport and consumption (thermal power generation, iron, steel and chemical industry). In addition, the universe of mostly privately owned - suppliers of equipment and services to China s coal sector are dealt with, as they provide a potential entry point for Dutch businesses to an otherwise rather closed and opaque system. In this part of the report, the technological and economic situation of these five areas is dealt with, as well as relevant recent policy developments with regards to the coal sector. The report will focus on specific environmental problems occurring throughout the four stages of the coal sector. The report applies a broad interpretation of what constitutes as an environmental problem in that inefficient use of resources and human safety issues are included as well. It highlights in which technology areas foreign technology and expertise is needed and stimulated. The final part of the report zooms in on The Netherlands and assesses which Dutch companies, organizations and research institutes can potentially benefit from China s perceived need of green solutions for the coal sector. 1 World Coal Institute 2

4 Table of contents Executive summary Introduction to China s coal sector China s coal supply chain Process: Mining and processing Process: Transportation Process: Coal consumption Thermal power plants Steel and Iron industry Coal-to-chemicals industry The Chinese coal sector: industry overview & dynamics China s coal mining industry The coal sorting and washing industry Coal consumption The power generation industry Steel and iron industry Coal-to-chemicals industry Alternatives to coal consumption in China Economic forecast and environmental issues of China s coal sector Main environnemental issues Soil pollution Water pollution Air pollution and emissions Chinese government policy framework for the coal sector Recent trends for the coal sector under the new Xi Jinping administration Opportunities for further greening of China s coal industry Mining Coal washing and sorting Transportation Coal consumption Power generation Thermal power plants Integrated gasification combined cycle (IGCC) Coking coal

5 6.4.5 Coal-to-chemicals Greening the Chinese coal sector, opportunities for the Netherlands Dutch strengths Marketing strategies to target customers in China s coal sector Via domestic equipment & services providers Via clustered approaches Linking Chinese needs and Dutch strengths Coal mining and processing Transportation Coal consumption Thermal power plants Coal to chemicals Funding pre-entry preparations History of Sino-Dutch cooperation on cleaner coal About SDS Ventures Expertise References

6 Tables Table 1: Overview of potential contributions by Dutch companies to greening of China s coal sector Table 2: Relevant technology and expertise areas for China s coal supply chain by top sector Table 3: Summarized recommendations for the coal mining and processing sector Table 4: Summarized recommendations for the transportation sector Table 5: Summarized recommendations for power generation sector Table 6: Summarized recommendations for other use Figures Figure 1: The geographical distribution of China's coal reserves. Source: Global Public Media... 8 Figure 2: The percentage of coal reserve per region in China... 9 Figure 3: Overview of the coal supply chain in China Figure 4: Overview ROM coal processing. Source: Wefore Figure 5: China s coal production by coal type (in million tons). Source: IEA Figure 6: Coal consumption per industry in Chinn. Source: Samsung Securities Figure 7: Simplified overview of poly generation process. Source: Shell China Figure 8: Trend Qinhuangdao Thermal Coal and National Energy Tariffs. Source: JP Morgan Figure 9: China's energy mix Source: JP Morgan Figure 10: Annual growth rate of the Chinese economy Source: tradingeconomics.com Figure 11: A villager herding his goats near a gangue hill at a coal processing plant. Source: China Photo/Getty images Figure 12: Thermal power generation versus water scarcity by province in China, 2010 and Source: Bloomberg new energy finance Figure 13: A coal fired thermal power plant running at full capacity. Source: China Photo/Getty images

7 Executive summary Status of China s coal sector Based on current predictions, coal will continue to play a significant role in China s energy mix in the next 5-10 years with no serious alternative in the medium term. The majority of China s coal reserves are located far away from its major economic regions. The coal sector in China includes coal miners, coal processors, coal transporters and industrial coal consumers, with each industry having its respective equipment suppliers and service providers. The dominant actors in these industries are State-owned Enterprises (SOE s) and large private companies. The processing industry is still in a developing stage, lacking sufficient investment due to an absence of regulation and coal quality standards. The coal mining industry includes both major SOE s and many private local mining companies. The latter has been facing continuing pressure from the Chinese Government to consolidate and close down inefficient, polluting businesses. The transport industry is also dominated by large SOE s. Environmental Challenges The supply chain of China s most abundant natural resource poses a range of environmental challenges that need to be addressed. First of all, 60% of China s Run-Of-Mine (ROM) coal 2 is burned without being washed and sorted, causing severe pollution and operational inefficiencies. In turn, coal that is washed and sorted has quality issues making industrial coal consumers reluctant to buy this processed coal. Transportation of coal in China is relatively inefficient due to high levels of waste that are transported with coal. Pollution of the soil, water and air is a recurring issue throughout the coal supply chain which provides many opportunities for improvement. The main issues that need be addressed in the coal mining, processing and transportation industry are decreasing pollution around the mine and sorting and washing plants, improving safety and increasing the amount of coal that is washed and sorted. Industrial coal consumers need to significantly reduce the pollution caused by the use of coal in their production process. An increasing focus on the environmental effects of China s economic growth model under the new government will provide new opportunities for foreign companies with cleantech expertise and technology to provide solutions for reducing pollution in the Chinese coal sector. Opportunities for the Netherlands Companies and knowledge institutes in The Netherlands boast specific expertise and technologies that can help reduce pollution throughout the coal supply chain in China. Dutch expertise in the field of water treatment and waste water management can help tackle several forms of water pollution. Fugitive dust prevention and monitoring technology is increasingly in demand throughout the Chinese coal supply chain. Dutch expertise on power plant construction, carbon captures & reuse and desulfurization technologies can help further improve the operation of Chinese power plants. Dutch companies have developed technologies to use byproducts of conventional coal combustion such as fly ash in order to make building materials. Coal gasification expertise could be very promising in helping to both 2 Unprocessed coal coming straight from the mine 6

8 increase the efficiency of coal as an energy source while capturing most of the pollutants during the gasification process. Dutch businesses have developed capabilities that can tackle air, soil and water pollution throughout China s coal supply chain. The new Chinese leadership installed in March 2013 is stepping up its efforts to deal with these persistent environmental issues. This recent development has so far resulted in promising measures which provide concrete opportunities for Netherlands based companies and organizations. 7

9 1. Introduction to China s coal sector Coal is China s most abundant domestic resource. The country is the world s largest producer of coal and it possesses the world s second largest coal reserve 3. China s coal production amounts to four times that of Saudi Arabia s oil production in terms of million tons of oil equivalents. Its share in the global consumption of coal is twice as large as the demand for oil in the United States 4. On average, coal meets 70% of China s annual energy demand. It provides 76% of the electricity generation, 70% of energy consumption in the steel and iron industry, 60% of energy consumption in the Chemical dyes industry and 80% of retail consumption. Based on the 11 th (published March 2006) and 12 th (published March 2012) five year plan 5 (FYP), China aims to diversify its energy mix and decrease its dependence on coal. Yet it has proved to be hard to substantially curb China s dependency on coal. As such, there is little doubt that coal will continue to play an important role in China s energy mix in the next 20 years. As this report will discuss, the pre-eminence of China s coal sector has large consequences for the environment and provides opportunities to companies with expertise and technologies to make it more efficient and less polluting. Figure 1: The geographical distribution of China's coal reserves. Source: Global Public Media 3 The United States possesses the world s largest coal reserves. 4 IEA, A plan published every five years by the Chinese government that stipulates the economic policy for the coming 5 years. 8

10 China s major coal reserves are predominantly located in the north and the west of the country, mainly in the following (economically less developed) provinces: Shanxi, Shaanxi, Inner Mongolia, Xinjiang, Guizhou and Ningxia (see figure 1 above on page 6). These provinces feature reserves of 833 billion tons of coal which amounts to 82% of China s total proven coal reserves. The second largest deposits of 126 billion tons (12% of total proven reserves) are located in the Northeast corner of the country in Heilongjiang province. Finally the provinces in the eastern coastal region have 55 billion tons of coal amounting to just 6% of the total proven coal reserves. The coal in the Eastern regions is of poorer quality and more complicated to mine, making exploitation less economically appealing. The coal of the Northern and Western regions is mainly used to fuel China s major economic regions: the Bohai Zone in the Northeast, the Yangtze River Delta in the Southeast, and the Pearl River Delta in the South. More than 60% of China s coal has to travel over 550 km to reach its end consumer 6. 12% 6% North and west China: Shanxi, Shaanxi, Inner Mongolia, Xinjian, Guizhou and Ningxia Northeast China: Heilongjiang 82% East China: Bohai, Yangtze and Pearl river delta Figure 2: The percentage of coal reserve per region in China 6 IEA,

11 2. China s coal supply chain China s coal sector covers the entire supply chain consisting of four successive main stages through which the coal is converted to products destined for end users (see figure 3 below). Mining Conventional and mechanized mining Processing Washing and sorting Transportation Railway Oversea Road Consumption Thermal power Coal-to-chemicals Otjher Equipment & Services providers Equipment & Services providers Equipment & Services providers Equipment & Services providers Figure 3: Overview of the coal supply chain in China 2.1 Process: Mining and processing Coal is mined in three different ways in China: blast mining, conventional mining and fully mechanized mining. Raw coal that arrives at washing and sorting plants is called run-of-mine (ROM) coal. This raw material contains coal rocks, and minerals as well as contamination due to the mining process, in the form of residual parts of digging tools. Figure 4: Overview ROM coal processing. Source: Wefore 10

12 (ROM) Coal (raw coal coming from the mine) is processed throughout several stages to be used for thermal electricity generation, production of coke for the iron and steel industry and the chemical industry (see figure 4 above). At the first stage, ROM Coal is washed and sorted. The coal recovery rate of this process amounts to approximately 50%. This process results in by-products such as coal gangue and middlings which can partially be recovered and utilized to make building materials. Subsequently, the coal is further sorted according to its sulfur value and split into high sulfur coal (>2% sulfur content) and middle-low sulfur coal (<2% sulfur content). High sulfur coal is mainly used as raw material for the coal chemical industry. Middle-low sulfur coal is divided in three subcategories: anthracite, bituminous and lignite. Anthracite powder is blended with long flame coal. Anthracite lumps are also used in the coal-to-chemicals industry. Bituminous coal can be used to make coke or alternatively it can be mixed with lignite to create steam coal for power generation. The demand for steam coal has been steadily rising due to China s growing need for power generation but also because steam coal is used in the process of making building materials and has some metallurgic uses. Figure 5 below shows the level of production of the different kinds of coal in China. Figure 5: China s coal production by coal type (in million tons). Source: IEA 2.2 Process: Transportation China s coal has to travel from the West and North to its consumers in the Eastern and southern coastal regions. It is loaded on to trains at coal transshipment stations in provinces such as Shanxi and Hebei then transported to Northeastern ports of Qinhuangdao and Huanghao. The main railroad used to transport coal from the inland to the coast is the Daqin (Datong-Qinghuangdao) line. Once the coal arrives at the ports, it is transferred to the ships that transport it to the South (east) of China. This method is preferred to direct inland shipping via rail because of its lower transportation costs. However, the inability of the railroad infrastructure to keep up with the growth of coal production represents a growing bottleneck in the Chinese coal transport system. As a result, coal producers increasingly have to resort to road transport which is undesirable from both an environmental and 11

13 economic point of view. China s internal waterways are also used to transport coal, mostly to supply regions that are no further than 400 km from the mine due to the limited span of these waterways Process: Coal consumption Coal has several types of consumers as outlined as below, with the main consumer being thermal power plants. The steel and iron industry is the 2 nd largest coal consumer in China, followed by the coal-to-chemicals industry (see figure 6 below). 5% 22% 17% 56% thermal power plants Iron and steel industry Coal-to-chemicals Others Figure 6: Coal consumption per industry in Chinn. Source: Samsung Securities 2.3.1Thermal power plants Thermal power plants convert coal (of which 60% is unprocessed) into electricity. This is done by heating water into steam via coal combustion which subsequently sets a turbine in motion that generates electricity. Most of China s power plants are located in the eastern and southern coastal region. Coal often reaches these plants by truck after transshipment at a harbor. Thermal power plants consumed 3,040 million tons (Mt) of coal in Steel and Iron industry The Iron industry uses coke, which is a blended coal product with high carbon content to heat and melt iron ore in a blast furnace. The steel industry uses coke to create an alloy between iron and carbon to make steel. The focal point of China s Iron and Steel industry lies in the Yangtze delta stretching from Shanghai to Chongqing. This industry consumed 510 Mt of coke in Coal-to-chemicals industry The coal-to-chemicals industry converts processed coal into gas, liquids and solid fuels into intermediate inputs that are used in several industries after further processing. Two subsections can be distinguished in this industry: on the one hand the traditional coal to chemical conversion industry 7 Censere, IEA, IEA,

14 that produces coking coal, acetylene and synthetic ammonia and on the other hand the modern coalto-chemicals conversion industry that mainly produces alternatives for petrol such as coal oil, olefin, natural gas, ethylene glycol and dimethylether. The modern coal-to-chemicals industry can be linked to power generation via integrated gas combined cycle (IGCC) technology. Syngas is produced after coal gasification and used in IGCC plant to power gas turbines to produce electricity. A promising development in this field is the so-called poly generation that can also produce olefin and propylene (after the initial production of methanol) that are also used to power a gas turbine (see figure 7 below). Gasification Electricity generation Coal Gasification Syngas Electricity Methanol Conversion Olefin & Propylene Figure 7: Simplified overview of poly generation process. Source: Shell China 13

15 3. The Chinese coal sector: industry overview & dynamics The Chinese coal sector consists of several industries that process coal as it makes its way from extraction to consumption. In addition, a vast universe of companies exists that supply the coal sector with equipment, services and other activities. 3.1 China s coal mining industry The coal mining industry in China is of a hybrid nature. On the one hand there are the central state owned enterprises, of which the largest player is Shenhua group, a state owned enterprise (SOE) set up in 1995 by the State Council (China s highest executive organ of State power). The company produces 12% of China s annual output. The second and third largest players, respectively China Coal Group and Datong Coalmine Group, each account for 5% of annual output 10. Shenhua Group operates 62 mines, 1,500 km of railway, two coal ports and eleven ships. In 2012 the company mined 460 million tons of coals. On the other hand, there are the local SOE s that account for 40% of China s coal production 11. The Chinese government has been pushing to consolidate them to further increase efficiency through economies of scale. Besides the state-owned companies, there are also several hundred smaller local companies. These so called township and village enterprises (TVE) are mostly operated by local agricultural collectives and pose many regulatory compliance challenges given their fragmented nature. They are characterized by relatively high levels of mining accidents, environmental degradation and tax evasion. Their number has been decreasing since they have faced consolidation pressure from the Chinese government. In the coal rich province of Shanxi for example the number of coal mining companies has been reduced from 2,200 to a 140 between 2009 and The goal being to increase efficiency but also to address the before mentioned problems with TVEs. Nevertheless, they still account for 38% of China s coal production. The Government aims to improve the overall efficiency level by the further closure of smaller mines and the mechanization the larger mines. The large coal producers are state-owned and have little to fear when it comes to domestic competition. They have limited incentives to make their activities cleaner but this is changing due to increased pressure from the general public on environmental issues. Smaller local producers are usually bound to local operations and do not have the means to scale up production. A combination of production slow down during the consolidation process and falling global coal prices after the global economic downturn have lead China to switch from a net exporter to a net importer of coal since In some cases, Australian and Indonesian coal have become cheaper for the southern coastal region of China due to the relatively high transport costs of coal from North and West China. These new foreign coal suppliers however do not have the capacity to compete with the large domestic producers. Their competitiveness is mainly due to the recent fall in coal prices. Their sales could thus easily be wiped out once global coal prices start rising again. The smaller local coal producers however are less capable of competing and staying in business unless they manage to consolidate. 10 Coalchina.org.cn (2012) 11 中 商 情 报 网 (China Business Intelligence Network), Censere,

16 3.2 The coal sorting and washing industry The coal sorting and washing industry is still in its infancy in China. Only 40% of China s ROM coal is processed due to a lack of regulation and coal quality standards 13. Capacity issues at smaller mines often lead to the absence of local coal washing and sorting plants. Due to their limited scale, these mines cannot cope with investment associated with a coal washing and sorting installation. Even the ROM coal that does get washed and sorted still has quality issues, making energy producers less keen on paying extra for this processed coal. The lack of incentives to use processed coal makes this industry relatively unattractive to invest in for China s large coal companies. China s increased focus on environmental issues and the Government-led consolidation drive however may bring about change in this lack of regulation. 3.3 Coal consumption The power generation industry The Chinese State Power (CSP) company was the largest power generator in China supplying 46% of the country s electricity before it was broken down into 11 smaller power companies. Today, the five largest companies together provide roughly 50% of China s electric power. The main source of their power generation is coal, which provides 76% of the total fuel needed for electric power generation in China. All major producers are state-owned and their electricity prices are strictly regulated by the National Development and Reform Commission (NDRC) 14. This creates significant uncertainty for the power producers given that they have to purchase coal at market prices but have to provide electricity at regulated prices. Figure 8 below demonstrates this situation for the largest coal harbor in China, Qinhuangdao Harbor: the chart shows how electricity tariffs barely change while coal prices move with the market. Recently, the Chinese government has allowed power plants that have serious pollution management capacity in operation to raise their prices to recover some of the investment in this capacity 15. However no substantial price liberalization can be expected in this industry in the next 3 to 5 years. Therefore, the major challenge for these companies is to improve efficiency and enhance profitability. Figure 8. Trend Qinhuangdao Thermal Coal and National Energy Tariffs Figure 8: Trend Qinhuangdao Thermal Coal and National Energy Tariffs. Source: JP Morgan 13 中 国 能 源 报 (China Energy report), An influential branch of China s executive power that regulates electricity prices as a means to control inflation. 15 Expert sources confirm that the Chinese government have recently initiated this policy. 15

17 3.3.2 Steel and iron industry The Chinese government considers this industry as a key pillar of China s economic development and has made significant investment in its development over the last three decades. The Chinese steel and iron industry grew at an average rate of 7% in the 1980 s, 10% in the 1990 s and almost 20% in the 2000 s 16. China exported 47.9 million tons of steel in Growth however has been slowing down since 2010, due to a fall in global steel and iron demand. China s steel and iron industry only grew at 2% in The strong focus on this industry by the government has lead to overinvestment and subsequent overcapacity. Throughout the last decade China produced 31% more iron and steel than it consumed 18. The forecasts are that the industry will continue to struggle with overcapacity. In 2009 it utilized 84% of its production capacity, in 2012 this number fell to 78% 19. In the current 12 th FYP cycle, the government plans to further consolidate this sector by restricting further capacity expansion, merging iron and steel producers, closing down old plants and focusing on the production of more high quality iron and steel. These developments will likely lead to a decrease in the growth rate of coking coal consumption (used to produce iron and steel) but given China s ambitious plans for further urbanization, it is unlikely that iron and steel production will decrease in absolute terms in the coming 3 to 5 years Coal-to-chemicals industry China has developed its coal-to-chemicals industry relatively early given its abundant coal resources and the government has invested heavily in this industry. The majority of China s 300 coal-tochemical plants are small scale producers. The government encourages development of coal-to-chemical projects in the coal rich provinces and has approved the installation of several large scale plants close to coal mines. It also welcomes foreign investment in this industry. A key issue for the Chinese government is scale. It has a strong preference for large conversion plants. The largest threat for the further development of this industry is its relatively high levels of pollution. In comparison, the petrochemical industry can produce the same chemicals as the coal-to-chemicals industry but with lower levels of pollution. Given the recent focus on environmental issues in China, project proposals for new coal-to-chemicals plants should include water management and carbon capture storage solutions before being submitted for approval to the government Alternatives to coal consumption in China The most likely long-term threats to China s coal consumption comes from outside the coal industry. As mentioned before, China has ambitious goals to diversify its energy mix and it has a strong focus on natural gas and renewable energy. Natural gas imports from Turkmenistan through cross border pipelines are scheduled to grow to billion cubic meters (BCM) by 2020 and the pipeline from 16 Reserve Bank of Australia, World steel, Ernst & Young, Ernst & Young, Shell,

18 Myanmar (12 BCM) is nearing completion. Meanwhile, Chinese national oil companies (NOCs) are aggressively pursuing investment in natural gas assets outside of China 21. Natural gas will continue to grow its share in the country s energy mix but it is unlikely that it will present a serious threat to the dominant position of coal in China in the next 7 to 10 years. Significant use of natural gas would make China too dependent on imports and create potential energy security issues. Furthermore, the NDRC has started to liberalize a gas price (with the ultimate intention to link it to oil prices) which in turn has led to rising gas prices. China s power generation infrastructure also inhibits natural gas from gaining a dominant position given that it uses coal for base load power generation and natural gas for peak load (complementary generation to facilitate peaks in energy consumption) generation. The share of renewables in China s energy mix is growing steadily (see figure 9 below) starting from a small base. The costs of renewable sources of energy such as solar and wind however remain too high to pose a serious threat to the dominant position of coal in the medium long term. The government projects that China will still derive 65% of the country s energy consumption from coal in In absolute terms, coal consumption is not likely to decrease and will continue to increase, as the Chinese economy continues to grow. Figure 9. China s energy mix Figure 9: China's energy mix Source: JP Morgan 21 Clingendael, Censere,

19 4. Economic forecast and environmental issues of China s coal sector The economic status of China s coal sector explains part of its environmental problems. It also provides insights into where solutions can be implemented. China s coal consumption is fairly closely correlated with its GDP growth. The country s economic growth path thus provides a good indicator of how the consumption of coal is going to evolve in China. Recently, China s economy has experienced a decrease from 8 10% growth to approximately 7.5% per annum. It is projected that this will remain the growth rate for the coming 5 years. As a result, coal consumption growth will decrease as well. Until late 2012, coal consumption was predicted to grow at 5% 6% per annum over the coming 3 to 5 years 23. This prediction also takes into account efficiency gains as well as the growing share of natural gas and renewable energy. Very recent events such the crackdown by the new Party Leadership on pollution by shutting down plants in urban areas and occasional drops in domestic production have led experts to believe that a further slowdown in coal consumption growth or even a halt are feasible. This slowdown of economic growth and the subsequent decrease in coal demand has led to a decrease in coal prices since February Coal with an energy value of 5500 kilocalories p/kg was priced at 575 RMB (approximately 69 EUR) p/mt, the lowest price since July 2009 when prices fell sharply amid fears of a global recession after the US financial crisis 24. The current price trend is going downwards and it is uncertain whether they will reach the 2009 levels in the medium term. This development is unfavorable to the coal mining companies who have already seen their profits fall. This price development however is positive for the coal-to-chemicals industry which is now able to better compete with the petrochemical industry as the price of its inputs has decreased. Moving forward, it is expected that the industry will face further scrutiny over environmental issues, as China s growing middle class becomes increasingly vocal on this issue. figure 10. Annual growth rate of the Chinese economy Figure 10: Annual growth rate of the Chinese economy Source: tradingeconomics.com 23 JP Morgan (2012) 24 Bloomberg 18

20 4.1 Main environnemental issues China s rapid economic development has led to an exponential growth in coal mining since the country s liberalization in the late 1980 s. During this process, environmental protection has mostly been a secondary issue. Since 2011 this has started to change as China is transforming the structure of its economy away from investment heavy export-led growth to domestic consumption-led growth. Increased societal pressures on the Chinese government to give greater consideration to environmental protection have reinforced this trend. The three main areas of pollution, namely soil, water and air pollution are outlined in this chapter Soil pollution Soil pollution in coal mining predominantly comes from gangue, a waste product of coal stemming from its initial processing. As a result polluted soil and ground water need to be treated. China boasts a stockpile of 300 billion ton of gangue and this is increasing by 200 million ton per annum spread over tens of thousands of gangue hills. Some of these hills can spontaneously combust with massive smoke clouds as a result. This combustion also leads to the release of harmful gasses such as carbonmonoxide (CO) and sulfur-dioxide (SO 2 ). The gangue hills also leak water after rainfall which pollutes the soil with acids. In some regions, the gangue contains heavy metals and radioactive elements which are washed into the soil as well. Coal gasification also causes soil pollution. Water with high benzene levels, a byproduct of gasification, is disposed in large basins where benzene stays behind after the water has evaporated. Some of this benzene also washes in to the ground. Figure 11: A villager herding his goats near a gangue hill at a coal processing plant. Source: China Photo/Getty images 19

21 4.1.2 Water pollution The main source of water pollution originating from coal mining in China is mine water. This type of water pollution emerges when surface and/or groundwater seeps into the mine, when water from rock pores accumulates or when water is used to for instance dustproof the mine. This muddy water is usually discharged in the direct surroundings of a mine creating significant local pollution. In addition, mine water has polluted China s rivers and creates problems for people using the water downstream. There is as such a need for affordable water treatment technology that can help reduce the impact of mining on water resources. A second source of water pollution is the waste water that is released after the initial processing (washing and sorting) of coal. This type of waste stream contains solid residues of coal and gangue. This water also includes different types of oils. Coal processing plants use flotation agents such as kerosene and light diesel. Other oils enter into the ground water due to leakage of equipment. All of these pollutants are harmful to local water resources once the water is disposed. Coal-to-chemicals processing presents a third cause of water pollution. Waste water in this industry normally contains solid residues and by-products of gasification, such as ammonia and nitrogen. Water used in gas cleaning processes contains high levels of sulfur. Waste water processed from certain gasification technology contains high levels of phenol and benzene when disposed. The final source of water pollution comes from thermal power plants. The waste water discharged by these plants contains high levels of sulfur, alkali, fluorine and arsenic. As most of China s power plants are located in provinces with water scarcity issues, water treatment and reuse will become an increasingly important issue in order to sustain China s electricity need (see figure 11). Figure 12: Thermal power generation versus water scarcity by province in China, 2010 and Source: Bloomberg new energy finance 20

22 4.1.3 Air pollution and emissions Coal mining and burning are the largest sources of air pollution in China. The storage and transportation of coal create high levels of local dust pollution. As a consequence, local governments are pushing companies to control the dust or relocate. Coal combustion by power plants is the largest source of air pollution in Chinese cities. Many large and medium sized cities feature air pollution levels (measured in terms of particulate matter of 2.5 micrometers) that are 2 to 4 times above the global standards set by the World Health Organization (WHO). At times these levels reach heights as high as 10 to 15 times the WHO standard for maximum air pollution acceptable for humans. Furthermore, two thirds of Chinese cities cannot even comply with the national standards set by the central government 25. Burning coal also results in the emission of Sulfur Oxides (SO x ), Nitrogen Oxides (NO x), lead and mercury. Methane emissions as a result of coal mining are also an issue. On average, China only captures 20% of Coalbed Methane (CBM) 26 that is pumped up from coal deposits prior to mining operations; the remaining 80% is directly emitted into the air. In comparison, coal mines in the United States capture on average 81% of the CBM Huffington Post, 中 商 情 报 网 (China Business Intelligence Network), US Environmental Protection Agency (EPA) 21

23 5. Chinese government policy framework for the coal sector For the Chinese government the main focus for the mining industry is further consolidation, according to the 12 th Five year plan ( ). It strives to increase the average annual production capacity of coal companies by creating large enterprises and closing smaller inefficient ones. It also plans to further intensify the mining of the existing coal reserves by further increasing production in coal rich provinces such as Shanxi and to explore the potential of reserves in Yunnan and Guizhou. As the world s largest coal producer, China wants to further develop the international trade in coal and market its project contracting and technical services overseas. Another focal point is further technology upgrade/mechanization and improvement of working conditions for mine workers. According to this policy, living conditions for mine workers have to further improve and their income should grow in line with their productivity growth, in particular for front-line workers. Reuse of byproducts is another area highlighted in the 12 th FYP. China strives to reuse 75% of mining byproducts such as gangue, CBM and waste water. Current levels are well below this goal. Special emphasis is placed on CBM, both as a byproduct of mining as well as direct exploration. Transportation, operational safety and environmental protection are the final three main issues. For coal transportation the policy target is to resolve the current bottlenecks and build extra capacity such as extra roads and railways in order to better facilitate the current consumption levels of coal. Safety measures also need to be further improved with a special focus of decreasing fatal accidents. The further introduction of standard operating procedures and better training of workers should help achieve this. Further mechanization of mining operations is another safety goal. It can help decrease human safety issues by replacing frontline human involvement in mining as much as possible. Finally, environmental standards need to be observed more strictly. The government plans to carry out stricter control on these standards. The coal law will be revised to make these standards legally binding. The main objective on the consumption side is the cap of overall coal consumption at 4 billion ton per annum by 2015 to halt China s growing coal consumption. The government also wishes to concentrate the coal consumption of the coal-to-chemicals industry in the coal rich provinces. New coal-to-chemicals projects will be also be reviewed based on their water and CO 2 emissions management plan. 5.1 Recent trends for the coal sector under the new Xi Jinping administration The new administration under Xi Jinping seems to be more sensitive to environmental issues in part owing to increasing civil protest on this issue. In 2013, the government cancelled a 6 billion USD uranium mining project in Guangdong province after civil protest. The administration has also linked the performance of provincial and local leaders to environmental indicators. The first concrete performance indicator announced in June 2013 is air pollution for which local leaders will now be held responsible and other indicators are likely to follow. In September 2013, the government also 22

24 unveiled a plan for a general reduction of air pollution. For instance, it wants to reduce air pollution in Beijing, Tianjin and Hebei province by 30% 28. This new government is preparing an environmental protection tax law (currently in consultation phase) to price carbon emissions. It has started with a carbon credit trading experiment as of June 18 th 2013 in Shenzhen and experiments in Beijing, Shanghai, Tianjin, Chongqing, Hebei and Guangdong province are to be started by the end of this year. Carbon is expected to be priced at RMB p/ton. A prior plan dating from 2010 suggested a price of 50 RMB p/ton by Companies are exempted from this system if they use carbon capture, storage or sequestration. Several NOCs have launched programs to use liquid carbon for enhanced oil recovery (EOR) and CBM development (pumping liquid carbon underground to recover these resources) and the production of plastics. Shenhua has been capturing carbon in a coal-to-liquids project and inject in a 3,000 meter deep salt water layer located 17 km from the plant. The increased attention to the environment represents a break from the traditional focus on pure economic development with GDP growth as the main performance indicator under previous governments. Another trend which will be set in motion at the third plenum in November 2013 is the launch of economic reforms. For the coal sector, this will result in the stimulation of private enterprises participating at different areas in the coal value chain, especially if they can solve pressing environmental and resource efficiency problems related to water, soil and emissions. Figure 13: A coal fired thermal power plant running at full capacity. Source: China Photo/Getty images 28 New York Times,

25 6. Opportunities for further greening of China s coal industry The previous chapters discussed the problems that occur in China s coal sector related to resource efficiency, environmental degradation and human safety. These problems need to be solved by the introduction of cleaner, more efficient and safer technologies, practices and solutions. China lacks time and resources to develop all solutions domestically. As a result, China is looking for foreign technologies to fill this gap in several areas of pollution. Table 1 at the end of this chapter provides a summary of the main pollution issues per sector and the solutions needed. 6.1 Mining The majority of China s coal is located relatively deeply under the soil, often below ground water and sometimes under buildings and railways. This makes stoping (digging out the underground mining area) more complicated and mining these resources can be risky given possible soil stability issues. China possesses the technologies needed to assess the stability of the mine, considering roof conditions and possible rock burst. Although China is making improvements on mine safety, it is still lagging behind international best practices. Further integration of technology is needed to address these issues together with automation and mechanization of Chinese mines. Making more efficient use of water during mining and treating waste water after usage are also important issues. Ground water pollution is a widespread consequence of mining in China. Costeffective solutions are in demand for processing water and cooling water systems, water optimization processes, sewer systems, water recycling, wastewater treatment and zero liquid discharge. Fugitive dust problems occur at several stages of the mining process, both inside the mine during the drilling as well as outside the mine during the first transportation and storage. Dust emissions cause harm to the health of employees, resulting product loss as well as water spillage and contribute to air pollution in the form of ambient particles such as PM 2.5. Products that can efficiently combat these dust emissions are increasingly in demand. Finally, energy use in and around the mines is an issue. Mines are often located in remote area and mining companies use diesel generators to generate power which causes local pollution and leads to high costs. As a result, there is a need for less polluting sources of local electricity generation. In addition, there is a need for more energy-efficient equipment such as energy-efficient conveyor belts 6.2 Coal washing and sorting In China the majority of ROM is not washed and sorted, but is burned without any processing. Only an estimated 40% of the ROM Coal is washed and sorted. The most visible result of this is heavy air pollution around major cities near coal operations. China lacks unified standards in order to grade the quality of all types of coal. The current standards are often quality ranges and are usually not mandatory. Besides pollution, the immediate use of ROM coal causes accelerated wear of equipment and makes transportation much less efficient. Fugitive dust problems occur also during the coal washing and sorting process, during the washing itself (ambient dust) as well as at coal storage facilities and during transport. Traditional methods for dust control such as water spraying and large 24

26 fence construction are increasingly being substituted by more cost effective solutions such as biodegradable spray solutions. Waste water treatment after the washing process is another issue together with relative inefficiency of energy use in the washing and sorting process. Membrane based treatment technologies, fluidized bed reactor systems and evaporation techniques are increasingly being applied. As such there is much to be gained from making sorting and washing more efficient and cleaner, and subsequently creating an incentive for energy producers to buy higher quality processed coal Transportation The relative remoteness of China s main coal reserves in the Northwest of the country from its economic heartland in the (South) east poses transportation challenges. China s railroad network can barely handle the amount of coal that it needs to transport. Furthermore, although mining companies handle 80% of the logistics, many transportation inefficiencies occur due to high number of small intermediate coal traders. Removing these middle men and improved logistical planning could help to improve this situation. The effects of the relatively high ROM coal burning further augment the transportation inefficiency impact. It is estimated that in China ROM coal contains on average 18% of gangue, which implies that transportation can be made more efficient if more coal is processed and gangue transportation is reduced. Coal which is lost during transport through dust emission and loss adds further room for efficiency improvement. Another big issue in the Chinese transport sector is the road freight industry. The road freight industry accounts for more than 15% of China s total oil consumption. But the fuel efficiency of trucks running on roads in the country is 30% lower than in OECD countries Coal consumption Power generation The power generation sector in China provides multiple opportunities to foreign companies. Plants are often located in populated areas and cause a range of problems related to efficiency, environment and safety. China plans to build urban areas for another 300 to 400 million people throughout the next decade. This will require the contribution of 45 GigaWatt of newly installed capacity. These plants will have to meet higher standards in emissions efficiency. In addition, existing plants need to be retrofitted or face the risk of being closed down Thermal power plants China has made large advances in increasing its power generation capability since the 1980 s. In It has installed MegaWatt ultra-supercritical (fuel combustion above 600 C) power plants. In 29 中 国 能 源 报 (China Energy newsletter), Worldbank

27 the coming 5 to 7 years, the main focus will be on the further development of relevant technologies for operating the ultra-supercritical plants. Some of the key areas that power plants in China are looking at: steam turbine vibration and fault monitoring technology, turbine bypass system, flue gas denitration and unit air cooling safety Integrated gasification combined cycle (IGCC) IGCC, in an optimal process, could potentially separate 98% of the pollutants for storage or industrial reuse with less use of water compared to conventional coal combustion. Poly generation can produce other products like olefin and propylene from the methanol coming from the coal gasification process. There are several domestic players that are involved in IGCC such as China Aerospace Science & Technology Cooperation (CASC). So far however, China has not produced any significant innovations in IGCC. Both SOE s and private enterprises are reluctant in taking on the risks of process innovations due to a lack of incentive programs and public-private cooperation. Furthermore, China has strict norms for autonomously developed technology which further increases the risks of development. This inhibits the domestic development of these technologies which has subsequently resulted in a relative tolerance towards the import of technology by the government in order to fill this gap. The major issues for current IGCC plants in China is the high CAPEX, which is more than 3 times higher than a normal coal-fired power plant, and the polluted waste water streams. In China, there is no current widespread use of efficient treatment for this type of water pollution. Currently, it is in most cases pumped to open air basins where water evaporates, leaving behind large quantities of solid phenol residue Coking coal The so-called hard coking coal (high quality coal used for coking) is predominantly found in Shanxi province. Coking coal miners in this province went through a government imposed consolidation in 2011/2012 which stagnated production growth 31. The core issue in this industry is the relative scarcity of hard coking coal resources in China. The government has labeled coking coal as a strategic resource in the 12 th FYP, imposing limits on production growth. This in turn has lead China to become an importer of coking coal. The main issue in the steel industry is to find solutions that make more efficient use of coking coal. Improving the coal blending (mixing high and medium quality coal) process is also an issue, in order to make more efficient use of high quality hard coking coal Coal-to-chemicals China s coal-to-chemicals industry is mostly active in the traditional conversion. This industry is characterized by low efficiency due to the high consumption of coal, high levels of pollution and only limited added value upon conversion. China has a focus on developing modern conversion methods and hopes to further move up the value chain to also produce plastics and fibers via coal conversion. It is expected that China will draw upon foreign technologies that can help the country increase its modern conversion capacity. As a result, foreign companies/clusters with expertise on how to 31 Standard Chartered,