China has experienced huge change over the past 30 years. But even amidst that change, coal has been the pillar of the country’s energy sector and its dominance will likely continue for the next 30 years. And that will be true even though coal is exacting a heavy toll in terms of pollution, land destruction, and human health.

Ever since 1978, when Deng Xiaoping launched the economic reforms, coal has been dominant. Without it, Chinese industry would literally grind to a halt. This year, coal will account for about 75 percent of industrial fuel use, 76 percent of electricity generation, 80 percent of civil and commercial energy, and 60 percent of chemical feedstock.

Indeed, the entire country is geared toward coal development. Coal provides about 70 percent of the country’s primary energy and that high percentage (second only to South Africa) explains why China has become one of the world’s biggest emitters of greenhouse gases. China’s carbon dioxide emissions are about equal to those of the US even though per capita energy use in the US is seven times as high as China’s.

China can rely on coal because of its huge reserves. One estimate puts total reserves at about 8 trillion tons of coal in place, with one trillion tons of proven reserves, of which some 280 billion tons are recoverable. (For reference the BP Statistical Review puts China’s coal reserves at 114 billion tons.) About 76 percent of the coal reserves are in the northwestern regions of Xinjiang, Inner Mongolia, Shanxi, Shaanxi and Ningxia provinces.

Coal fields are distributed throughout the country. They cover about 600,000 square kilometers or some 6 percent of the land area of the country. And those reserves account for about 94 percent of China’s total proven fossil energy reserves. Of the total coal reserves, 13 percent is lignite, 75 percent is bituminous, and 13 percent is anthracite. Steam coal takes about 73 percent, of which 70 percent is located in Shanxi, Inner Mongolia, Shandong and Henan provinces.

As the economy continues to grow, driven by the rapid urban expansion and the government’s plan to double GDP by 2020 over 2000 levels, the government sees tremendous coal demand ahead. A recent report by the Energy Research Institute, an arm of the powerful National Development and Reform Commission, China’s urban population will grow by 350 million from 2005 to 2025. By the end of 2007, China had an urban population of 594 million out of the total population of 1.3 billion. Each year, 15 million people migrate to cities from rural areas, which has created more than 12 million new jobs annually.

The urban expansion is fueling energy demand. In 2008, China produced 2.62 billion tons of coal. Hu Cunzhi, chief planner of the Ministry of Land and Resources, expects annual coal output to increase to 2.9 billion tons by 2010, to 3.3 billion tons by 2015, and to 3.5 billion tons by 2020. Of the total, China’s largest coal-producing province of Shanxi plans to raise its coal production to 700 million tons per year by 2010, up from 540 million tons in 2008.

In 2005, China began adding coal production capacity, with plans to build 13 coal production zones that will include 98 existing mines and 500 new mines with capacity totaling 1.3 billion tons. The zones are located in 14 provinces and regions in northwestern, southwestern, northern, and central China. These zones cover 103,000 square kilometers, and have total coal reserves of 690.8 billion tons, accounting for 70 percent of China’s total. Out of the 2.9 billion tons of coal production by 2010, 2.24 billion tons will come from the 13 new zones.

Environmental Costs

Coal-fired power plants account for 74 percent of China’s total sulfur dioxide emissions, 60 percent of nitrous oxide emissions and 70 percent of total suspended particles. The emissions are a primary contributor to China’s myriad air-quality woes and they are causing acid rain problems in countries like Japan and South Korea.

The country’s major power plants consumed 1.34 billion tons of coal in 2008, up 4 percent over 2007. The figure will rise to 1.75 billion tons by 2020, with coal accounting for 73 percent of China’s power generation. In 2008, 90,510 megawatts of new generating capacity came into operation, including 65,750 MW of thermal power. China’s total generating capacity thus rose by 10.34 percent to 792,530 MW, just short of the government’s target of 800,000 MW.

In 2005, coal-fired power plants emitted 2.2 billion tons of carbon dioxide, accounting for 43 percent of China’s total carbon dioxide emissions. The volume has kept growing, as the government has not found a way to reduce carbon dioxide emissions. According to a government estimate, by 2030, China will need to build up to 700 gigawatts of coal-fired power generation capacity. While the government is working to improve the non-carbon power generation by building more wind and solar power facilities, as in all other countries, these energy sources cannot make a dent any time soon in the coal-generated power.

Work to improve China’s energy efficiency and reduce pollution emissions

has proved difficult. Progress has been so slow in achieving improvements that government finds it hard to meet targets set for 2010, NDRC chairman Zhang Ping said. “High-emission and energy-intensive industries are likely to grow faster over

the next two years,” Zhang said recently.

Improvements in both areas demand investment in new technology and new

equipment, and this is proving challenging as businesses are cutting costs to focus on survival during the global economic slowdown. The NDRC’s 2010 targets included reducing emissions of major pollutants such as sulphur dioxide and carbon dioxide by 10 percent from 2006 levels.

The government has planned to spend up to $4.4 billion to install sulfur-capturing units at 221 of its coal-fired power plants, with the goal of cutting 10 percent of its sulfur dioxide emissions by 2010. In addition, policies favoring desulfurized power plants are being implemented, such as granting priority to those that connect to local grids, and allowing them to operate longer than plants that do not desulfurize.

The coal-fired power plants scheduled for sulfur-capturing units have a total generating capacity of 137 GW, about 27 percent of China’s capacity. That 137-gigawatt total breaks down as follows: 7.37 gigawatts from 12 plants owned by the State Power Grid Corp.; 17.62 gigawatts from 34 power plants of the Huaneng Group; 18.12 gigawatts from 61 power plants of the Datang Group; 9.34 gigawatts from 81 power plants of the Huadian Group; 13.56 gigawatts from 107 power plants of the Guodian Group; 10.33 gigawatts from the China Power Investment Co.; and 60.26 gigawatts owned by local authorities.

Some of the sulfur-removal equipment is already in place. In 2006, power plants with a total of 57.6 gigawatts installed such equipment, 34.47 gigawatts was installed in 2007, 28.75 gigawatts in 2008, and the remaining 12.78 gigawatts in 2009.

In part to cut pollution and improve energy efficiency, Chinese authorities shut down 553 small thermal power generators with a total capacity of nearly 14.4 gigawatts, in 2007. These small units were to be replaced with large generators with a single-set capacity in excess of 50 MW. The NDRC projects that the larger plants will help the country save 18.8 million tons of coal and cut emissions of sulfur dioxide by 290,000 tons emissions of carbon dioxide by and 37.6 million tons, annually. By 2010, China plans to close some 50 GW of small coal-fired plants and another 10 GW of small oil-fired units in order to cut pollutants discharges by 10 percent. Getting rid of the small power plants is critical if those targets are to be met. Although they provide a fraction of the country’s overall power supply, they create nearly 40 percent of the total sulfur dioxide discharged by the country's power industry.

Safety Costs

In 2005 China had 28,000 coal mines, over 2,000 of which were state-owned, with recovery rates averaging 45 percent of reserves. Townships and individuals owned 26,000, with recovery rates ranging between 15 and 20 percent. Of the total number of coal mines, 23,000 were considered small with annual production capacity of less than 300,000 tons.

These smaller mines have become major sources of pollution as well as the primary culprit for accidents with large casualties and losses. While small coal mines produce only 30 percent of China’s coal, accidents in these mines account for two-thirds of China’s mining fatalities.

Chinese coalmines are notoriously unsafe due to lack to modern facilities, excessive amount of mine gases and/or negligence of safety rules. The poor worksite safety at small coal mines administered at county levels has been an ongoing problem for the central government, which continues its effort to shut them down.

The government wants to close small mines, merge medium-sized ones, and build larger ones. But the effort to shutter the smaller mines has been met with strong resistance at local levels because of conflicting interests between the local and central governments. Between 2008 and 2010, China is poised to close 4,000 small mines. Of that number, 1,500 will be either merged or have their capacity expanded, while the rest will be shuttered. All told by the end of 2008, China had closed 12,155 small mines due to their poor safety record and low operational efficiency, cutting capacity by 300 million tons.

Most accidents are caused by inadequate safety infrastructure or outdated and worn-out safety facilities. Many coal mines exceed their mining capacities in pursuit of profit, risking dangerous gas build-ups in the tunnels of depleting mines. Gas explosions are the biggest cause of miner fatalities. According to government data, China’s coal production accounts for 31 percent of the world total. But its coal mine casualties account for 79 percent of the world’s total.

In 2005, 5,986 coal miners were killed in 3,341 accidents. The number of deaths declined 0.7 percent from 2004 and the number of accidents dropped by 8.2 percent, thanks to the new investment the government made to improve mine site safety.

In 2006, China recorded 2,945 coalmine accidents, which killed 4,746 miners. In the first 10 months of 2007, 3,069 miners were killed in 1,920 accidents.

Figures for 2008 are not available, but it is understood to have fallen by a big margin thanks to the tougher efforts on worksite safety in order ensure the success of Olympics. In the top producing province of Shanxi, 303 people died in 120 coalmine accidents in 2008, down by 34 percent and 19 percent respectively. In 2008, small coalmines produced 35 percent of China’s coal, but death tolls account for 73 percent.

The government has realized that investment in safety improvement alone will not be enough to solve the problem. Further action is on the way. China is poised to revise the Coal Law, in place since 1996, to tighten measures for coal mine safety and bring to justice officials who are found to be responsible for coal mine accidents.

Transportation Bottlenecks and Trade

While China has huge resources, the government is having difficulty moving the coal from the mines in the north and west to the markets in the south and east.

In addition to a few coal-dedicated railways, China is planning to build more railways in order to transport coal produced from Xinjiang region in the northwest to the market. The line will start from Hami city of Xinjiang, branching out with two spur lines. The idea is to further tap coal reserves in Hami to help quench the demand for coal in the eastern provinces. The scheme calls for building a $17.6 billion trunk line from Hami to Lanzhou city of Gansu province for passenger transportation, while the existing Hami-Lanzhou line will be used for transporting coal only.

In the meantime, power companies are building dedicated railways in the province. For instance, China Power Investment is building a rail line between Jinzhou and cities in the northeast.

In 2007, China transported 1.54 billion tons of coal by train, 220 million tons by highway and 244 million tons by river or sea.

China has been discouraging coal miners from exporting their output by introducing a tight new quota regime. The move is designed to ensure there is sufficient supply to meet strong domestic demand for coal. The government issued a total coal export quota of 47.7 million tons in 2008, down from 100 million tons in 2003. In August 2008, the government imposed 10 percent export duty on steam coal and anthracite which further slowed exports.

In 2009, exports are expected to continue weakening as a result of the tightened quota as well as depressed global demand.

Imports dropped 21 percent in 2008 to 40.4 million tons as demand waned in the face of the global financial crisis. Chinese authorities have been cutting import duties on steam coal and anthracite in order to assure adequate supplies.

CTL

China has been flirting with coal-to-liquids (CTL) since 1999, with its first CTL project in Henan province. However, that 10,000 barrel-per-day project ended once it was discovered that the coal being used was unfit for liquefaction.

By 2015, China hopes to be producing about 1 million barrels of motor fuel per day. Although China is moving forward on CTL, a number of problems loom. First and foremost is the air-quality problem. Coal-related pollution is already emerging as a major environmental headache. Officials are willing to accept increased coal use if this leads to improved environmental conditions. But CTL is not a likely solution; their facilities produce huge amounts of carbon dioxide and they require enormous amounts of water. Industry officials say that about 100,000 tons of water are necessary to produce 200,000 barrels per day of liquids from coal, a hurdle since most of the proposed CTL projects are planned for the country’s northern regions, which are already short of water.

Therefore, the central government has now taken a cautious step to develop the sector, in effect requiring local governments to stall on any new CTL projects. And last September, the central government announced that all but two of the country’s CTL projects had been halted in an attempt to control surging investment in the water-intensive sector. In a circular sent out just before the official announcement, the NDRC told local governments that they should try to find ways of developing CTL technology via pilot projects, before moving on to building projects.

Companies that saw planned projects culled include Yankuang Group’s plant in Shaanxi province with annual production capacity of 100,000 bpd, and Lu’an Group’s plant. Shenhua also had one of its two projects axed, a CTL project it planned to build with Sasol in Shaanxi province.

In late December, Shenhua Group CTL and Chemical, completed the construction of the country’s first major CTL project, a 200,000 bpd unit in Ordos, Inner Mongolia. But, industry sources said the company may wait for a rally in crude oil prices before it begins operation.

The government wants to use Shenhua as a pilot project to usher in the country’s CTL sector as enunciated by Chinese premier Wen Jiabao in June 2006 when he visited Shenhua. Wen said that CTL projects should be done “on a trial basis” and that “coal liquefaction projects should not be carried out in a rush.”

The project’s coal liquefaction reactor was fabricated by China First Heavy Industries. The hydrogen unit, using Shell gasification technology, consists of two series with identical design capacity of 313 tons per day hydrogen output. The air separation section, supplied by Linde AG, has two lines, each with a capacity of 50,000 cubic meters per hour.

When the project was planned in 2007, the cost of generating each ton of oil was estimated at $45. But “the figure has changed as the prices of coal and oil have been fluctuating,” according to officials with Shenhua.

The other looming CTL project is a joint venture between Shenhua’s Ningxia Coal Industry Group and South Africa’s Sasol Ltd. It will use indirect liquefaction technology, which Sasol has developed and used for decades. This project, although officially still going ahead, has however, yet to break ground.

In all, the Chinese government has planned to invest as much as $150 billion in CTL projects by 2020. But if low crude prices persist that money is unlikely to be allocated any time soon.

Regardless of when that money is allocated, it is obvious that at the same time that the US and other developed countries are increasingly reluctant to utilize their coal resources, China is surging forward with massive investments in all types of coal infrastructure. Indeed, when it comes to coal, China’s future is looking a lot like its past.