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26 Sep 2022

Han Chen, Wei Shen - China Dialogue

China's pledge to end coal power overseas, one year on

"China’s no new coal power overseas pledge, one year on" 22 September 2022


Policy announcements and signals

Since the announcement, China’s government bodies, financial institutions and power plant builders have been working at the policy, finance and project level to increase support to renewable energy projects in its overseas energy investments.

At the policy level, in March this year the National Development and Reform Commission and three other government bodies published a joint document on promoting green development in Belt and Road nations. It called for “a full stop to new coal power projects overseas, and cautious progress on those already under construction,” as well as the green and low-carbon development of overseas coal power projects which have already been built, which in practice means retrofitting plants to improve efficiency and reduce pollution. These were the first concrete instructions from Chinese officialdom on how to handle projects at different stages of implementation since the initial announcement.

Between September 2021 and April 2022, 15 overseas coal power projects that were in the pre-financial closure and pre-construction stages were shelved or cancelled. These were projects that had nonetheless received Chinese financial backing or EPC (engineering, procurement and construction) support.

Question marks still hang over projects where financial closure has already occurred but construction has not yet started, and “captive” power plants being built specifically to power industrial zones. In these cases, compensation for breaches of contract could be due if a Chinese party unilaterally withdraws, making cancellation more complicated.

On 6 January 2022, the Ministry of Ecology and Environment (MEE) and the Ministry of Commerce published guidelines on environmental protection in overseas investments. These focus on managing environmental risks across the lifespan of projects in Belt and Road nations, and encouraging firms to apply standards produced by international organisations and multilateral bodies, or Chinese standards where tougher.

The rapid tempo of policy announcements shows that there is unanimity across government on decarbonising China’s overseas projects. While producing high-level policy and specific guides for project-level operations at home, China was also active diplomatically, working with developing nations to build platforms and mechanisms for international green and low-carbon cooperation. In November 2021, the Forum on China–Africa Cooperation issued a joint declaration on tackling climate change. The following month, a China–ASEAN forum on high-quality Belt and Road development was held. In May 2022, a joint statement was issued at a high-level meeting on climate change of the BRICS nations (Brazil, Russia, India, China and South Africa). [...]

Our research at the Green BRI Center in the International Institute of Green Finance, Beijing, has found that power plant construction firms owned by central government have already pulled out of projects where binding commitments have not yet taken effect, and are actively looking at how to expand their renewable energy portfolio. The proportion of fossil fuel projects in China’s Belt and Road energy sector projects started to fall in 2016 and bottomed out in 2020 [...]

China’s low-carbon approach to overseas energy investments requires its financial institutions to be flexible, open and innovative, leaving behind homologous, closed and rigid investment models. Specifically, they can no longer rely on EPC+F (engineering, procurement and construction plus financing) contracts underwritten by sovereign guarantees from the host nation. [...]