China Mergers May Stall Environmental Goals

The government pushes its state sector reform plan.

Freight cars filled with coal are parked inside a coal mining facility in Huaibei, northern China's Anhui province, March 5, 2014.

A mammoth merger of state-owned coal and power companies in China may create the world's largest electric utility, but what it will do for the environment remains to be seen.

Under an agreement approved by the cabinet-level State Council on Aug. 28, China's leading coal company Shenhua Group Corp. will join with generating giant China Guodian Corp. to form National Energy Group, Reuters reported.

The combination will control 1.84 trillion yuan (U.S. $280 billion) in assets, the companies said.

Shenhua brings 420 million metric tons of coal mining capacity to the table, adding to Guodian's 65 million metric tons, the South China Morning Post said. Combined coal production this year may exceed 336 million tons, based on company reports.

Guodian's installed generating capacity of 145 gigawatts (GW) includes 26.17 GW of wind power, the world's largest source. Shenhua's installed power capacity stood at 82 GW at the end of 2015, Bloomberg News said, citing the energy analysis firm BNEF.

The merger of the two state-owned enterprises (SOEs) includes a slew of other assets including rail lines and port facilities.

The new company accounts for 13 percent of China's power generation and coal mining capacity, according to a Citigroup estimate cited by Bloomberg.

Despite Guodian's investments in wind power and other renewables, the merged company's output will continue to rely heavily on coal.

Bloomberg New Energy Finance estimated that 77 percent of National Energy Group's generation will be coal-fired, with 14 percent coming from wind, 8 percent from hydropower and 1 percent from solar.

It is unclear how many of the company's generating plants will be affected by the National Energy Administration (NEA) plan last November to close or delay 103 coal-fired plants and projects with capacity of 150 GW by 2020.

But the company is expected to keep building and opening new coal power plants.

Shenhua alone is likely to commission nine new coal-fired plant sites in 2017-2018. All will be "ultra-supercritical" generators, which rely on high temperatures to use coal more efficiently, the Global Energy Research service of consulting firm Enerdata said.

The changes come as China appears to be on the verge of reversing a declining trend in coal consumption which, according to official figures, has lasted for three years.

In the first half of this year, China burned 1.83 billion tons of coal, a slight increase from year-earlier consumption of 1.82 billion tons, the National Development and Reform Commission (NDRC) said in separate reports.

The figures from the government planning agency may be an early sign that coal use is on the rise again this year along with the economy.

Last year, coal consumption fell by a substantial 4.7 percent. In the first half of 2016, coal use dropped 5.1 percent from a year before, the NDRC said last year.

The turnaround in consumption is taking place against a backdrop of conflicting forces.

On the one hand, China's government has ordered cuts in production overcapacity in industries including coal and steel, while downsizing generating plans.

On the other, China is facing rising demand due to the increase in economic growth rates to 6.9 percent in the first half of 2017 from 6.7 percent last year.

Power consumption in the first half rose 6.3 percent, up from a 5-percent pace in 2016.

The forces have combined to drive up prices for coal and steel, triggering increased production. Coal output through August climbed 5.4 percent, while crude steel production gained 5.6 percent.

Onset of winter smog

The environmental effects have been evident this year.

In the first half, the concentration of fine smog-causing particles known as PM2.5 rose 5.4 percent from a year earlier in 28 monitored northern and central cities, marking the first increase since 2013, the Ministry of Environmental Protection (MEP) said.

In early September, the MEP warned that the onset of winter smog had started early in Beijing this year, prompting new limits on coal.

On Sept. 16, the official Xinhua news agency reported that only natural gas, electricity and renewable energy would be used for heating in the 28 cities, but it did not say how the rule would be enforced.

Beijing authorities have also promised to suspend most construction activities to ease pollution pressures from Nov. 15 to March 15, Xinhua said.

Steel production is to be reduced by half in the nearby port city of Tianjin this winter, but it was unclear whether wider seasonal cuts ordered last March by key agencies and six provincial governments for steel, cement and aluminum would be put into effect.

Despite the new environmental measures, the joining of large coal and power interests suggests that the merged company will have a strong incentive to utilize its own resources and boost coal-fired power.

The government has targeted a reduction in coal's share of primary energy use from 62 percent last year to 58 percent by 2020. But the proportion is now "around 80 percent" in China's north, according to Xinhua.

In a blog posting, China energy expert Philip Andrews-Speed said that one of the government's aims in promoting the merger is to further its goals of reducing coal-fired power capacity, cutting coal production and consumption, and curbing emissions.

Those aims have met with local resistance, in part because coal mining and power provide more jobs than renewable energy, said Andrews-Speed, a principal fellow at National University of Singapore.

"In undertaking the merger of Shenhua and Guodian, the government seems to have shifted the responsibility to the new company," he said. "Even within the company, the business logic will continue to support coal use, at least in the short-term, as the merger reduces the impact of fluctuating prices."

The environmental effect of the merger appears to have been a secondary consideration at best as the government pursues its separate goal of restructuring its bloated state-owned giants and reducing the number SOEs.

In July, the State Council unveiled its broad plan to register all of its centrally-administered SOEs, except those in financial and cultural enterprises, as limited liability companies or joint-equity corporations in an effort to make them more competitive.

It is unclear whether the program will succeed in reforming the heavily-indebted SOE sector under modern management with participation of private capital. But the government claims that 92 percent of SOE subsidiaries had already been "restructured into modern companies" by the end of 2016.

Part of the goal has been to reduce the number of centrally-administered SOEs to under 100 by the end of the year.

That target was reached in August with the announced merger of Sinolight Corp., a light industry and financial services group, with China National Arts and Crafts Corp., incorporated in turn under China Poly Group Corp., which is engaged in activities ranging from real estate to defense equipment.

While the logic may seem less than obvious, the merger allowed the government to claim that the number of SOEs had dropped to 99 from 102 at the start of the year and 196 in 2003.

In time for the party congress

The speedup of SOE merger activity appears to be aimed at advancing claims of success in reform efforts in time for the Communist Party of China (CPC) 19th National Congress, scheduled for this month.

The Shenhua-Guodian deal may have clearer logic, but it is part of the same process, reducing the number of central SOEs to 98.

China analysts say the mergers do little for competition and may succeed only in creating bigger SOEs, leaving the size of the state sector unchanged.

Andrews-Speed said it was uncertain what part environmental considerations may have played in the Shenhua- Guodian merger plans.

"I guess it is a case of mixed motives will lead to mixed outcomes," he said.

"Although one of the (secondary?) official reasons for the merger is the reduction of thermal power, it is far from clear how this will be achieved other than through the ongoing program of enforced closures," he said by email.

In an upbeat assessment last week in the run-up to the party congress, the chairman of the State-owned Assets Supervision and Administration Commission (SASAC), Xiao Yaqing, announced record rates of revenue and profit growth for the sector in the first eight months of the year.

Debt risks at the companies are "totally under control," Xiao said, according to Xinhua, citing an average debt-to- asset ratio of 66.5 percent.

Separately, the Ministry of Finance reported that total SOE assets in the eight-month period climbed to 146.3 trillion yuan (U.S. $21.9 trillion), while liabilities rose to 96.5 trillion yuan (U.S. $14.4 trillion). Both increased by 11 percent from a year earlier, Xinhua said.