Water Drives Coal Reform

By Feng Hu 13 August, 2014

Feng Hu explains why water drives coal reform and how Water-for-Coal plan & circular economy will help

Makes dollar sense to clean up coal: enviro cost is RMB556bn (MEP) same as 25% of its output value
Water use & allocation restricted for the sectors; New mines & coal-to-chems need special approval
Coal is here to stay but given limited water, State Council wants coal & power circular economy

Coal is often blamed for the black smog lingering over Beijing. Since China declared war on pollution, regulations have been put in place to solve air pollution from burning coal. But what will actually drive coal reform is water. The government knows this and coal reform is needed to protect limited water resources.

Over 50% of industrial water is used in coal and related industries. Moreover, coal and coal-related industries such as thermal power, mining, steel, cement and chemical have all been singled out by the MEP amongst the 16 highly polluting industries. Given six out of these 16 industries are related to coal, it is not difficult to see why the War on Pollution means a coal clean-up. Moreover, a recent MEP study revealed the external environmental cost of coal in 2010 to be RMB555.54 billion. This is 2.3x of the total environmental protection expense and a quarter of coal industrial output value in 2010.

2010 Environmental Cost of Coal 2.3x Total Public Expense on Environmental Protection

Government’s Water-for-Coal plan controls water allocation in coal and coal-related production

The MWR’ Water-for-Coal Plan issued on 17 December 2013 pertains to the development of large scale coal bases in China and includes:

1. Total water use by coal bases & power generation

Total water allocation control for coal bases to be “taken seriously”

Up to 83% of China’s coal lies in water scarce and water stressed regions. As such, the government is promoting clean coal production and wants to increase the coal mine water utilization rate up to 75% by 2015 according to the Energy Development 12FYP.

Water use must be within provincial quotas

China’s top four coal mining provinces (Inner Mongolia, Shanxi, Shaanxi and Henan) produced 2.64 billion tonnes or 72% of coal production in 2012. 24 bathtubs of water are required to produce one tonne of coal yet these four provinces only have 3.9 – 28.1 bathtubs per person per day (see how thirsty coal is here)

MRW’s Water-for-Coal Plan wants annual water consumption per MW of coal-fired power installed capacity to be 2.52 million m3
…  and State Council wants coal-fired boilers to be upgraded

Water usage coordination between coal mines & coal fired power plants

Coal-fired power plants need large amounts of water for cooling. The Water-for-Coal Plan wants to promote air-cooling technology in power generation in water scarce regions and reduce the annual water consumption per million kW of coal-fired power installed capacity down to 2.52 million m3 or 0.1 m3 per second per million kW.

Differentiation between surface and groundwater use

Stricter use of surface water and prohibited use of groundwater is expected with the exception of mine drainage . In China, 95% of coal is mined underground and an estimated 1m3 of groundwater reserves are destroyed per tonne of coal mined. In the North China Plain, over 70% of deep and shallow groundwater is polluted.

2. Water efficiency in coal & coal-related industries

Implementation of water efficiency measures for newly built coal-fired power plants with a “first save water, then use water mentality”

Coal-fired power plants, especially those located in water-scarce regions, are encouraged to prioritize water reuse & water-efficient technologies (see “Spend to Quench Coal Thirst“)

Implementation of water efficiency measures for development of coal bases

State Council’s Energy Saving and Low Carbon Development for 2014-2015 Action Plan issued on 26 May 2014 encourages clean coal consumption and updating outdated coal-fired boilers.

In July 2014, the Ministry of Industry & Information Technology ordered a list of companies in several polluting industries to replace/upgrade their outdated equipment and shed excess production capacity by the end of September 2014. 44 coking and 381 cement factories were named. Those not on the list but also with outdated equipment or excess capacity are expected to do the same by the end 2014.

3. New coal mining capacity needs water approvals as well as EIA

Coal-fired power plants in water-scarce regions are encouraged to prioritize water reuse & water-efficient tech

Construction of coal mines must complete feasibility reports to be submitted to MWR & NEA for approval

On 17 July 2014, MEP issued the Notice on Environmental Impact Assessment of Coal-Electricity Base. It requires water resources capacity assessments based on water resources demand and allocation among all the main industries in coal-electricity bases (see our review on China’s EIA reform here)

4. Water allocation across industries is more restrictive

Restrictions on the transfer of water use permits by the coal base

Considering the 14 largest coal bases account for more than 90% of total coal production, this limits ways of big miners to find sufficient water for their coal production.

By the end of 12FYP, coal production will be up to 4 billion tonnes. To achieve this target, the coal industry has to adopt water-efficient measures and technologies as set out by the plan.

2011-2014 Coal Production 14 Large Coal Bases

Coal-to-chemical also hit by new regulations

China plans to ban coal-to-gas projects with annual production below 2 bn m3 & coal-to-oil projects with annual production below 1 mn tonnes

NEA  July 2014

Meanwhile, the coal-to-chemical industry also faces challenges to expand because of limited water resources. According to a notice issued by NEA on 22 July 2014, China plans to ban coal-to-gas projects with annual production below 2 billion m3 and coal-to-oil projects with annual production below 1 million tonnes.
For projects above the permitted scale, location selection needs to consider water resources availability, and they are not allowed to compete for domestic, agriculture and ecological water use.

“Water security is more important than energy security.”

Mr. Li Junfeng, director of National Climate Change Research Center

Water security is more important than energy security”, asserted Mr. Li Junfeng, director of the National Climate Change Research Center, in a national conference on coal-to-gas development on 25 July 2014.

He further explained that the coal-to-gas process needs 7 m3 of water per 1,000 m3 of gas, and currently most coal-to-gas projects are located in water-scarce northwestern regions, putting great pressure on water and the environment.

Perhaps this is why Datang International Power Generation sold its coal-to-chemical and coal-to-gas operations back to their parent.

In addition to highlight water use and water efficiency, the Water-for-Coal plan also includes water pollution control for coal bases & coal-fired power plants through the treatment of wastewater & mine drainage. Therefore it is actually helping the coal industry to hold the “three red lines” in managing limited water resources.

War on pollution = closing down small coal mines and big fines

Since Premier Li Keqiang declared war on pollution, more stringent regulations and monitoring efforts are being put in place.

10 coal-fired power plants without proper desulfurization operations were fined RMB 519 million.

MEP & NDRC, July 2014

It’s not going to be cheap to pollute anymore.

Just recently 10 coal-fired power plants without proper desulfurization operations were charged with big fines totaling RMB 519 million, according to a joint announcement by the MEP and NDRC in July 2014.

Once the amended Environmental Protection Law is put in force in January 2015, new “sticks” such as unlimited daily fines and criminal sentences for non-compliant companies will make pollution even more costly.

China plans to close down 2,000 small & “backward” coal mines across the country by the end of 2015.

Those who cannot afford to clean up, and those that are difficult to monitor – especially small coal mines – will simply face shutdown. The government is trying to speed up such consolidation processes. On 12 May 2014, 12 central government bodies including the MEP, NDRC, MLR, MoF & NEA et al jointly issued a Circular on Stepping Up Efforts to Shut Down Small Backward Coal Mines, aiming to close down 2,000 small & “backward” coal mines across the country by the end of 2015.

On top of this, the government is signaling the phasing out of coal in certain regions. Beijing is taking the lead and has enforced the use of cleaner low-sulfur coal across all industries since 1 August 2014 according to its new local standard on coal products. It also announced the ban of coal use in its six main districts by 2020.

At the national level, State Council’s Energy Saving and Low Carbon Development for 2014-2015 Action Plan aims to abolish 0.2 million tonnes of steam coal-fired boilers and slow down coal consumption in Beijing, Tianjin, the Yangtze River Delta region and the Pearl River Delta region to return to 2012 levels. Moreover, NDRC just amended the Measures for the Supervision and Administration of Coal Trading on 30 July 2014 to ban the sale & import of inferior coal with high ash and sulfur content from 1 Sep 2014.

Government wants a circular economy for coal & coal-related industries

However, although coal is under fire on all fronts, it is here to stay. And the government has shown the way forward with the “Circular Economy Development Strategies and Action Plan” which covers nine industries including coal and coal-related industries such as power, steel, chemicals and construction.

Circular economy for coal: cleaner production and more efficient resource utilization

As Mr. Wu Xinxiong, director of the National Energy Administration, stated in a national meeting on 13FYP Energy Development in June 2014, coal will continue to be China’s No.1 energy source for a long period, and the keystone for energy security is clean and high-efficient utilization of coal.

Given currently 66% of total power installed capacity comes from coal, it seems that we will hit the 12FYP target of reducing coal’s share to 65%. By 2050 the government plans to drop coal’s share down to 43%. However, despite the decrease in share, demand for coal will continue to increase in absolute terms. China’s coal imports increased significantly over the last ten years: coal import in 2013 is 17x of that in 2004.

Coal will continue to be China’s No.1 energy source for a long period, and the keystone for energy security is clean and high-efficient utilization of coal.

Mr. Wu Xinxiong, director of the National Energy Administration

2004-2013 China's Coal Imports vs Exports

Other than being water intensive and causing water pollution, coal also has climate change and air pollution implications. But can developing non-fossil fuels help to break the water constraint in China’s future energy development?

If we look at the available options, such as hydro (see “Avoiding Hydro Wars), gas (see “Hydraulic Fracturing: Lessons from the US”) and nuclear (see “Inland Provinces: Nuclear At Crossroads”), they are also highly water-reliant. The key factor in China’s energy mix is actually water.

The government thinks the way forward is to develop a circular economy. For the coal industry, the key points are:

To move forward…it is time to have a corporate water strategy

  • To develop clean mining processes;
  • Comprehensive utilization of resources;
  • Energy saving and resource recycling, including mine water;
  • Ecological environmental protection of mining zones; and
  • To extend the industry chain by linking coal, power and construction materials.

It is clear that coal is here to stay and will remain as the keystone of China’s energy security. The government knows this, and with limited water resources, coal reform is inevitable. Thus to move forward, there is no other choice but to develop a circular economy. Maybe it is time for corporates in coal & coal related industries to have a water strategy.

Further Reading

Coal & Coal-related:

  • Water for Coal: Thirsty Miners?: With up to 83% of China’s coal reserves in water stressed & scarce regions, the recent CLSA report asks if there is enough water to grow coal production. If not, what are our options? Debra Tan expands
  • Syngas: Trade Offs for Water & Air: WRI discusses how China’s latest scheme to cut air pollution by replacing coal with synthetic gas will exacerbate water stress in coal-rich provinces. Find out how China’s response to air pollution poses a threat to water
  • Mismatched: China & New Coal-Fired Plants: With 51% of China’s planned expansion in coal-fired power plants in water scarce areas WRI discuss how China must reconcile its rising demand for coal & its increasingly scarce water supply
  • Water: A Mining Blindspot?: The Head of ICMM’s Environment & Climate Change work programme gives us her candid take on water management & disclosure in mining and the potential for being blindsided by water risk
  • Spend To Quench Coal Thirst:Can China manage to balance her limited water resources & coal expansion? Debra Tan argues that the sector can spend to quench coal thirst with consolidation or more investment in aggressive water savings tech
  • China: No Water, No Power: HSBC asks if China has enough water to fuel its power expansion as China plans to add more than the total installed power capacity of the US, UK & Australia by 2030
  • Elephants in the Room: With coal-fired power plants and hydropower doubling by 2020, Debra Tan discusses coal, financing the power build out and dams. Is a fundamental shift required to work round these elephants?

Alternative Options:

  • Avoiding Hydro Wars: With up to 124GW of planned hydropower on China’s transboundary rivers, no wonder regional geopolitical tensions over water is running high. Debra Tan gives the low down on China’s hydropower expansion, are there other options to avoid sparking hydro wars?
  • Inland Provinces: Nuclear At Crossroads: Given China’s limited water resources, is planning to build 28 inland nuclear power plants wise? Wen Bo, policy & media advisor to the National Geographical Society on future nuclear plans and concerns over water resources
  • Hydraulic Fracturing: Lessons from the US: With heavy water use in hydraulic fracking for shale gas plus water pollution concerns, Freyman from Ceres shares water lessons  & challenges learnt from the shale gas boom in the US

Water Policy Review:

  • 2013 State of Environment Report Review: MEP’s 2013 State of Environment Report says the ‘overall environmental quality was average’ but a closer look reveals mixed news, whilst discrepancies found in sets of pollution data add uncertainty of the real state of the environment
  • Pollution: 5 Reasons to Remain Optimistic: Given the recent release of depressing groundwater & soil pollution statistics, Debra Tan gives us 5 reasons to stay optimistic – from changes in the law to water tariff hikes in Beijing
  • Prioritising EIA Reform in China: Fraudulent & substandard EIA reporting persist. How does China’s EIA process compare to the US & HK? We examine the reforms in store for companies & EIA assesors
  • The War on Water Pollution: Premier Li has just declared war on pollution. Tan expands on the government’s stratagems & offensives and fundamental changes required to shore up the MEP’s arsenal in order to wage a successful war
  • MEP Reform: From Mountaintop to Ocean?: The MEP is currently regarded as too weak to punish polluters due to dispersed authority & overlapping functions. Given the ‘war on pollution’, is reform to make a Super MEP necessary to improve China’s ‘mountains, water, forest, farmland & lakes’?
Feng Hu
Author: Feng Hu
Having previously led CWR’s work on water-nomics, Feng now sits on our advisory panel to help us push the conversation on integrating water considerations in planning sustainable transition and mobilising finance toward climate and water resilience. Feng currently works on ESG advisory at a regional financial institution. Prior to that, Feng worked as Sustainable Finance Research Manager APAC at V.E, part of Moody’s ESG Solutions. During his time at CWR, he initiated and led projects for CWR including the joint policy briefs with China’s Foreign Economic Cooperation Office of the Ministry of Environmental Protection on the water-nomics of the Yangtze River Economic Belt. Feng expanded the water-nomics conversation beyond China by co-authoring CWR’s seminal report “No Water No Growth – Does Asia Have Enough Water To Develop?”. He has given talks on water-nomics and other water issues at international conferences, academic symposiums, corporate trainings and investor forums. Previously, Feng also sat on the Technical Working Group of the Initiative for Climate Action Transparency (ICAT) and worked as a senior carbon auditor on various types of climate change mitigation projects across Asia and Africa. Feng holds two MSc degrees – one in Finance (Economic Policy) from SOAS University of London and the other in Sustainable Resource Management from Technical University of Munich – and a BSc degree in Environmental Science from Zhejiang University.
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