China’s thermal power generation, coal production and output in key energy-intensive industries all fell in the first six months of the year, the National Bureau of Statistics said Wednesday, paving the way for a drop in GHG emissions that is likely to increase the permit glut in the country’s oversupplied pilot carbon markets.

Thermal power generation fell 3% in the first half of the year compared to the same period in 2014, data released by the statistics bureau showed.

Coal production (-5.8%) and imports (-34%) also fell, partly due lower output levels among major coal-consuming industries such as cement and steel, amid a slowing economy that the government is consciously shifting towards relying more on service industries and less on polluting manufacturing.

Wednesday’s numbers continued a trend that an increasing amount of analysts say is the “new normal” for China, which is likely to cause its greenhouse gas emissions to peak early next decade, several years ahead of the government’s official 2030 target.

PERMIT SURPLUS

But while the drop in coal use is good news for the climate and the environment, it could cause problems for China’s seven pilot carbon markets, where prices are already depressed due to over-allocation, analysts warned.

“Consumption of coal in China seemed to have decreased year-on-year. Against this backdrop, the allowances oversupply situation might worsen this year,” said Jian Wei Lim, an analyst with ICIS-Tschach, though he stressed there is not yet detailed data available for the pilot regions.

That would likely mean prices in the pilot markets could drift down further. In the past two months, allowances in four of the markets have dropped below 20 yuan ($3.22), and even the Beijing market is hovering at record lows of 35 yuan, after having stayed above 50 yuan for its first 18 months of operation.

The downward trend for coal and energy-intensive industries is not new, yet the governments operating the carbon markets appear unable or unwilling to adjust allocation numbers accordingly.

Earlier this week, Guangdong, the biggest of the pilot schemes, announced it will issue the same amount of permits for 2015 as it did last year, despite previously having vowed to fix the market’s surplus problem.

Some of the markets, such as Hubei and Shenzhen, have rules that allow regulators to make adjustments to the allocation based on actual, verified production and emission data, but only within certain limits.

IMMATURE PRICING

But unlike in Europe, where the carbon market responds to fresh data in seconds, the numbers released Wednesday are not predicted to have an immediate impact on CO2 prices.

“I do not expect the allowance prices to have any reaction to this news at least for now because China’s carbon market is not mature enough to price this in,” said Lim.

None of the seven pilot markets have published the fundamental emissions and allocation data necessary to accurately estimate the value of allowances (although Hubei this week came fairly close).

Instead, prices have opened near levels preferred by the local governments, and have mostly only moved significantly in the weeks ahead of compliance, when short companies often have problems buying the allowances they need because the surplus holders are uninterested in trading.

At the moment, nearly all the markets are illiquid with falling prices because annual compliance has just ended and traders are stepping back, with the notable exceptions of Hubei and Guangdong, which cleared 1.8 million of trades on Wednesday, a record across all the Chinese markets.

COAL BUBBLE

But while China’s carbon markets are struggling to make an impact on the country’s emissions path – the central government does not expect the national ETS to start biting until around 2020 – some are now calling on the government to clamp down on what they see as a rapidly growing coal bubble.

As the statistics bureau reported a 3% drop in thermal power generation, the China Electricity Council said Wednesday that 23GW of new thermal capacity had been installed over January-June, meaning new coal plants are being built as fast as ever, despite slowing demand and a shift to cleaner energy sources.

“Coal power overcapacity is worsening rapidly,” said Lauri Myllyvirta at Greenpeace.

“Last year saw the lowest capacity utilisation since the beginning of reform and opening up, and now we’re seeing a further 9% fall in utilisation in the first half of 2015, with more than half of capacity lying idle on average,” he told Carbon Pulse.

If the trend from the first half of the year continues, the utilisation rate for the full year could be as low as 49%, he said.

“Subsidised credit and other market distortions create incentives for state-owned enterprises, local governments and banks to keep pouring money into new coal plants despite lack of demand. The government needs to clamp down on the coal bubble rapidly, as it is creating a conflict between renewable energy and coal in the grid, and represents a waste of capital on a massive scale,” Myllyvirta said.

By Stian Reklev – stian@carbon-pulse.com

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