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China’s energy sector is getting cleaner and dirtier at the same time. The country added record capacity in wind, solar, and energy storage last year. Yet fossil fuel power generation also hit a new high. Economic growth and energy transitions don’t always sit well together.
Despite aggressive investments in renewables, China’s power sector recorded a 1.5 per cent increase in thermal power output, primarily from coal, in its energy mix last year, according to official data. The increase in fossil fuel output reflects pressures from rising electricity demand, which has outpaced GDP growth for the fifth straight year.
One driver of this is artificial intelligence. AI is highly energy intensive and gets more so as models become more complex and widely deployed. Broader adoption of automation across industries, from logistics to manufacturing, is also increasing energy demand. The expansion of 5G networks, data centres and cloud computing to support this shift soaks up electricity. These energy-intensive sectors have become increasingly important for China as it builds up its position vis-à-vis its main strategic rival, the US.
Rapidly rising demand for electricity has boosted the shares of the country’s coal companies for years, pushing the market value of the largest, China Shenhua Energy Company, to more than $100bn.
This year could mark a turning point. Analysts expect renewables to meet all new electricity demand in 2025, putting a lid on coal-fired power demand growth. While positive for the environment, it puts the fortunes of the country’s coal giants at risk.
Previously, sustained investments in wind, solar and hydropower were undermined by a lack of adequate grid infrastructure. That showed in rising curtailment rates, a measure of potential renewable energy going unused due to grid constraints. Those hit 4 per cent for both solar and wind early last year.
But more than $800bn has been set aside for grid upgrades through 2030 — and it is about to start paying off. Grids that are upgraded to enhance transmission capacity and reduce energy loss should be able to unlock more renewable capacity. Last year, solar power capacity increased by about 50 per cent while wind power rose about a fifth.
As these upgrades come online, it is a good time for investors to shift their focus towards local renewable energy stocks. Shares of China Shenhua are down a tenth this year and trade just below 10 times forward earnings, a significant discount to its solar and wind peers. The value shift may already be under way.
june.yoon@ft.com
