China is Hoarding Coal Ahead of Summer Demand Peak

China, the world's biggest investor in and generator of wind and solar power has been stocking up on coal in anticipation of peak demand during the summer.

Now, the move is about to start paying off as temperatures rise and so does demand for cooling. After several years of coal shortages during peak demand season, this year may be the first year that China avoids one.

Bloomberg reported this week that China had accumulated inventories of 162 million tons of coal over the first five months of the year, equal to about 8.5% of consumption during those five months, per data from cqcoal.com.

The increase came from both domestic production and imports. The former actually fell in the first quarter of the year after a series of fatal incidents prompted shutdowns and investigations in China's coal country-the Shanxi province. Output ramp-up only began this month, but demand for coal has offset the effect of the temporary shutdowns thanks to a surge in hydropower generation following abundant rainfall.

Imports, meanwhile, rose quite substantially over the first four months of the year thanks to lower prices that boosted demand. Over the period, China's imports of the commodity rose by 13%, as prices almost halved from a year ago.

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China continues to lead the world in both wind and solar capacity, as well as coal capacity. Last year, global operating coal capacity increased by 2% as the world added a total of 69.5 gigawatts of coal power, with China representing two-thirds of new additions. The country is still going strong on coal capacity, in line with its all-of-the-above energy policy.

As for the immediate future, chances are there will be enough coal to secure supply for the hottest months of the year, especially as hydropower remains strong for the time being. Over the first five months of the year, hydro output rose by a respectable 15%, which led to a much more modest increase in cola-powered generation and, as a result, higher inventories.

According to Bloomberg, China's economy is "sluggish," which contributes to more moderate electricity demand growth, and while a GDP growth rate of 5.3% for the first quarter can hardly be called sluggish with any seriousness, the pace of industrial power demand growth has moderated, leading to a decline in coal demand.

As it happens, China's comfortable coal supply position was also helped by none other than the weather. In addition to heavy rains earlier in the year to fuel higher hydropower output, moderate temperatures going into the summer are helping keep demand equally moderate.

Of course, this could change as summer advances, but it seems this year will not see a shortage of coal that threatens the security of electricity supply in China. The situation, however, begs the question of what happened with forecasts that wind and solar could replace hydrocarbons entirely. If China is any indication, this is not really true-and China is the biggest case study on transition technology because of the sheer scale at which it is installing that technology.

By the end of this year, China will have some 1,400 GW of wind and solar capacity. This would represent a substantial 40% of the energy mix, while the share of coal would fall to 37% from a little under 40% last year.

Yet China is still building new coal power plants instead of simply waiting for when it is time to retire existing ones and double down on wind and solar. However, China is aware that wind and solar cannot compare on reliability of supply with coal-and on price, incidentally-so it is keeping coal in its energy mix for the observable future, despite the ambitious net-zero targets.

By Irina Slav for Oilprice.com

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