Two Enormous Countries Burn Lots of Coal. That's a Cue for the Energy Transition.

Two of the biggest coal consumers in the world, India and China, have promised to retire coal, even though their coal usage is currently skyrocketing. In the global Conference of Parties climate negotiations in autumn 2021, Prime Minister Narendra Modi pledged to attain 500 GW of installed electricity capacity from non-fossil fuel sources by 2030. China is planning to reduce coal use from 2026, and will become carbon neutral by 2060. Those pledges imply billions in infrastructure investment.

Before we dive into whether current coal use undermines the case for investing in the countries’ transition, let’s take a broad view of these two countries to see where governments’ energy choices might intrigue clean-energy investors.

According to the International Energy Agency (IEA), approximately 44% of India’s overall energy comes from coal. Though it produces more coal than all but one other nation, India also imports coal from Indonesia, Australia and South Africa for electricity generation and industrial activities. This runs the world’s seventh-largest economy, which totaled $2.72 trillion in 2021.

China is the second-largest economy in the world, and its coal dependency is due to decrease. In 2020, “coal accounted for 56.8% of China’s domestic energy generation, down from 72.4% 15 years ago,” according to CNBC. This leaves China the heaviest greenhouse gas emitter in the world, producing 27% of all global greenhouse gas emissions. In terms of coal consumption, China essentially shapes the global coal market as it consumes more than half of the world’s coal. China is also the largest producer of coal as it extracts 3.84 billion tonnes of coal from the ground.

Even though China produces more coal than it consumes, China and India are currently going through a coal shortage crisis. These shortages are driving coal prices up now, but are also potentially strengthening the case for the countries’ pledges of decarbonization.

One of the reasons why China is facing a coal crisis is because China stopped importing coal from Australia in 2020, after Australia attempted to place pressure on the World Health Organization for an international inquiry as to how Covid-19 started and how Beijing handled the outbreak. Since Australia delivered nearly a quarter of China’s coal imports in 2019, and since demand for energy picked up with activity in 2021, a supply crunch emerged.   .In 2021, China’s economy grew 17.1%, according to Reuters, and the demand for electricity has increased.

China’s dependency on coal highlights how complicated it will be for the economy to decarbonize while still focusing on manufacturing. And manufacturing has resumed: shipment of goods from the world’s largest exporter rose by  25.6% in August 2021, Yet  The central government has limited the utilization of electricity and is ordering power cuts due to the shortage of coal. While you can argue that this predicament can motivate Chinese leaders to accelerate the transition, it also shows how much of its export economy depends on cheap electricity.

In the case of India, similarly, there is an “unprecedented increase in demand for electricity due to the revival of the economy”. Just from April 2021 to September 2021, India’s electricity consumption has “increased by 12.7% to 707 billion units (BU)”. In India’s caste system, emergence from lockdowns has meant that lower-income people can and do consume more electricity. Separately, a weak monsoon season meant more “demand from the agriculture segment during July and August 2021”, according to an Indian business newspaper.

The country’s ecological complexity also aggravates its resource economics. In other parts of India, heavy rains adversely affected production in several coal mines during September and disrupted the transportation of coal due to flooded train tracks. India could have relieved its shortfall of coal through importing coal from international markets such as Australia, but the global price that Chinese demand had helped inflate made imports too expensive for some Indian marketplaces. This led to an increase in coal prices and to power shortages throughout India.

Weather shocks and economic froth can recur almost any year, so Chinese and Indian leaders will face more turmoil unless they substantially replace volatile coal with zero-marginal-cost solar or wind power.

Again, they have promised the world that they will do just that- with qualifications. During the COP26 summit, according to Carbon Brief, "Prime Minister Narendra Modi stated that India will aim to build 500 gigawatts of renewable energy and ensure that half of its energy mix comes from sources other than fossil fuels by 2030. While this means that coal will remain an integral part of India’s energy mix,  Ernst & Young's (EY) 2021 ranked India as the 3rd most attractive place to install renewable energy capacity, after the United States of America and China. In 2020, India was the 4th largest consumer of renewable energy in the world as it produced 136 GW of electricity from renewable sources, a little more than a third of its total capacity.

To achieve the enormous task of installing 450 GW of renewable energy by 2030, India needs to invest approximately USD $500 billion in wind and solar infrastructure, grid expansion, and storage. Sameer Kwatra, the Acting Director for NRDC’s International Program in India, stated that India’s heavy reliant on coal does not  undermine decarbonization. “It does make it more challenging,” he told me. NRDC advocates for clean energy, and Kwatra noted that India has started to invest heavily in green hydrogen for industrial purposes and many states in India have introduced policies for the subsidization of EVs.

So opportunity exists for renewable investment – over many years, with bumps along the way. Deepak Sriram Krishnan, the Associate Director of Energy for India in the World Resources Institute (WRI), says most people think that coal will not peak in 2030. He stated that “the journey will not be smooth” for decarbonization. For one thing, Krishnan said, a ban on coal imports in nearby Indonesia means that India will need to produce more coal at home to avoid power cuts. He noted that most of India’s electricity generation is locked in bilateral Power Purchase Agreements (PPAs) with power producers, while only 10% of electricity is traded on something like the American electricity trading system.

Similar to India, China pledged to become carbon neutral by 2060, reaching peak emissions by 2030. This also looks questionable. As part of China’s strategy to attain international prowess, the Chinese government is financing and building coal-fired powerplants, bridges, roads, and railroads, mainly concentrated in South Asia, and Africa. Xi Jinping has promised the United Nations General Assembly, according to the World Economic Forum, that China will stop financing coal in other countries as part of their development strategy and will also reduce coal-fired powerplants at home.  

As part of their decarbonization strategy and expanding their portfolio into renewable energy, China planned to raise their renewable share of total electricity from 35% to 39% by 2020 in their  13th Five Year Plan for Electricity (2016-2020). The nation reached a milestone of sorts in October 2020, running more than a third of its power on renewables.

So unlike India, China has evolved a renewable track record. China has already invested heavily in the development and manufacturing of inexpensive solar and wind technologies by pumping in billions of dollars into subsidization, research, and development.  Now, “30 percent of the world’s wind turbine manufacturers are in China, and over 70 percent of the world’s solar photovoltaics are manufactured by them,” according to GreenBiz. Where India presents a long-range renewable opportunity, China has built a more robust renewable industry already.  

Even with the coal shortage, the market for renewable energy is increasing rapidly, Via pv Magazine, India looks on track to set a record for renewable investment in 2022. And China is so confident in its renewable sector that it’s ending all public funding for new offshore wind projects and halving public funding related to subsidizing new solar farms from CNY 3 billion ($460 million) to CNY 1.5 billion ($230 million), It has also started phasing down feed-in tariffs for solar PV starting from 2021, which has led investors to brace for a “post-subsidy era in China” for solar PV.  

So behind and beyond the coal crunch, these enormous countries see enormous capital incentives to invest in renewable capacity. Such investment could, along the way, mitigate future coal crunches.