China has been working to enhance its coal reserve system in an effort to secure supplies and stabilize prices, and the newly released draft on building capacity reserve at qualified coal mines would help further improve this.

 

The government plans to set up a coal capacity reserve system by 2027, and achieve a coal dispatchable capacity reserve of 300 million tonnes per annum (Mtpa) by 2030, according to a draft released by the state planner for public comment on December 6.

 

According to the draft, released by the National Development and Reform Commission (NDRC), coal mines that can apply for the construction of reserve capacity should be newly approved or under construction with designed production capacity not less than 3 Mtpa, and these mines should be restricted to the five major coal producing bases, i.e. Shanxi, West Inner Mongolia, East Inner Mongolia, North Shaanxi and Xinjiang.

 

This marks the first time China is working to establish a coal production capacity reserve system at the national level in the form of policy. It would help further improve China's coal reserve system which has been under development for over 10 years. It is also beneficial for the healthy development of the coal industry and price stabilization.

 

China has abundant coal resources with diverse coal types and high quality. Coal accounts for about 94% of China's total proven fossil fuel reserves. Coal is supposed to take a lion share in China's energy mix from the perspective of energy security, which is unlikely to change in the near term. Moreover, coal is one of China's most cost-effective fossil fuels, with prices only one-ninth of diesel and one-third of natural gas.

 

However, China's coal industry still faces issues such as uneven distribution of coal reserves between resource-rich and consuming regions, resulting in long-distance transportation. This imbalance has become more pronounced in recent years after the supply-side reforms were implemented. It brings challenges to road and rail transportation and can also cause temporary energy supply shortages in some areas.

 

The snow disaster in southern China in 2008 exposed vulnerabilities in the coal supply chain. Natural disasters, geological hazards or accidents that impact coal producing or transportation hubs could threaten coal supplies. Therefore, establishing coal reserve bases in major consuming regions has great significance in mitigating supply risks caused by natural disasters.

 

In 2010, the NDRC proposed accelerating the establishment of emergency coal reserves. Guidelines were later issued in 2011 to manage national emergency coal reserves aimed to address major supply disruptions from natural disasters or accidents. The reserves mainly involved stockpiles along transportation routes and in consuming areas.

 

In the following years, however, the execution was not that good, due to factors including declining coal output and long-term price declines, which increased stockpiling costs. However, tight supply since 2021 has led to rapid price increases, with record levels seen in early 2022. In Response, China released national coal reserves multiple times to target areas with acute supply tightness and difficulties.

 

In April 2021, the NDRC emphasized progress made in constructing government-dispatchable reserves, totaling 100 Mtpa, as part of the objective that is to establish coal reserves equivalent to 15% of the annual coal consumption, or 600 Mtpa nationwide. Of this, government-dispatchable coal reserves were set at no less than 200 Mtpa, while the remaining 400 Mtpa would be maintained by enterprises.

 

Despite these measures, challenges persisted in the construction of coal reserves. In March 2022, the NDRC's Deputy Director Lian Weiliang reiterated the need to expedite the development of government-dispatchable coal reserves exceeding 200 million tonnes.

 

In May 2022, the People's Bank of China allocated an additional 100 billion yuan earmarked for enhancing coal development and bolstering coal reserve capacity.

 

Notably, the focus of reserve system construction used to lie on post-coal production storage, with no discernible strategy yet in place regarding production capacity.

 

This time, the NDRC has made up the last piece of the puzzle. During emergencies, this reserve capacity can be mobilized based on unified national dispatch to flexibly increase production as needed.

 

The reserve capacity is relative to the regular capacity. The latter refers to the capacity mined during non-emergency situations, organized by enterprises based on market conditions and not subject to national unified scheduling. The former, reserve capacity, represents a moderately-sized reserve built on top of regular capacity, utilized for peak load regulation.

 

According to the draft, capacity reserve mines building 20%, 25%, or 30% of their designed capacity for reserves will be exempt from 60%, 80%, or 100% of capacity swaps for their new capacity increases, including regular and reserve capacities.

 

For mines that have been approved capacity swap plans, including those still under construction, 60%, 80%, or 100% of their total approved capacity swap targets can be utilized for other uses while leaving 20%, 25%, or 30% of their designed capacity for reserves.

 

Also, the reserve capacity does not utilize the newly added capacity quotas determined in the national coal development plan for the provinces or regions where the capacity reserve mines locate.