Coal is as dirty a word in China as elsewhere. But while the world’s environmentalists balk at the mere thought of the pollution it causes, coal is critical for China. Roughly 80% of its electricity is generated through coal combustion, compared with 50% in the U.S., the world’s second largest coal user, says Edward Steinfeld, a political science professor at Massachusetts Institute of Technology and co-director of the China Energy Group at MIT’s Industrial Performance Center. Last year, Steinfeld and his team at the center completed the first independent survey of Chinese power plants — covering nearly 300 generating units — in order to get a handle on how efficiently and innovatively they are using coal while responding to environmental and economic pressures. In an interview with China Knowledge at Wharton, Steinfeld — who is also the author of the forthcoming book, Playing Our Game: Why China’s Rise Doesn’t Threaten the West — discussed the survey’s preliminary findings, including how the current commercial and political mix of pragmatism and policy could help make China the global standard-setter for cleaning up coal.


An edited transcript of the conversation follows.


China Knowledge at Wharton: One of the interesting findings of the study was that most of China’s coal plants are receiving no, or relatively small, subsidies for the fuel they need. Will subsidies become a bigger part of the picture if prices escalate?


Edward Steinfeld: Subsidies can enter this business in a variety of ways, but as your question suggests, subsidies for fuel are critical because it is the biggest cost for coal-fired power plants. While I can’t predict the future, I can say that domestic coal prices in China have already converged with global levels. If you include transport costs and everything else, power plants in China — with some exceptions — are today paying global prices for coal.


It’s a complicated question though because pricing for coal in China doesn’t always correspond to quality and other attributes (such as the amount of moisture, ash content and sulfur in coal). The market for coal is wide open in many ways and it is not differentiated very effectively in terms of quality. Transport ends up being a big swing in the costs for plants, so what we often see now, and have seen over the past two years, is that as prices spike, plants try to minimize transportation costs by sourcing more coal locally on the coast. The problem is that a lot of this coal is very low quality. High-quality coal (with low sulfur and ash content) tends to be found in the northwest and coal in the east and north tends to be low quality but it can be trucked or shipped in. These plants are behaving like market actors. They’re trying to control costs and do that in an area that has an impact on fuel. We’re starting to see the results of that.


One of the conclusions we drew from our research is that as the plants face more economic pressure and try to minimize costs, they do two things. They upgrade technology so they can burn coal more efficiently, which is the single best way to have better environmental performance (that is, improve the combustion technology and efficiency). What the report also said is that the firms source low-quality coal and make their desulfurization systems idle, so sulfur dioxide emission increases. But that’s changing.


Some preliminary data shows that the government is better at tackling operational regulatory issues than other issues. It is forcing plants to run their desulfurization systems. We don’t have data for emissions yet, but we have preliminary data for the operation of the desulfurization systems and there’s a lag. The government seems to be increasing its ability to tighten the screws on the outflow of power generation and the pricing for the inflow of fuels.


China Knowledge at Wharton: Your research also explores how power plants are price takers and how they are making a lot of money. Is the motivation for the government to repurchase some of the mines, or is it more policy focused in terms of wanting to put more money back in the government’s pocket?


Steinfeld: I agree with the question’s premise that there seems to be, at a corporate level, a recentralization effort in the mining industry. It’s still a little bit unclear when you or I say the government is repurchasing these, which level of government or who exactly. What is clear on the ground is that some of the coal majors — the large state-owned corporate organizations — are trying to consolidate the industry. Whether they’re acting as proxies for central or provincial agencies is disputable.


The coal majors, which have a lot of cash right now, are clearly making an effort to consolidate and increase the scale of their operations. You see this across the energy sector in China. At the same time, there has been policy pressure for a while now to consolidate because the center wants not only control, but also — broadly speaking — technology upgraded and safety standards increased. Whether it’s valid or not — I think it’s valid — the assumption is that generally smaller, more entrepreneurial wildcat-like mines are low technology players and rather unsafe.


The way I would characterize my impression is that companies are working in their own interests and on their own volition, and they’re buying what they can. At the same time, the center and provincial-level agencies involved in this certainly aren’t standing in the way and if anything are encouraging consolidation. One of the intersection points of corporate and government interests is the extent to which the coal majors can be consolidated and scaled. If they can, it makes it easier for them to go public, both domestically and internationally, and that clearly is a goal of both the firms and central government.


There’s a battle today commercially, and to some extent in a regulatory sense, about how the intersection of different industries — mining, power generation and renewables — is going to be handled and who is going to end up ahead in that intersection. There are a number of players in that domain, many of which are state owned. Many are also accessing state capital, so there is a lot of domestic and foreign money in the picture.


Players in another sector — oil and gas — want to enter one of these other industries because they have certain managerial talents. They feel they are in a position to move into things like clean coal, even though they’re not in mining or power generation. Chinese oil and gas majors are interested in learning how to manage and develop clean coal technologies.


There’s another argument that clean coal is the future but that’s all about mine-mouth power generation [which transforms coal into electrical energy directly at the mines]. So the coal industry is getting interested in clean coal combustion technologies and power generation and, of course, the power generation guys in China want to be in mining. You can see the effort of a number of these companies looking upstream and downstream as they think about consolidating.


A number of people have interpreted that as a central government move to consolidate everything. I don’t think that is quite right. There are some people in the center who want to see that, but not everybody. In fact, there are some who want to avoid that. At the commercial level, there is certainly interest in trying that, but for any player to be able to do that, it would need capital and a certain level of managerial expertise that they just don’t have yet. Last, while many are big companies, they are generally quite small by global standards. So their ambitions are a little outsized. Even with consolidation, it’s going to be quite hard for them to do this.


One of the reasons some of these firms — particularly in coal, but also oil and gas and power generation — want to expand outside China is to not only grab assets, but also grab or absorb managerial talent. They seem to think [the answer is] going abroad, doing international deals, maybe buying some equity or taking some equity positions in global companies or buying companies outright whose talent they are somehow going to absorb. Also, the coal industry knows imports are China’s future. China is not going to be a global exporter of coal; it’s going to be a very big importer. Chinese producers want to be a part of that upstream business.


China Knowledge at Wharton: The U.S. is just now getting to CCS, or carbon capture storage, with six proposed projects nationwide out of hundreds of power-producing sites. We are talking about a five to 10-year wait to get these on stream. Do you see anything different in China?


Steinfeld: It’s different structurally because of China’s rapid building of scale. It’s building from nothing rather than replacing, so it can deploy state-of-the-art technologies on a large scale.


Because the Chinese are expanding power generation and infrastructure so rapidly right now, the government has been able to push — at various levels of investment — the idea that China is not going to buy cheap or build junk. Our survey results indicate that the plants that are up are large and efficient by not just Chinese, but also global standards.


They’re deploying state-of-the-art pulverized coal technologies. From an environmental perspective, that’s good. One of the reasons why China has done that, even at the expense of domestic producers of technology, is that they think they can produce this stuff cheaper at some point — so they can deploy it now, learn about it and then sell it to the Americans when they have to upgrade their systems. It makes sense and it’s not some kind of secret strategy. It’s partly an identity issue. Very few Chinese want or are willing to view their country as third world anymore. They don’t want third-world technologies; they want today’s technology, even if it’s expensive. They want to be state of the art.


CCS is kind of abstract in a way because nobody’s done it at scale yet. We did the study at MIT on the future of coal. One of the points was to say that each piece of a CCS system is a proven technology, but running all the technologies together as a system has not been demonstrated yet. That’s going to be very hard to do at scale. It’s hard technologically, commercially and in a regulatory sense to integrate the various pieces into a system.


China Knowledge at Wharton: In the U.S., the air is clean, while 16 of the 20 most polluted cities in the world are in China.


Steinfeld: It’s ash, it’s particulate in China. You absolutely feel it. [The U.S. has] some incredibly dynamic companies in the energy domain, which are leaders in [clean] technologies and they’re involved in China’s efforts [to clean up its air pollution]. But it is a problem that the [companies] have to go to that market to deploy state-of-the-art technologies rather than do so in the U.S. I don’t mean that just in a competitive sense. It’s intriguing that a lot of undergraduate engineers know that if they want to work on state-of-the-art technologies in transport, or power generation and transmission, more likely than not those technologies are going to be deployed first in China, not in the U.S. or Europe.