China’s march towards carbon neutrality is forcing its aluminium smelters away from using captive coal-fired power, says Wood Mackenzie.
Aluminium smelting is known to be one of the most emissions-intensive industries in China. Over 80% of aluminium capacity in China uses coal-fired power. Wood Mackenzie estimates that Chinese aluminium smelters produced an average of 12.36 tonnes of CO2e per tonne of aluminium produced from coal-fired power generation last year.
Wood Mackenzie senior consultant Xinlin Chen said: “In the past, Chinese producers would strategically choose locations for new smelter projects based on local power tariffs and where self-generated or captive power plants were permitted. This is a more cost-effective solution. However, the strategy of building power plants first and aluminium facilities later has become harder to sustain under China’s goals to control energy consumption and achieve carbon neutrality.”
China’s largest aluminium producing province, Shandong, has been under pressure to reduce coal consumption against an assigned target. The Weiqiao smelter in Binzhou city had to turn to Yunnan province to build a 2-million tonnes per annum (Mtpa) hydropower-based aluminum project, with the potential to reduce coal consumption in Binzhou by around 9 Mtpa once the entire 2-Mtpa of smelter capacity is relocated. Inner Mongolia also reportedly intervened in several local energy-intensive industries and cancelled preferential power tariffs after being chastised several times for disproportionately increasing energy consumption.
At present, local governments remain cautious in approving dedicated power plants, particularly in the coastal provinces. Captive power generators tied to several industrial enterprises will retire without replacement. These plants are not allowed to build new units but can operate old units up until retirement and then face closure.
Chen said: “We expect existing smelters to maintain both normal production and moderate growth until 2030, when coal-fired power is expected to peak. Meanwhile, active coal-fired power units will gradually retire as they reach the end of life, which is usually 20 to 30 years.
“So post 2030, smelters would either exit the market in line with the pace of their captive power plants or operate taking power from the grid, which by then would have a higher participation of renewable energy in their power mix. The government has offered to support this transition for at least 10 years to allow a smooth switch.”
Grid-powered smelters are less at risk and only face the task of increasing operating efficiency and reducing energy consumption. Local grids and power plants will take responsibility for the transition to cleaner energy in the region, leaving a greener carbon footprint for energy-intensive manufacturing. Smelters in Yunnan, Qinghai and Sichuan provinces are adopting grid hydropower, to avoid government intervention and policy-driven suspensions.
The resetting and relocation of the aluminium industry to renewable-rich regions in China will inevitably cause the industry’s power tariffs to rise. Chinese smelters are likely to lose the cost competitiveness gained from self-generated electricity when grid companies impose additional electrical and wheeling charges.
Chen said: “In the long run, increasing scrap recycling will be necessary to ensure lower carbon emissions production while meeting growing metals demand in China. Producing secondary aluminium requires a fraction (< 5%) of the energy required to produce primary aluminium, so it is a more sustainable process.
“Another solution is investing abroad under the replacement capacity policy. China has been successful in securing upstream aluminium supply chain outside the country with either direct or indirect interests. The industry is well-positioned to relocate its capacity overseas as it marches towards the country’s carbon-neutral goal in 2060.”