Coal and hydro expansion

We estimate China's power sector uses approximately 10% of the nation's water, relatively low compared to the UK's 34% and 49% in the US. However, China plans to add 1,212 gigawatts of water-reliant power capacity by 2030, equivalent to almost six times India's current installed generation capacity. Coal-fired power will continue to dominate: in the decade to 2020, China plans to add 453 gigawatts of coal-fired power capacity, equivalent to double Russia's entire 2009 power generation capacity.

China's coal-fired power capacity expansion will also involve an increase in coal mining, which consumes an abundance of water for extraction and processing. We estimate that 47% of coal reserves are located in water-scarce regions. Water scarcity could also lead to a greater reliance on coal imports; for example, 30% of China's ensured coal reserves are in Shanxi, a province suffering from extreme water scarcity.

Changes in water availability also threaten hydropower. Although hydro-capacity is usually built in water-rich areas, the effects of shortages can be felt more quickly in the event of drought. Some hydropower stations have operated at below capacity in recent summers due to droughts in southern China.

The government plans to expand hydropower from 216 gigawatts in 2010 to 568 gigawatts by 2030. Unfortunately, the damming of rivers upstream has the potential to generate tensions with countries further downstream, so hydropower in China comes with geopolitical risk.

We believe the expansion of China's installed thermal and hydro capacity will further stress water resources. Even with a change in fuel mix, we expect that 87% of power capacity will still require water. That means efficiency needs to be greatly improved.