China Renewables CurtailmentIs there Light at the End of the Tunnel?

Liutong Zhang (lzhang@lantaugroup.com)

The Lantau Group

Renewable curtailment in China – All ready to generate but no place to go

1

TWh

RE curtailment in China

50

89

34

5

0102030405060708090

100

Hydrocurtailment*

2015 windcurtailment

2015 solarcurtailment

Total

Total curtailment amount in 2015 for solar and wind is equivalent to Singapore’s power consumption

This presentation is to discuss the causes of RE curtailment and how it will change in the future

Hydro

Wind

Solar

Introduction

Source: TLG research from public news

12.320.6 16.2 12.6

33.9

0%

5%

10%

15%

20%

-

10

20

30

40

2011 2012 2013 2014 2015

Total curtailed wind volumeCurtailment rate (RHS)

TWh

0%

10%

20%

30%

40%

50%

Jilin Xinjiang Inner Mongolia Gansu

2012 2013 2014 2015

Wind curtailment details

Wind Curtailment rate in selected provinces

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Agenda

1

2

3

4

Market fundamentals

Grid infrastructure

Policy and Regulation

Summary

2

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Are you competing against non-commercially minded investors?

3

-

20

40

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015

Solar

Wind

Hydro

Nuclear

Gas

Coal

Averageload growth

GW

Incremental annual power supply & demandNo supply response to slow-down in demand growth so far…

Source: CEC; TLG research and analysis

850

889

320

11642

-

200

400

600

800

1,000

1,200

1,400

1,600

Max Demand 2015 installedcapacity

OthersSolarWindHydroNuclearOilGasCoal

GW1500

+76 percent namplate excess

Annual average incremental surplus capacity was about 90 GW in 2012-2015, close to the total installed capacity in UK

Reserve margin is at historically high level

Over-supplied situation is particularly serious in the resource - rich regions in the inland

provinces.

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The pain in the over-capacity market is shared among the different types of generations via the annual quota-based dispatch system

4

0

2,000

4,000

6,000

8,000

Overall Thermal Hydro Nuclear Wind

2008 2009 2010 2011 2012 2013 2014 2015Average Utilization HoursUtilization hours have been declining for thermal (mostly coal), nuclear and wind

Level EntityNational dispatch organisation State Grid

Regional dispatch organisation Regional grid companies

Provincial (PDO) Provincial grid companies

Prefecture dispatch organisation Prefecture power supply organizations

County dispatch organisation County power supply organisations

“Unified Dispatch and Multi-level Management” dispatch principle

“Energy Conservation” Dispatch Rules at Provincial level • Intermittent renewable resources such as wind, solar,

wave and run-of-the-river hydro• Hydro-power with storage, municipality waste generation

and geothermal• Nuclear plant• Power generation from integrated use of waste heat,

waste gas and coal-bed methane from non-coal resources• National demonstration project (like IGCC)• Coal-fired combined heat and power (CHP)• Natural gas and coal-to-gas generation plant• Coal-fired power plants• Fuel oil-fired power plants

1

23

4

5

Fundamentals Grid Policy

Source: China Electric Council (CEC); TLG research and analysis

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Gansu Example: allocation of dispatched quota for different generation sources in 2016, probably driven by both economics and politics

Total Consumption 104.2 TWhExport 12 TWhTotal Generation 116.2 TWh

Quota for provincial dispatch 89 TWhLess Lijiaxia hydro 0.5 TWhLess captive generation 15 TWh

Local generation 73.5 TWh

Priority dispatch (1st type)10 TWhWind and solar19.9 TWhCoal peaking2.5 TWhGrid safety7.6 TWhCombined heat and power6.7 TWhCogen

Priority dispatch (2nd type)23 TWhHydro-power

Dispatch not under priority dispatch (likely to be coal) 3.8 TWh

Source: Gansu Economic and Information Commission

Some coal and hydro-power plants are under regional dispatch for inter-provincial balancing

Gansu wind capacity: 12.7 GWGansu solar capacity: 6.78 GW

The guaranteed generation quota implies that the minimum hour is only about 513, far below National Development Reform Commission’s guidance of 1,800 hours for wind and 1,400-1,500 hours for solar

Fundamentals Grid Policy

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3%

8%

13%

18%

23%

28%

33%

38%

43%

Spring (Mar.-May) Summer (Jun.-Aug.)

Autumn (Sep.-Nov.)

Winter (Dec.-Feb.)

Wind generation Energy

Mismatch of supply and demand timing is another key challenge for RE generation, leading to curtailment

6

Fundamentals Grid Policy

Wind case study (Jilin)

Strong wind speed is at the wrong time of the day and the year

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Wind generation Average load

Frequency

Share of total

Source: TLG research and analysis

Wind generates more at night when the demand is lower

Wind generates more in Spring and Winter time when combined heat and power plants have to be run to meet

the heating requirement

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Agenda

1

2

3

4

Market fundamentals

Grid infrastructure

Policy and Regulation

Summary

7

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China is not a monolithic region – huge differences in energy drivers, ranging from fuel access, to demand growth and development trends

8

Xinjiang

Tibet

Qinghai

Gansu

Inner Mongolia

Ningxia

Sichuan

Yunnan

Guizhou

Chongqing

Fujian

Taiwan

Jiangxi

Guangxi

Hunan

Hubei

Henan

AnhuiJiangsu

Shanghai

Shandong

Liaoning

Jilin

Heilongjiang

Shaanxi

Hebei

Beijing

Zhejiang

Hainan

Shanxi

Guangdong

China’s hydropower bases

China’s coal/unconventional gases/wind/solar energy bases and China’s future energy warehouses

China’s most developed and populated regions and energy/power demand centers

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UHV DC and AC lines expansions will enable power exports from the curtailed regions, but they are also driving new generation capacity additions

9

UHV AC lines (Controversial but progressing well in the past 2 years)

UHV DC lines

Substation

Operating

Building

Proposed

DC Terminal±660kV EHV DC in OperationUHV DC in OperationUHV DC under constructionUHV DC approvedUHV DC proposed

Large new coal plants + solar/wind

Key hydro resources

The power re-balancing across provinces/regions in China due to the commissioning of these UHV lines is a key factor to watch to understand future curtailment rates

Fundamentals Grid Policy

Source: TLG research and analysis

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But load centers may not need more power imports in a slow growing market; and tension between exporting and importing provinces is growing

More exports to Load centres (coastal cities in South and East China) via the UHV lines?

10

Coal + Solar/wind or Large hydro in resource rich regions

Local governments do not want more imports to squeeze out more local generation as demand growth slows

Fundamentals Grid Policy

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Agenda

1

2

3

4

Market fundamentals

Grid infrastructure

Policy and Regulation

Summary

11

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Transmission and Distribution Reform has been rolled out in seven provinces/cities in the past two years:• China Southern Grid areas: Shenzhen, Yunnan, Guizhou.• West Inner Mongolia Power Grid: West Inner Mongolia.• State Grid: Anhui and Ningxia.

Power reform in China has been slowly under way, but most of the reform initiatives are not necessarily positive for resolving RE curtailment

12

• Continuing on-grid tariff reform: On-grid tariff structure in China is still rigid, and its continuing reform will have uncertain impact on RE and coal dispatch.

• More stringent environmental regulation: – The emission stardard for non-carbon pollutants from coal plants has become

more stringent, and this will increase cost for coal generation.– Seven pilot carbon trading markets have been formed at local level, but they are

still yet to reach real “market-based” status.

Reform on Transmission and

DistributionImpact on RE is

uncertain

• Power Direct Sale: Provincial governments have been actively promoting direct power purchase so as to reduce power tariffs for big industrial electricity users against a backdrop of large power over-supply and economic slowdown.

• Power Exchange centre: Power exchange centres have been recently set up in several provinces (such as Yunnan, Guangxi and Guangdong) to help facilitate trading and provide price transparency for “market-based” tariffs.

Reform on Retailing power

Impact on RE is likely negative

Other key reforms

Impact on RE is uncertain

Fundamentals Grid Policy

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It is still too early to determine whether any of the proposed policies to mitigate RE curtailment will be successfully implemented

13

Proposed policies to mitigate curtailment

Fundamentals Grid Policy

There are no magic bullets to solve the over-capacity and RE curtailment problem

• Slow-down approval or halt new coal, solar and wind projects in highly curtailed regions will be very positive to reduce curtailment; but

• Several Non-hydro RE targets have been discussed in China. The non-hydro RE targets will incentive existing generators to continue to build new solar and wind capacity.

• Consumption-side: 5-13 percent each province (nation-wide average at 9 percent) in 2020. Non-hydro RE generation needs to almost double from current level.

• Generation-side: 15 percent non-hydro RE obligation on coal power. This means that wind and solar generation needs to be doubled in 2020 from the 2015 level.

• Wind/solar for heating: This is still not commercially proven. • Local governments with high wind and solar curtailment rates have been trying to

attract energy intensive industries (like data centres) to move to their provinces.

Supply-side

Conflicting policies

• More pumped storage plants: Several provinces like Gansu and Jilin have plans to build new pumped storage plants.

• Increasing flexibility of the system: This has been discussed, but it remains to be seen whether private players will invest in technologies (such as battery) that can improve the flexibility of the system.

Flexible Generation

Demand-side

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Agenda

1

2

3

4

Market fundamentals

Grid infrastructure

Policy and Regulation

Summary

14

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RE curtailment – probably will get worse before getting better

• Slow demand growth• Supply – Still no visibility on slow-

down in new addition

• No easy way to resolve the RE supply and demand mismatch

• Coal utilization hours will likely continue be squeezed; but will there be early retirements?

• Tension between imports and local generation will increase

• Push on direct purchase will probably favor non-RE projects

• Policy initiatives such as proactively slow-down/halt new build will be most positive but other policies can drive existing generators to build more

• More enhancement of local and regional grids

• More UHV DC and AC lines are approved and built

• BUT Who will take the power?

15

Core Fundamentals Grid Policy

Each provinces face different trends, but likely will become worse before getting better

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Quantitative wind curtailment forecast from TLG’s model (for illustration)

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0123456789

10

Wind curtailmentpeakingwindMingen

2016 Spring (Mar-May) Curtailment = 46 percent

GW

0123456789

10

0:00

1:00

2:00

3:00

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6:00

7:00

8:00

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GW 2016 Autumn (Sep-Nov)Curtailment = 45 percent

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Spring Summer AutumnWinter Annual

Case study: Wind curtailment forecast in Jilin

Source: TLG research and analysis

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Thank you

For more information please contact us:

Liutong Zhang, Senior Managerlzhang@lantaugroup.com

By phone+852 2521 5501 (office)

By mail4602-4606 Tower 1, Metroplaza223 Hing Fong Road, Kwai Fong, Hong Kong

Onlinewww.lantaugroup.com

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Value

Insight

NetworksElectricity Gas

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APPENDICES

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Generation • SOE generators• local government-owned generators• IPPs• Others

End-users

Regulatory

Legislation: NPC

State Council

NDRC, NEA, MoF, MEP, …

Provincial DRC and others

City DRC and others

Grid operators

Local governments

Central Government

More on Implementation and monitoring roles

Generation

Reform initiatives:• On-grid pricing

reform

Grid operators as single buyers (Increasingly more direct purchase)

Transmission • SGCC (State Grid)• CSG (China Southern Grid)• Local government-owned grid operators

Distribution• SGCC• CSG• Local government-owned grid operators

Retail: • SGCC and CSG subsidiaries; • local government-owned grid operators;• independent retailers

Reform initiatives:• Incremental

demand open to private retailers (“direct power purchase”)

• Pricing of transmission and distribution services

• Offtake policy of renewables

• Reform of dispatch policies

The market is regulated, and dominated by powerful players with heavy government involvement at both the central and local levels

19

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China’s demand growth has slowed down materially in recent years

20

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

200 2,200 4,200 6,200 8,200

kWh Consumption

per capita

GDP per Capita (USD)

ThailandCambodiaIndonesiaPakistanPhilippinesSri LankaVietnamIndiaChinaMyanmarLaos

Sri Lanka

Indonesia

China

Thailand

Vietnam

India

Recent trend in ChinaConsumption per capital has saturated

China’s GDP and electricity demand growth

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Electricity

China’s monthly electricity demand growth Year-on-year

Source: World Bank, China Electric Council, Morgan Stanley Research and TLG analysis

Year-on-year

TotalSecondary (industrial)

Fundamentals Grid Policy

Total Consumption per capita vs GDP per Capita (1989-2013)

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Overview of five tier dispatch system

21

Level Entity Jurisdiction Key FunctionsNational dispatch organisation (or Guodiao)1

State Grid Voltage level > 500 kV

Geographic: Regional interties

Generators: Large thermal or hydropower plants exporting power across regions

Inter-regional balancing, inter-regional dispatch

Regional dispatch organisation (or Wangdiao or Zongdian)2

Regional grid companies Voltage level: 330-500 kV

Geographic: Provincial interties

Generators: e.g. Pumped hydro storage

Inter-provincial balancing, inter-provincial dispatch

Provincial (PDO) (or Shengdiao or Zhongdiao)3

Provincial grid companies

Voltage level: 220 kV (330-750 kV terminal substations)

Geographic: Bulk provincial system

Generators: Larger generators not controlled by regional or national dispatch organisation

Intra-provincial balancing, intra-provincial dispatch, coordinating load management

Prefecture dispatch organisation (Didiao or Shidiao)4

Prefecture power supply organizations

Voltage level: ≤220 kV

Geographic: Local system

Generators: Smaller local generators

Prefecture load management

County dispatch organisation (Xiandiao)5

County power supply organisations

Voltage level: ≤110 kV

Geographic: County system

Generators: Any remaining generators such as small hydropower plants

County load management

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4,982 4,9584,551

3,854

5,0745,767

4,657

3,852 4,0484,329

4,0493,716

3,326

4,9794,730

3,778

1,879

2,682

1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000

China Guangdong Shanghai Jilin InnerMongolia

Xinjiang Gansu Yunnan Sichuan

2012201320142015

The coal-fired power generation, the dominant and “infamous” source, is taking the biggest hit in the over-supplied environment

22

Annual average generation hours of thermal capacity in ChinaUtilization hours Coal, solar and wind regions Hydro regionsDemand centres

050

100150200250300350

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

ImportExport

Million tonnesChina coal import and export

Source: CEC; TLG research and analysis

Fundamentals Grid Policy

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Dilemma on coal retirement: most of the coal capacity is relatively new, and more new capacity is still under construction/plan

23

-25

-5

15

35

55

75

95

2006 2007 2008 2009 2010 2011 2012 2013 2014

New thermal capacity Retirement of thermal capacity

Annual thermal capacity addition and retirement

GW • Most of small and old coal plants were retired in 2006-2010

• About two third of current coal capacity is added in the past ten years in China

• China continues to add new coal projects aggressively

‒ In 2015, on average, two large new coal projects was approved every week

Source: CEC; TLG research and analysis

Fundamentals Grid Policy

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Ongoing debate in China: Air Quality Control (AQC) Technology for coal plants can achieve emission of non-carbon pollutants similar to gas plants

24Source: Ministry of Environmental Protection of China

http://www.nbepb.gov.cn/UploadFiles/%E8%BF%90%E7%BB%B4%E5%85%AC%E5%8F%B8/images/2014-07/201407220847483782.jpg

http://weather.news.sina.com.cn/news/2013/0130/094784939.html

If AQC technology were replicated throughout China’s power sector, non-carbon emissions would be reduced by:

• SO2 99.6%• NOx 94.8%• PM 97.2%

The new Chinese dream

Fundamentals Grid Policy

5000

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Ta

rge

t b

y 2

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0U

SC A

vgB

est

A-U

SC e

xpe

cte

d

Sup

ply

he

at

rate

(k

J/k

Wh

)

0

1

2

3

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emis

sio

ns

(gra

m p

er k

Wh

gen

erat

ed b

y co

al

pla

nts

)

SO2

Nox

PM

Coal could be utilized More Efficiently AND More Cleanly

The Lantau Group

China’s planned nationwide carbon market will start in 2017?

25

Can a low price of CO2 make a difference?

Carbon price, yuan/tonne-CO2

0

10

20

30

40

50

60

70

80

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100

Beijing Shanghai Shenzhen Guangdong Tianjin Hubei Chongqing

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Hydro variation is also a real issue

26

Source: china meteorological administrationNote: 1989 data are not available

Fuzhou rainfall data (difference from the long term average of 1985-2013) andFujian rainfall data (difference from the long term average of 2004-2013)

Fuzhou FujianJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual Annual

1985 -4% -9% -12% 4% 7% 11% -13% -9% -10% -15% -31% -21% -4%1986 -88% 8% 140% 1% -49% 9% -64% -68% -46% -5% -71% -70% -18%1987 -41% -25% 46% -16% 56% -24% -57% -92% 46% 2% 125% -92% -6%1988 -75% -24% 85% 25% 13% -37% -76% -73% 156% 5% -77% 16% 1%19891990 70% 62% -56% 68% 3% -31% -79% 249% 249% -65% -45% -63% 48%1991 -26% -77% -20% 6% -42% 33% -92% -55% 99% 18% -78% -55% -16%1992 54% 139% 101% 27% -26% -33% 58% 83% -21% -93% -39% -24% 23%1993 0% 5% -20% -23% -8% 33% -33% -68% -19% -49% -42% -43% -18%1994 -57% 45% 12% -14% 28% 47% -12% -33% 22% -61% -99% 172% 7%1995 2% -25% 11% -43% 27% -25% -18% -53% -93% -98% -68% -45% -30%1996 -70% -25% 44% 8% 6% -27% -38% 78% -53% -77% 55% -86% -5%1997 -6% 31% 10% -37% 17% 37% 40% 53% 63% 69% 29% 132% 31%1998 137% 152% 42% -51% -20% -34% -72% -91% -37% 207% -45% -46% -12%1999 69% -79% 25% 11% 4% -75% 57% 44% 81% 48% -90% -80% 6%2000 10% 17% -79% 60% -82% 103% 33% 48% -87% -6% 152% 82% 11%2001 108% -42% -16% -6% -10% -2% 39% -45% -10% -73% -66% 40% -9%2002 66% -75% -49% -26% 1% 11% -10% 19% 42% 55% -19% 94% 2%2003 12% -71% -47% -2% -29% -33% -87% -35% -57% -49% -64% -95% -42%2004 -38% -11% 8% -53% -22% -60% -50% -34% 34% -97% -41% -15% -29% -20%2005 -84% 66% -31% -63% 83% -41% 123% -45% 79% 441% -64% -71% 22% 12%2006 -75% -11% 20% 25% 53% 71% 217% 2% -65% -100% 125% 98% 36% 25%2007 -17% -3% -39% 11% -66% 2% -78% 51% -83% 19% -19% 33% -21% -9%2008 35% -44% -49% 3% 38% 20% 153% -41% -72% 144% -27% -70% 6% -7%2009 -54% -85% -15% -27% -63% 27% 64% 115% -84% -77% 95% 67% -2% -16%2010 22% 66% 22% 127% -10% 52% -5% -70% -9% 27% -78% 1% 14% 22%2011 -62% -38% -72% -76% 30% -52% 101% 30% -72% -7% 221% -43% -11% -21%2012 206% 98% -36% 75% 37% 22% -59% 61% 12% -70% 228% 57% 36% 20%2013 -93% -47% -24% -15% 27% -5% -43% -21% -64% -94% 33% 125% -19% -5%

Ratio of total rainfal 3.7% 5.9% 9.7% 10.2% 13.8% 14.8% 9.2% 12.5% 10.4% 3.5% 3.4% 2.9%

Frequency for rainfall <

201122% 30% 4% 0% 78% 7% 85% 63% 19% 52% 93% 41% 33%

Fundamentals Grid Policy

Source: TLG research and analysis

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Even for large hydro with storage, hydro curtailment is still possible due to mismatch of supply and demand timing and export arrangement

27

This results in excess hydro power supply during flat and wet years

Excess supply (after export) In Yunnan

Source: The Causes and Spatial and Temporal Distribution of Seasonal Hydro－electricity in Yunnan Province. Gao et al. (EHV Power Transmission Company, China Southern Power Grid and Yunnan Electric Power Design Institute) Yunnan Electric Power Vol 42 No. 5. Oct 2014.

100 GWh

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Wet season is in summer,

while industrial demand

decreases as rainfall affects

mining activities

Export arrangement to Guangdong and

Guangxi are based on dry year

hydrology to ensure there is sufficient

local supply

Excess during normal years

Exported

Provincial demandCoal and non-hydro RE

Hydro

Fundamentals Grid Policy

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Gas generation capacity still accounts for a very small fraction of the total fuel mix

28

Suggested target

The gas generation share is at a level of 2.2% of total generation (comparing with coal’s share of 68-72%), and new coal capacity addition is still far more than gas

GW

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2010 2011 2012 2013 2014 2015 2020

GW

The total gas fleet is comparable to ONLY one year of coal capacity addition

Total Natural Gas Generation CapacityAnnual INCREMENTAL Coal Capacity Addition