Environmental stress testing for China's overseas coal power investment project

Abstract

The advance of the Chinese "Belt and Road" initiative encourages increased overseas investment in coal power projects. However, it also brings about external environmental risks. In this paper, we use the approach of environmental stress testing to examine China's overseas coal power investment projects by focusing on two countries: Indonesia and Vietnam. We first identify five key testing factors (i.e., coal price, utilization hours, exchange rate, carbon tax, and environmental protection requirements) by examining the market regulation and the environmental risks of coal power projects along the "Belt and Road" countries. Then, we observed changes in the enterprise value and internal rate of return (IRR) by setting different scenarios in which the values of the five stress factors varied. The results show that (1) the economics of coal-fired projects in Indonesia is most sensitive to exchange rate, while the economics of coal projects in Vietnam is most sensitive to coal price; (2) the pressure of nationally determined contributions (NDC) goals on environmental protection will push the "Belt and Road" countries to implement more stringent environmental regulation, which will reinforce environmental stress on overseas coal power investment. These results have important policy implications for the enterprise, industry, and Chinese government.