BEIJING—China's government is banning construction of new coal-fired power plants in areas with surplus power supply, a move that could weigh on already-struggling coal markets.

The new measures outlined Monday by China's top economic planner, the National Development and Reform Commission, underscore the central government's deep concern with overcapacity across China's economy, a result of weakening industrial demand as growth slows.

Beijing has previously said it aimed to curb thermal power overcapacity; analysts said the fact that it now came from an official NDRC communiqué was the clearest signal yet that it won't tolerate new coal capacity in regions that already have excess supply.

Weaker demand for coal inside China could ultimately lead to higher exports, which would exacerbate the huge supplies of coal sloshing around global markets. The higher supplies could drive down global benchmark prices and hit the bottom lines of major U.S. and international coal producers.

The global commodities downturn has proven particularly tough on global coal companies. St. Louis-based Peabody Energy Corp. and Arch Coal Inc. are among the large U.S. miners to file for chapter 11 bankruptcy protections in recent months. The U.S. sector has shed 31,000 jobs since 2009.

The NDRC also said that in regions that currently face a shortage of electricity supply, the government will give preference to new-energy power projects and arrange for transporting more electricity across provincial borders.

"If China tightens coal-fired thermal power plants then this will significantly lead to a decline in coal-demand growth," said Miao Tian, an energy analyst at North Square Blue Oak investment bank in Beijing. The regions that could be affected most by the NDRC's tightened measures include the coal-rich areas of Inner Mongolia, Xinjiang and others across northeast China, she said.

The requirements by the NDRC effectively strengthen central-government oversight over new coal-fired power capacity after years in which local governments pursued new projects as a way to boost local economic growth. That has contributed to falling utilization rates at power plants across much of China's industrial heartland.

Such measures illustrate China's top-down approach to try to fix its energy challenges. In addition to limiting coal capacity, the central government has also simultaneously embarked on an ambitious reform agenda to reshape how China's power grid operates—moves that aim to raise the proportion of clean and renewable energy in the overall energy mix.

Under the NDRC's new requirements, the government will also establish a risk-assessment mechanism to measure efficiency of power production. That would take into account capacity-utilization ratios and other factors. The NDRC said local governments must take action when these indicators show "significant divergence" from normal levels.

Despite the government's pledge to prioritize new energy sources like solar and wind, coal still accounts for about two-thirds of China's primary energy consumption. But as China's economy decelerates to a more moderate pace of growth compared with the last two decades, that gives the government somewhat greater leeway to reduce its dependency on fossil fuels that pollute China's skies and contribute to higher levels of greenhouse gases in the atmosphere.

Wang Xianzheng, president of the state-backed China National Coal Association, said Monday that coal demand would grow about 2% annually over the next five years and hit about 4.3 billion metric tons by 2020. That compares with average growth of about 9% from 2000 to 2010—a period that saw China consumption rise to nearly as much coal as the rest of the world combined.

Liyan Qi contributed to this article.

Write to Brian Spegele at brian.spegele@wsj.com

(END) Dow Jones Newswires

April 26, 2016 01:05 ET (05:05 GMT)

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