Thursday, 10 October 2013

China: World's Largest Clean Tech Market + Its Chaotic Migration to a Green Economy

For most, when one talks of China  and its environmental and energy challenges, one tends to paint a very bleak picture.  This perception is well-founded in that China 1) displaced the US as the world's largest energy consumer as of 2009 -- doubling its energy consumption between 2000 and 2009 --- 2) represents the world's  highest pollution levels with 16 of the top 20 most polluted cities in the world being in China and 3) now has total annual vehicle sales higher than that of the US.  Add to the picture considerations to the effect that approximately 62% of China's current electrical power generation is derived from thermal, mainly coal-fired, generating plants and much of China's industrial pollution emanates from plants with dated technologies.

The flip side to this gloomy portrait, is that China is actively engaged in a chaotic migration to a green economy.  Indeed, in 2012, China had the highest level of investments in clean energy, totalling $67.7B, up 20% from 2011 due to a solar sector surge.  The US was in a distant second place with $42.4B in clean energy investments in 2012.

With these sharp contradictions, one might be tempted to conclude that China is schizophrenic on environmental issues. However, that would be unfair because the trends are shifting in favour of clean technologies supported with massive investments by the national government.

On massive government funding for clean technologies, sustainable development related R &D, energy efficiency and emissions and pollution control, China committed $223B in 2009 to initiatives in these areas and in August 2012, China announced a new plan for $372B up to the year 2015.

Concurrent with the aforementioned investments, under the 2009 China Renewable Energy Law, China introduced 1) a Feed-in-Tariff (FIT) for renewables (fixed price paid above market prices for all renewable energy sources) and 2) Right-to-Connect obligations that require all grid operators buy all of the renewable energy produced in their respective regions.  (Note, the FIT and Right to Connect formula was conceived in Germany and has since been copied by 40 governments around the world, including Ontario, until that province abandoned the model in response to a WTO ruling over Ontario content provisions.)

Complementing the FIT and right to connect programs, in 2012, China began to implement a quota system for provinces and cities for the amount of their energy that must come from renewable sources.

Against this backdrop, China has become the world's fastest growing wind energy market. With 13.2 GW of new wind power capacity added in 2012,  the total wind installed capacity reached 75.6 GW by the end of 2012.  (To put this in a relative perspective, Quebec's current total installed electricity production capacity, including Churchill Falls, is 44 GW.) Projections are for over 16 GW of new installations in 2013 and 17 GW and 18 GW for 2014 and 2015 respectively.  China's unofficial target is 200 GW by 2020 but that may be an underestimate. 

In terms of jobs in the wind energy sector, the projection is that from the 150,000 jobs in China's wind sector in 2009, the numbers will rise to 500,000 jobs by 2020.

Unfortunately, in its haste to advance its wind and solar energy sectors -- from the development of clean energy manufacturing capacity to the construction of wind and solar farms -- China had "forgot" to invest in corresponding increases in electricity transmission capacity.  Consequently, Chinese electrical grids are not in place to handle all of its new renewable energy production capacity -- 20% of wind production capacity was not connected in 2012.  To remedy the situation, China will build 19 new ultra high voltage lines, but the first two lines will not be ready until 2014.  One of these lines will be 2000km long.

In the interim, with the help of generous state financing from the Chinese Development Bank and other sources, China dumped its manufacturing surplus production of clean energy technologies on global markets.

The US has since responded to China's dumping by imposing steep tariffs on China's clean technologies - up to 250% on some Chinese solar products and up to 26% on Chinese wind turbine towers.

With respect to tariffs and Europe, following sabre rattling to the tune of an 11.8% introductory offer solar products tariff on Chinese imports effective June 6, 2013, on August 6, 2013 the EU decided not to impose provisional tariffs averaging 47% that were supposed to come into effect that same day, on Aug 6, 2013. That is, a preliminary truce was worked out on 1) prices and 2) a maximum export volume. Notwithstanding this preliminary agreement, Europe is keeping its options open for new tariff decisions at a later time.

Regrettably, up until the aforementioned trade wars, China's PV solar manufacturing sector was almost entirely dedicated to global markets -- with hardly any domestic market to speak of -- going from 1% of the global market in 2004 to 50% by 2012, that is, up to when US and European tariffs eliminated China's price advantage. The US and EU tariffs having brought China back to earth, China is now more focused on internal solutions to its temporary surplus in solar manufacturing capacity.
One these internal solutions comes in the form of PV solar energy targets to install 10 GW/year in the 2013-15 period --quite a sharp increase from the total installed PV solar capacity at the end of 2012 at 5 GW. To encourage the private sector to get into the act -- 40% of PV projects are represented by private developers -- the Chinese government is offering 50% tax breaks for utility scale projects for that period.  As a result, when the figures are in for the year 2013, China will likely be the world's largest solar market. 

What this will mean in terms of growth jobs in China's solar sector may not be known for a while, but it is worth noting that prior to new policies and targets mentioned above, there were 300,000 jobs in the PV solar sector in 2011.  As well, there were another 800,000 employed in China's solar heating and cooling sector in that same year.

But since domestic market growth by itself would still not be sufficient to address the solar manufacturing overcapacity and declining overseas demand, China has since introduced tax breaks and other measures to encourage Chinese solar manufacturing sector restructuring.  Further on restructuring, with the cap on exports to Europe, Europe being the world's largest solar market, China has blocked access of its small solar firms to European markets.

Where does all this lead? Well the projections of BNEF are such that 50% of China's electricity would come from wind and solar energy by 2030, roughly equal to that of coal.  Further on coal, in the recent Common Sense Canadian article on the end of coal, it suggested that coal production in China will peak in 2015. This may suggest that the BNEF projections are too conservative.­­­­­­­­­­­­­­­­­­­

An indicator that the clean energy projections may be too conservative or, at least, not tell the whole story, is China's recognition that overarching policies are essential to bring all sectors of the economy on side.  More precisely, in May 2013, China's National Development and Reform Commission began a process to explore cap and trade options with the objective of having a scheme come into effect in 2016.  The review of this option began in June 2013 with the first of seven pilot carbon trading schemes in Shenzhen.  In line with these objectives, the plan call for strict  emissions, pollution and energy efficiency standards for the industrial sectors by 2016, backed by stiff penalties for non-compliance.  To assist industry to achieve compliance, loans would be made available to firms to invest in clean technologies.  According to Bloomberg New Energy Finance (BNEF), if the power sector is faced with a price of carbon, GHG's in China would peak around 2023.

As to why Shenzhen was chosen for China's first cap and trade pilot, it may well be because that city's green leadership, particularly in the area of clean transportation alternatives.  To this effect, the city of Shenzhen has established a target to have 1) more than 3000 electric taxis and 2) 5000 hybrid and 1000 electric urban transit buses around by 2015.  In addition, by 2015, the city will ban all vehicles that fail to meet in advanced emission standards.  Not bad for the city that ranks second to Beijing as having the most vehicles in mainland China. 

Moreover the audacity of city of Shenzhen complements that of the Warren Buffet-backed BYD of Shenzhen which 1) has become a world leader in all electric buses; 2) will introduce its e-buses to Canada through pilot projects with the Société de transport de l'Outaouais (STO in the Gatineau area) and Société de transport de Montréal (STM); 2) has introduced its e-buses in a pilot in Frankfurt Germany; 3) built an e-bus and electric car manufacturing plant Sofia, Bulgaria which began operations in February 2013; and 4) is building an e-bus and an Iron-Phosphate energy module (large-scale battery) manufacturing facility in California that will be operational in late 2013.

Meanwhile, back in Canada, Stephen Harper continues to present economic development and sustainable development as two opposing policy paths. This is true only as long as all of Canada's economic eggs are in the old economy and one turns a blind eye as to what's happening by way of economic paradigm shifts in China, Europe and the US.  Only in Canada, pity!

Will Dubitsky, Oct 10, 2013

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