November 2021

In our previous post, Infrastructure Ideas surveyed the state of the energy transition in China, the world’s largest consumer of energy and largest emitter of greenhouse gases, up through 2020.  Today we pick up the country’s energy transition story for 2021, and look at it going forward.

As we saw in Part 1, China is on the one hand the home of world’s largest coal-fired electricity generation fleet, the home of probably 75%+ of plans for building more coal-fired plants, and the home of 14,000 Gigatons a year of GHG emissions – 30% of the world’s total.  On the other hand, China is also the home of the world’s largest hydropower, wind and solar-powered generation fleets, and the energy and carbon-intensity of its economy have dropped about 40% since 2000.  Its transition has been formed by a mix of directed government policies and market-driven shifts, and it entered 2021 simultaneously seeking to ensure availability of cheap and abundant power to support continued economic growth, and to be seen as a global leader on the fight against climate change.

2021: A turbulent year

The first eleven months of 2021 have been a rough ride for China’s energy sector.  As global economic growth rebounded after the 2020 COVID-induced slowdown, the demand for China’s manufactured exports has jumped, leading in turn to sharp increases in demand for electricity from factories across the country.  Demand for coal increased 11% in the first half of 2021, according to Foreign Policy.  At the same time, political differences with Australia, China’s main source of imported coal, led the Government to block further imports from Australia.  And officials looking to implement Xi Jinping’s directives to reduce emissions began to implement rules requiring provinces to reduce energy consumption.  Natural gas shipments, which form a small but growing part of the country’s fuel sources, also became scarce and more expensive as demand for natural gas spiked across the world, in tandem with economic recovery and widespread disruptions in supply chains across different sectors.  These factors came to a head in September and October, as demand for power steadily outstripped supply, and factories in many parts of the country began to run out of electricity.  In order to avoid the domestic political costs of power shortages, officials have turned to re-opening coal mines and shuttered coal-fueled generation plants.  As the New York Times reported in the week ahead of the Glasgow COP26 Summit, “The campaign has unleashed a flurry of activity in China’s coal country. Idled mines are restarting. Cottage-sized yellow backhoes are clearing and widening roads past terraced cornfields. Long columns of bright red freight trucks are converging on the region to haul the extra cargo.“

The ongoing energy crisis is laying bare fault lines among Chinese policy-makers.  As Kelly Gallagher, a professor at the Fletcher School of Tufts University, notes: “There’s a tug of war right now. The central government is trying to limit coal production, and the local governments are doing the opposite. They want to restart plants or build new ones to get their local economies moving again post-pandemic.”  Already in 2020, unusually sharp debate had arisen in China over how aggressively it should cut the use of coal.  Prominent Chinese climate scientists and policy advisers want stricter emissions limits, including virtually no new coal power projects; powerful provinces, state companies and industry groups say China still needs to use large amounts of coal for electricity and industry for years to come (see the New York Time’s “China’s Climate Ambitions Collide with its Coal Addiction”).

The short-term crisis of 2021, however, sits against longer-term plans and objectives of China’s central government.  More specifically, in a country led by a President who has arguably accumulated more authority than any President since Mao Tse Tung, it sits against declared objectives of President Xi Jinping.  In April 2021, President Xi announced in a major policy speech that China’s emissions would peak by 2030, that China would increase the share of non-fossil fuels in its primary energy consumption to 25% by 2030 from just 6.8% in 2005 and take its total installed wind and solar capacity to 1,200 GW, and that China would achieve carbon neutrality by 2060.  While full details of how China would achieve these objectives have not been announced by the Government, several building blocks in this direction have become visible:

• China has begun to build a large network of ultra-high-voltage transmission lines linking the country’s interior, where wind and solar resources are plentiful and cheap, to demand hubs near the coast;
• China’s National Energy Administration (NEA) has set a target to have renewables make up 50% of national installed capacity by 2025;
• the NEA has further proposed that Chinese companies should be required to purchase 40% of their electricity needs from renewable sources by 2030;
• electric utilities have been instructed to charge industrial customers up to five times as much when power is scarce, and generated mainly by coal, as when renewable energy is flooding into the grid;
• provinces have been given directed incentives to make annual emissions reductions;
• and the country has created the world’s largest carbon market (see “China’s New Carbon Market”).  

China’s latest Five-Year Plan, a revered document in a country where state planning plays a large role, also charts several routes towards an increased investment shift to green tech.

A 1.5-degree roadmap

China’s energy path over the next few decades will in all likelihood be the single biggest determinant of how much the earth’s climate warms.  It would be comforting to see a clear game plan for how the ambitious goals announced by the country’s leadership might be achieved – especially comforting in view of the country’s current scramble to increase coal use.  As far as we know, the country does not yet have such a detailed plan.  But, such a roadmap does exist.

We are informed by the International Energy Agency (IEA) that the Chinese government reached out to the IEA for input on its future energy transition.  Who reached out to who is, for now, a secondary issue.  What we have seen, as of last month, is the IEA’s release of “an energy sector roadmap to carbon neutrality in China,” which we can presume is being studied in Beijing.  It is interesting that this IEA report has drawn limited visibility to date, as it is the most detailed and authoritative statement of how China might achieve its climate objectives, and how it might play its part – the biggest of all parts – in helping the world limit global warming to 1.5 degrees.

The IEA report’s roadmap has several key elements:

1.         The first key finding from the IEA is that, to achieve carbon neutrality, China’s electricity consumption growth would have to greatly accelerate.  This counter-intuitive finding, that China’s energy investment would have to rise 60% and electricity generation by 130% by 2060 in order to achieve carbon neutrality, is driven by the need to shift heating and other industrial processes from a reliance on liquid fuels and coal to electricity – which can “more easily” be made “clean.”  Electricity demand also increases due to the development of hydrogen-based energy, which is power-intensive.  Yet in spite of this increase in electricity consumption, power emissions reach a peak of 5.6 Gigatons by around 2025 and then fall to zero before 2055 and are marginally negative in 2060, helping to offset residual hard-to-abate emissions. The rate of decline in the carbon intensity of electricity – CO2 emissions per kilowatt hour generated – averages 3% per year in the 2020s, compared with 1% over the last decade.

2.         The reliance of electricity generation on renewable energy sources in the IEA roadmap jumps from 23% in 2020 to 41% in 2030, and 83% by 2060.  Solar power alone makes up 45% of the electricity mix by 2060, up from about 10% today.  Between 2030 and 2060, 220 GW of PV and 57GW of wind are added to the grid annually, on average.  Aside from wind and solar, four 1 GW nuclear reactors are launched every year (though the share of nuclear goes down to 10% from 5%), and hydropower grows 45% over the period. 

3.         Meanwhile the use of unabated coal generation drops to zero in 2045, with overall coal-fired generation capacity dropping from 1,030 to 360 GW, with 190 GW of that capacity having Carbon Capture and Storage capabilities, and 170 GW operating as standby reserve for the system.

It will no doubt take some time before China adopts, or not, the IEA plan, or more likely announces some variation of the roadmap.  In the meantime, a big question would be: is there a viable 1.5-degree roadmap including China, and is the IEA plan a realistic version of such a roadmap?

Saying that pretty much everything in the IEA roadmap is unprecedented is correct, but not terribly illuminating.  After all, much of what has happened in China’s energy transition to date has been unprecedented.  Could China manage to add 220 GW of solar and 57 GW of wind power every year for the next three decades? 

As we saw in the last post, China added some 72 GW of new wind power capacity in 2019 alone.  The country has the manufacturing capacity to meet the roadmap target in wind, it has the wind potential, and it is investing today in building the transmission lines to connect windy areas with demand centers.  It is worth noting that China’s command economy can push through transmission line investments more easily than can the United States, where local opposition is more likely to disrupt such plans.  Aside from the policy incentive, wind power also has the advantage – a very big advantage – that it is far cheaper than coal-fired electricity, and will only get more so.  China’s massive wind investments to date have not relied so much on this economic advantage, as the country’s yet limited use of competitive auctions for procuring renewables means that prices for new wind power in China remain perhaps double what they are in many places – including the US, where prices to buy power from new wind farms average less than 2 cents (US$0.02) per KwH – compared to coal-fired power prices in China of 5 to 8 cents.  The wind targets in the IEA roadmap therefore look manageable.

The faster growth of solar generation in the roadmap will be more of a challenge.  The 220 GW annual additions of solar called for by the IEA scenario are nearly equal to China’s current solar generation capacity.  The entire United States, in 2020, installed less than 20 GW of new solar PV, less than 1/10^th of what the IEA calls for China to install annually.  Here China’s manufacturing base will be sorely taxed to produce this volume of panels.  The high share of intermittent generation in the roadmap, driven by solar growth, also implies the need for a giant leap in the manufacture and installation of energy storage capacity – even higher than that for solar, on a relative basis.  Is it doable?  Perhaps.  China is already in construction on the world’s largest renewable energy project, a 100 GW wind and solar development in Kunming.  This would be bigger than the combined wind and solar capacity of all of India, for one, and four times the size of China’s famous Three Gorges Dam.  In fact, in a remarkable development, the company that created the dam, Three Gorges, has pivoted from being a hydropower developer to becoming one of the world’s largest wind and solar developers.  The June 2021 IPO of its new affiliate, Three Gorges Renewables, became one of the most successful IPOs in history.  If solar and storage are going to be the main engine of the roadmap for the next phase of China’s energy transition, then economics and employment will make the engine go.  Much as is the case for wind, new solar power farms produce electricity cheaper, far cheaper, than coal plants – at least in most of the world.  Slowly, this economic reality is arriving in China, as procurement shifts towards the auction-based competition which has been driving costs down everywhere else.  At somewhere between a quarter to a half of the cost of coal power (without storage), or half the cost to even with storage, cheap solar power will be a huge economic boom for China’s consumers and manufacturers.  Estimates indicate that by 2040, solar-plus-storage costs in China should range between $0.03-$0.085/KwH (depending on location) due to declines in battery costs and economies of scale.  The development of wind, solar, and battery storage on the scale called for in the IEA roadmap will also create massive amounts of new jobs in China, as even their far smaller developments are creating around the world today.  A challenge for China’s policy-makers, as is visible elsewhere, will be to sufficiently match the jobs displaced by reductions in the coal economy with those generated in the renewable economy.

Conclusion

Very ambitious targets for 2060 indeed in the IEA’s roadmap.  You won’t have to wait until then, however, to see if China is on this kind of path, and have a clearer view as to how high global warming is headed.  Most of the modelled 1.5-degree scenarios for China include rapid CO2 reductions over the next 5-10 years.  Policies in place in 2020 would appear to have China’s emissions path more in line with a 3-degree global warming scenario.  Yet even in the difficult energy crisis unfolding today in the country, more concrete steps towards the roadmap are being put in place.  The two big hopes for lower emissions should be pinned on a combination of economics and global leadership aspirations.  Both are those are pretty good incentives.  Global Leadership on climate fits the narrative Chinese leaders have been trying to establish, and is certainly a topic which is much more welcome in global fora than discussions of internal Chinese political matters.  Global leadership on climate also brings in its wake opportunities for China to lead in many industries of the future, with the prospect of underpinning continued strong economic growth for many years, and underpinning further growing global influence.  Stay tuned…

November 2021

This is the sixth of Infrastructure Ideas’ country-focused posts on the great Asia Energy Transformation underway, following previous reviews of the energy transition in each of Pakistan, Bangladesh, Indonesia, India and Vietnam.  This will be a two-part review, with today’s post looking at China’s transition through 2020, and our next post looking at the events of 2021 and the path forward for China.

China is colossal, in terms of both energy and emissions.  The country has the largest emissions of greenhouse gases (GHGs), the largest coal-fired generation fleet, the largest pipeline of still-planned new coal-fired plants, and… the largest wind-power fleet, and the largest solar generation capacity.  In all these categories, second place to China is far, far distant.  China’s energy mix is also in flux, and its choices matter far, far more than those of any other country.  Where China’s energy mix heads over the next decade will go farther than anything else in determining how much warmer the world gets; as a recent report by the International Energy Agency (IEA) opens, “there is no path to limiting the global temperature rise to 1.5 degrees without China.” 

China has been the top global emitter of GHG since 2006, and accounts for about 30% of the world’s total. The over 14,000 gigatons of GHG emissions in 2019 was a 25% increase ten-year since 2010.  With some 4,500 gigatons, China’s power-generation sector is the biggest contributor to the country’s emissions, and accounts for about 10% of all global GHG emissions from all sources.  A study by Carbon Tracker reported that, for the world to hit its goal of limiting global warming to 1.5 degrees, China would need to cut its CO2 emissions by more than 90% by 2050 – relative to its current trajectory.  To do this, the study’s models show that China’s power sector would need to cut down its emissions by 66% by 2030 and achieve full decarbonization by 2050.  A different study, by Climate Action Tracker, notes that while Xi Jinping’s April 2021 announcement on climate sets out a goal broadly consistent with the 1.5-degree target, current policies would rather imply that emissions levels from China are more consistent with a 3-degree global warming.  Most recently, in September, the IEA issued a roadmap on how China could get from where its current policies would take its emissions, to Xi Jinping’s announced objective.  The report notes that China’s energy sector has a path to deep cuts in emissions – though this path is not where current policies are heading, and it is very, very different than how the sector has evolved over the last decade.  In this post we’ll take a look at that path to 1.5 degrees, and compare it to where China is and has been.

China’s Power Sector in 2020

Coal.  In 2020, China consumed 7,620 terawatt-hours of electricity, an increase of 80% since 2010.  Coal-fired power remains the mainstay of electricity generation in China, though its share has dropped from 78% of all generation in 2010 to 62% in 2020.  In terms of capacity, coal makes up slightly over 50% of all electricity generation capacity, running naturally at higher rates of usage than intermittent sources such as wind and solar.  China has some 4,000 coal-fired generation plants, and their installed capacity is eight times that of India’s.  This coal-fired power fleet has grown enormously over the last decade, and is therefore quite young in technical terms.  According to Global Energy Monitor (GEM), nearly half of China’s 1,047 Gigawatts of coal generation capacity has come on line since 2010.  China now accounts for 51% of global coal-fired generation capacity.  Again according to GEM, China has another 121 GW of coal-fired plants in the pipeline, 55% of global planned additional capacity around the world.  This probably understates China’s share in potential coal-fired additions, as the announcements over the past year from Japan, Korea, and the China (see “Xi Jinping’s UN Coal Pledge”) that they would no longer finance coal-fired generation overseas – followed by the similar COP26 pledge made by several more high-income countries, means that at least half of all other planned capacity additions will be unfinanceable.  China’s still-planned additions probably account for at least 75%, and possibly close to 90%, of the remaining global new coal pipeline.  This said, there are some interesting aspects of this to consider.  For one, China has actually cancelled 619 GW of at-one-time-planned coal plants: more than the rest of the world combined has built since 2010.  And the building of new plants slowed significantly in 2019 and 2020.  So it could be worse…

For the world’s climate, the million-dollar question is, where will coal in China go from here?  Will the recent slowdown in building coal continue, and be followed by an era of decommissioning or retrofitting carbon capture on China’s coal fleet?  2021, as we’ll see in our next post, has provided a roller-coaster but not yet a clear answer.

Hydropower.  When many people think of energy in China, the one image which comes to mind is the Three Gorges Dam, the largest in the world.  Hydropower certainly has been an important part of Chinese planners’ approach to increasing energy supplies, and continues to be, generating more electricity than any source other than coal.  Hydropower generation capacity in the country increased from 213 GW in 2010 to 375 GW in 2020.  China is not only the world leader in hydropower capacity, but has more than triple the amount of this capacity than the next closest country, the United States.  The share of hydropower in China’s generation mix has been relatively stable over the last decade, at between 16-19% of total generation.  The share of hydropower in new power capacity additions has fluctuated during this period, depending on the timing of opening of new large dams.  The 22.5 GW Baihetan dam hydropower facility, opened last year on a tributary of the Yangtze, is the world’s second largest hydropower scheme in operation, after the Three Gorges dam. 

Further growth in hydropower would be an important ingredient in a decarbonization strategy for China, especially as it provides baseload power to replace coal much more easily than wind and solar do. 

Nuclear.  China is one of the very few countries in the world still rapidly adding nuclear power generation capacity.  David Sandalow, of the Columbia Center for Energy Policy, reported that in 2018, seven of the world’s nine nuclear power plants that connected to the grid for the first time were in China.  Today just under 5% of China’s electricity generation comes from nuclear energy, with reported generation capacity at about 49 GW from 36 operational reactors.  That volume is expected to quadruple over the coming decade, according to China’s National Energy Administration, to some 200 GW by 2030, and then grow another 70% to 340 GW by 2050 (see figure below).  Like hydropower, further growth in nuclear capacity would be an important ingredient in a decarbonization strategy for China, especially for baseload power supply.

Natural gas.  When the combination of new drilling technologies and the development of cheaper, commoditized shipping containers for natural gas emerged around 2010, global trading in natural gas began to grow exponentially.  No country was as eager to benefit from this emerging trade boom than China, which announced a target of 110 GW of electricity generation from natural gas by 2020.  While that target was not met, the 97 GW of natural gas-fired capacity now installed in China represents a dramatic increase, accounting for some 3% of total power production.  In the short-term, China sees natural gas as a critical component of its strategy to reduce dependency on coal, especially for baseload power.  The 14^th Five-Year Plan calls for adding some 40-50 GW of additional natural gas-fired capacity by 2025.  In the longer-term natural gas-fired plants, much like coal, would need to be either decommissioned or abated for China to achieve its stated zero-emission goal by 2060.

Wind Power.  The year 2020 was a landmark for wind power in China.  The country added a whopping 71.7 GW of wind power capacity last year, the most ever and nearly triple 2019’s levels, according to data released by the National Energy Administration (NEA).  China’s 2020 figure is ahead of the 60.4 GW of new wind capacity added globally in 2019, according to data from the Global Wind Energy Council.  It was also a landmark in that 2020 saw, for the first time, wind being the single largest source of new electricity generation capacity in China (see graphic below).  Among recent noteworthy wind developments is China’s State Power Investment Corporation Ulanqab Wind Power Base, approved in 2018, which would be spread across a 3,800km2 area in the north of China, close to the border with Mongolia.  It would be the largest onshore wind farm in the world. The 6 GW, $6.8 billion project would deliver to the Beijing-Tianjin-Hebei power market to the south, without subsidies.  Wind now accounts for over 10% of China’s total generation capacity, and at slightly over 300 GW, is some 30% higher than the collective installed wind generation of the European Union, and more than double that of the United States.  Going forward, any decarbonization strategy for China and its energy sector will need to rely very heavily on wind.  Wind is cheap and it is plentiful in China, and there is enormous growth potential, but for it to be realized China will need to address its transmission capacity shortages.

Solar Power.  It can be hard to remember, but once upon a time China was well behind the rest of the world in solar power.  In 2009, China accounted for a tiny 2% of global installations, as Europe began to scale up its installations. Just eight years later, China claimed more than half of the market, installing over 50 GW of solar in 2017.  This level had an element of artificiality to it, as China in 2017 was still using the pricing mechanism for new solar farms that most of the rest of the world had already abandoned: feed-in-pricing.  Feed-in-tariffs mean that the buyer (in this case China’s state-run distribution companies) agrees to pay a pre-announced price to anyone able to deliver solar power by a certain time: with costs of installing solar power plunging, this created a situation where installers saw larger profit potential than they did in other markets, where they were forced by auctions to compete against each other.  China caught on eventually and began to move towards auction-based procurement in 2018, which had the effect of reducing installations of new solar in 2018 and 2019, but also the effect of significantly reducing the prices distribution companies now had to pay for new solar.  At the end of 2017, the average cost of solar in China was $0.11/KwH, substantially higher than the 2 to 5 cents being paid for new solar in most markets.  The market has now re-adjusted and new solar installations bounced back up in 2020, from 30 to almost 50 GW.   Prices for new solar contracts are capped at $0.08/KwH, and have seen drops to as low as $0.03.  Given abundance of land and sun, and the ability to build very large-scale projects, we would expect these prices to drop further, to the levels seen in the Gulf, of between 1-2 cents per kilowatt-hour. 

At the end of 2020, China had 252 GW of solar power generation capacity, up from a 2010 level of… One GW (see figure below).  The country with the second largest solar electricity fleet, the United States, passed the 100 GW installed mark earlier in 2021.  China’s 252 GW accounts for just under 10% of China’s installed power generation capacity, and accounts for just under one half of the entire world’s solar generation capacity: essentially all of this has been built in the last decade.  Going forward, solar is expected to continue, and hopefully even further accelerate, its remarkable growth in China.  Combined with energy storage, it is projected – in all decarbonization models for China – to become the country’s number one source of electricity.   Can it do so?  That has to be the second of the million-dollar questions for the trajectory of global warming.

Recent Changes in China’s power markets

As with many things in China, energy management in China is a hybrid of government decision-making and market mechanisms.  Prices for power generators have become increasingly freed, while prices to consumers are allowed to go down, but rarely up.  As noted above, China used administrative mechanisms to promote the growth of wind and then solar generation, and then moved (sometimes slowly) to the competitive procurement of both through auctions.  The move to competitive auctions for solar was initially unsuccessful, with most 2018 bids coming from state-owned companies only; private firms were wary of the combination of sharply lower prices from competition, while uncertainties about offtake risks remained.  The government then had to complement the introduction of auctions with a series of incentives, including that all renewable power from new entrants would be purchased under 20-year contracts, with guaranteed grid connections and reduced transmission fees.  State planning continues to matter a lot, as do political pronouncements.

China’s hybrid approach to sector management has had unintended consequences at several junctures.  One unusual situation dates back to late 20^th century reforms.  As China’s economic growth accelerated and continued, energy supply emerged as a major issue.  This prompted the government to adopt a number of policies encouraging the building of new coal plants, including price mechanisms essentially guaranteeing their profitability, but with central government approval always required.  That central approval began to lead to years-long delays, and in 2014 China allowed provincial governments to approve power plants on their own.  Local governments were under enormous political pressure to increase the economic productivity in their region and saw new coal plants as a great shortcut: as a consequence, in 2015 the capacity of newly approved coal plants in China tripled.  The Federal government backtracked two years later, but the number of plants launched in 2015 and 2016 (along with the steep increases in supply from other sources) led to oversupply of power through 2020. 

Power oversupply in recent years has had further unintended consequences.  In 2019 it was announced that over half of the power plants operated by China’s Big Five state-owned utilities were running at a loss, idle up to 50% of the time, and that the government planned for up to 15% of the country’s coal capacity to shut.  Meanwhile curtailment (power offered by wind and solar producers but not accepted by transmission companies) emerged as a major issue for renewable energy producers.  Curtailment also stems from geographic issues: although major solar and wind power installations in China’s more far-flung provinces can produce large amounts of renewable energy, a lack of high-voltage transmission infrastructure means that a sizeable percentage of that goes unused.  Curtailment reached a high of 17% in 2016, in part because transmission companies preferred to use steady (though polluting) coal power rather than intermittently available renewable power.  This created major – unintended – disincentives for renewable energy providers.  Another directive in 2018 now guarantees new solar generators that state-owned transmission companies will buy their electricity.  Government planners now need to direct investment – and that would be public sector investment – to building the transmission lines that can utilize that power.  Along with transmission, storage will also be needed.  China’s State Grid Corp announced in late 2020 that it will invest US$5.7 to build pumped hydro storage plants in an effort to ease stranded power systems, with a combined capacity of 6 GW, giving it a total of 30 GW of storage under construction. 

Prices have also begun to become more important in China’s power sector.  Part of the 2014-2015 reforms proclaimed that the market should give investors price signals on when and what to build. Progress on implementation has however been slow, and less than 30% of electricity produced in China was sold via deregulated mechanisms in 2019.  Not surprisingly, with falling wind and solar costs, where electricity has been sold at deregulated rates, prices have dropped.

The State of Play Entering 2021

At the end of 2020, China stood squarely in the middle of the big global questions on climate change.  One the one hand, its emissions dwarf those of other countries, coal dominates the energy sector and the building of new coal plants boomed over the last decade.  Local and state governments in China, much like in many other countries, are often strong defenders of coal, fearing local economic decline and unrest if its use falls.  On the other hand, China has become the world’s leading builder of non-emitting generating plants using wind, solar, hydropower and nuclear.  In spite of the boom in new coal plants of the 2010s, coal has lost over 15% of its market share to wind and solar.  China’s central leadership, most importantly Xi Jinping personally, has made clear its desire to be seen as an international leader on helping tackle climate change. 

China’s mix of directed policy and use of markets has not always produced the intended results, at least in the short term.  2021, as we will review in the next Infrastructure Ideas post, has seen its share of further unintended results.  Next up: what does the path to China’s stated emission targets look like?

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