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 1/10th 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.
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…