Chinese Energy Strategy in the Next Five Years

I recently had to write an essay about energy trends affecting China, so I thought I’d share here as well, with a few details modified:

While China has actively expanded its use of renewable energy and fostered innovation in the clean-tech space, planning on the renewables development and deployment front has been suboptimal in the face of present realities. To advance China’s twin goals of modernization and security in the energy space, China should place greater emphasis on renewable capacity utilization rather than capacity expansion in the next five years. China should also find ways to increase the proportion of non-maritime energy imports in its overall import portfolio.

Perhaps the biggest policy flaw so far is that the renewable power generation industry (i.e. wind turbine and solar panel manufacturing) has been subsidized to a level beyond what is necessary to create a globally competitive industry. As a result of Beijing’s subsidies to the industry, global overcapacity is rampant, the domestic market is unlikely to be able to absorb this excess capacity, and the industry – at least on the solar panel side – will likely face consolidation. Furthermore, excessive subsidies have drawn the ire of western competitors and governments, which are pushing for heavy tariffs against Chinese-manufactured equipment. These subsidies – while successful at establishing a competitive domestic renewables industry in the early 2000s – have outlived their usefulness.

Absorbing additional capacity by simply setting up wind and solar farms is also not an ideal strategy. China’s inland provinces are already inundated with far more wind turbines and solar panels than they can connect to the electricity grid. In fact, it is estimated that over 25% of China’s renewable electricity generation capacity remains unused (some estimates are as high as 40%), because the electricity grid system needed to carry that power to consumers currently does not exist. Simply put, China is facing a challenge faced by every other country attempting to exploit renewable energy – the places where the sun shines the brightest and the wind blows the hardest are often places where few people live. Installing additional generation capacity simply will mean that more panels and turbines remain underutilized.

There are also external factors beyond China’s control that constitute potential obstacles to China’s long march toward sustainable energy generation and energy security; chief amongst them is the emergence of the US as a leading oil and gas producer. The widespread use of recently-developed hydraulic fracturing (fracking) and artificial lift technology is enabling the US to develop domestic shale gas and oil reserves previously inaccessible due to technical limits. If current trends continue, the US will build enough capacity to achieve energy self-sufficiency by as early as 2030, and surpass Russia and Saudi Arabia to become the world’s biggest producer of oil and gas. Expanding US production will result in a cumulative increase in global oil and gas supplies. This trend has both positive and negative consequences for China. In the short to medium term (present day to 2030), this will be a mitigating factor that tempers the market price of hydrocarbons, which leads to savings for net-importers such as China. Moreover, cheap and abundant shale gas is making renewable energy relatively less attractive for the US, thus making new competitors in the field less likely to emerge from the US.

As for the negative effects, cheaper hydrocarbons on the international market could also make renewables less attractive in China, even though the effect may not be as severe (especially if shale gas remains difficult to extract from China’s complicated terrain) as in the US. Worse yet, US energy independence, along with widely available supplies from Canada and Latin America, reduces America’s vulnerability to global supply shocks. Therefore, energy vulnerability will no longer act as a constraint against America’s propensity for disproportional use of force. In fact, if the US becomes a net exporter of petroleum products after 2030, it would have a limited profit incentive to instigate global supply shocks through its military or its intelligence/security apparatus. US perception of China as an ideological and strategic competitor creates an additional incentive to disrupt Chinese energy supplies. In the short to medium term, China will have neither the military capability to constrain America’s tendency toward frequent armed conflict, nor the degree of energy independence required to withstand such global supply shocks should it occur.

In sum, China’s renewable energy policies have been suboptimal, and external factors will create both vulnerabilities and opportunities for China. In the next five years, clean-tech policy incentives should be gradually directed away from solar panel and wind turbine manufacturing, and toward grid optimization, as well as R&D of utility-scale electricity storage options. Such a policy would maximize utilization of China’s existing capacity, enable utilities to cope with the intermittent nature of renewable energy, and encourage renewable equipment manufacturers to consolidate and compete more efficiently. The timing for such action is ideal; if the US finds a way to profitably export its excess shale gas in the coming years, the downward pressure on US domestic gas prices will be eased, and that might make US renewables more viable. America’s current inability to export so gives China a window of opportunity to take away subsidies to panel/turbine manufacturers with reduced risk of eroding global competitiveness in the solar and wind industries. Increasing the proportion of on non-maritime supply (Russia, Central Asia, etc.), as well as exploring and producing domestic shale gas and coal-bed methane can minimize, but not eliminate, vulnerabilities to global supply shocks. On the other hand, China should not be concerned that the US has a first-mover advantage in the shale gas realm, particularly given the uncertain environmental impacts of fracking.