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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.

  1. Zack
    December 20th, 2012 at 02:24 | #1

    great analysis, Mister Unknown, very impressive!

    It’s certainly an incentive for the US leader to intiate ‘supply shocks’ towards China if they think it can constrain a potential competitor.

    i read somewhere as well, that the problem was also that newer technology meant that what infrastructure China builds might need to be further upgraded ie telecomms

  2. December 20th, 2012 at 06:56 | #2

    @Zack

    Infrastructure would only need “further upgrade” IF it doesn’t use the same grid system. At the end of the day, electricity is electricity; as long as you use the same AC power as everything else, it doesn’t really matter where you get your electricity from (coal, hydro, wind, or nuclear), since that output is in the same “format” if you will. In layman’s terms – electricity is like a .doc file, it can be used on any PC/device with MS Word, or any other software compatible with .doc files.

    The major challenge with renewables is that you don’t always get sufficient sun shine or wind, and you might not get it at the time you need it, so there needs to be some kind of storage system (a battery of sorts for the solar/wind/hydro/whatever power to be stored for later use). However, the type of battery needed to store electricity on a utility scale currently doesn’t exist. This is why more R&D is needed for smart grids and utility scale storage. THIS is where the next phase of the clean-tech battle will happen. Panels and turbines are becoming commodity products, and China is quite good at commodity manufacturing. What we’re not good at is transmitting and storing the power generated by renewables, but neither is anyone else at the moment.

  3. pug_ster
    December 20th, 2012 at 08:59 | #3

    Excellent analysys. I agree that China should embrace smart grid technology but according to wikipedia, China is going to spend 22 billion by 2015 on the OpenADR Standard, far more than other countries are spending it on. I would disagree on the subsitzing the manufacturers altogether, but rather only subsitize on the Chinese buyers of solar panels and wind power, and not for exports.

  4. December 20th, 2012 at 21:00 | #4

    First a good piece, Mr. Unknown.

    Not so sure about the latest sanguine outlook that the US will become the largest oil and gas producer by 2030. Its unstated assumption is the smooth adoption of the likes of fracking, some deep-sea drilling techniques. A disaster like the BP spilling can easily set this projection back.

    China’s goal on wind power is 190 TWh in 2015. It sounds impressive — more electricity than Mexico consumes in 2011, and more than half of what the UK consumes in 2011 — but it will be only 3% of what China needs in 2015. Renewable energy will still be a supplemental source of energy in the foreseeable future.

  5. December 20th, 2012 at 22:16 | #5

    @jxie

    Thanks for the additional comments. I’m in full agreement with what you’re saying. I didn’t really consider the risks involved in US production, which are important especially since I’ve heard one or two horror stories about entire US towns being engulfed in unknown human health hazards, which happen to be located close to shale gas E&P sites.

    I also should have articulated this more clearly – the fact that renewables will remain a small part of China’s portfolio in the foreseeable future (at best, 15% by 2015) underscores the importance of having a more efficient grid system. Part of the reason we’re nearly 4 times as energy intensive as the US is not only because our economy is engaged in more energy-intensive economic activities, but also because our grid is very wasteful of electricity. A smart grid has two major benefits – first is that it’s an enabler for future adoption of renewables; second, and perhaps more immediately relevant, is that it allows the country get more utility out of current generation capacity, regardless of the fuel source.

    That’s why I advocate redirecting subsidies and preferential treatment away from panel and turbine manufacturers and toward smart grid companies, in the short-term (next 5 years) we’ll get the most bang for our buck when we make all sources of power generation more efficient, instead of blindly expanding solar and wind generation capacity.

  6. December 21st, 2012 at 13:00 | #6

    @Mister Unknown

    One of the reasons why China’s “energy intensity” appears to be high, is China’s under-developed and/or under-counted service industry, and under-stated overall GDP.

    As you said, “the type of battery needed to store electricity on a utility scale currently doesn’t exist.” It’s possible that it will never exist, at least the chemical variety of battery. There are some neat ideas such as using compressed air to store energy, albeit with lower efficiency than traditional battery, it at least conceptually can scale. Of course, if the Shenzhou 75 mission manages to find some abundant Unobtainium somewhere, this can all be changed…

    China’s electric transmission/distribution loss rate is already at a very respectable 6%, not sure how much more juice you can squeeze there. To compare: the US is at 6% also, Korea/Japan at 4%, Brazil at 17% and India at 22%. Electric T/D losses are mainly due to two factors: voltage and distance. (In India’s case, there is the 3rd factor: pilferage.) Typically higher the voltage or shorter the distance in transmission, the less the loss. China is already a leader in UHV transmission… and it simply can’t get to the level of Korea/Japan due to its size.

    Don’t get me wrong, smart-grid technologies are still very useful. Case in point, if Hubei experiences electricity usage peak due to heat, ideally you want to fire up only the most efficient turbines in the country to satisfy that need. Heck, it can be in a power plant in Laos or Myanmar…

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