A Ray of Clean Energy Sunshine Peeking Through the Beijing Haze

China’s environment is in a deplorable state, a nasty byproduct of the most successful spurt of economic growth in world history. Hardly a month passes without more vivid examples of how air, water and soil pollution threatens the health of millions of Chinese and undermines the quality of life that the Chinese worked so hard to achieve over the last decades.

Yet, while levels of PM 2.5 in China reached obscene levels in 2013, last year also marked an important renewable energy milestone: China surpassed Germany as the world’s largest market for solar energy.  Though the world rightly is aghast at the despoliation of China’s environment, it also should not lose sight of China’s progress in building a clean energy future.  

The now two year old Chinese leadership led by President Xi Jinping, has concluded that the old “crude” approach to economic development, characterized by environmentally destructive and economically low margin manufacturing, and dominated by favored state owned enterprises who are showered with abundant capital and disproportionate public policy advantages, is now a thing of the past.  

Though contradictory impulses and powerful pockets of resistance might call into question China’s ability and commitment to chart a new course, Beijing knows that if China is to get on a sustainable path of broad-based middle-income growth, China must resolve to forge ahead with a new economic model. This model will be characterized by increased reliance on the domestic market, innovation, higher value-added manufacturing, greater efficiency and an energy sector that contributes to growth without adding to China’s already gargantuan environmental predicament.

China is at an inflection point.  And because inflection points appear more like the present than the future, it is not always easy to see the outlines of what’s to come.  So, let’s peak through the smog and catch a glimpse of what could be China’s environmental and energy future if the leadership is successful in clearing a path.

China’s clean energy goals are ambitious and attaining them will be a steep climb, but China has made any number of steep climbs since Deng Xiaoping ushered in the reform era.  During the current 12th Five Year Plan period (2011-2015) the Chinese government set these objectives: a) total energy consumption in 2015 to not exceed approximately 40 billion MT of coal equivalents; b) the percentage of total energy consumption which comes from non-fossil fuel sources to grow to approximately 11.4 percent; c) non fossil fuel power generating capacity to reach 30 percent of total energy generation in China; and d) power generation from burning coal to decline to 65 percent.  

The slowing of the Chinese economy to approximately 7.5 percent/year is helping China achieve these objectives. In 2013 total energy consumption increased just 3.7 percent to 37.5 billion MT of coal equivalents, a rate of growth 0.2 percent less than the year before.  For the first three years of the 12th Five Year Plan period (2010-2013), energy consumption increased 4.9 percent; though that is greater than the 4.3 percent goal, the trend of slower growth in energy consumption is clear.  

During the first three years of the 12th Five Year Plan, energy consumption per unit of GDP declined by 9.9 percent, demonstrating how efficiency improvements and economic restructuring are making important contributions. This trend of slower growth in energy consumption clearly has been aided by the slowdown in the expansion of industries, such as steel, concrete and building materials, for which capacity has vastly outstripped demand. Despite this decline in energy consumption per unit of GDP in China, energy intensity per unit of GDP continues to be 1.9 times as much in China as the world average.  Clearly, the opportunity for further gains is substantial.  

Beijing’s ability to rapidly effectuate large-scale macro energy policy changes and incentivize the market has led China to become the world’s largest market for solar power in a startlingly short period of time.  It was not long ago that China dominated PV manufacturing and sales worldwide, but was disinterested in building solar power at home.   In that era, the Chinese government set a pitifully small goal for solar power construction in China; the 2007 Mid- to Long-Term Renewable Energy Plan called for only 1.8 GW of solar power domestically by 2015.  

Though China was then content simply to dominate worldwide PV sales, as has been true in countless other industries, the inability of the Chinese to curtail capacity development led to a domestic solar manufacturing industry operating at less than 50 percent capacity utilization; this was an important incentive for the rapid ramp-up in domestic PV installations.

To quantify the effectiveness of Beijing’s macro-economic solar energy policy, consider this: in 2013 alone China installed an astonishing 12 GW of solar power, an amount nearly as large as the total of solar power installations that year in all of Europe and almost three times what the U.S. installed, in its own record-breaking year. The 12 GW of solar power installed in 2013 alone also is 50 percent larger than the entire installed base of solar power in China as of 2012 — 8 GW.

And while there is much progress in shifting China’s energy base, there continues to be a large differential between clean energy capacity development and the percentage of China’s energy consumption that comes from clean technologies.   As of the end of 2013 power in China came from these sources in the following percentages: hydropower (22.4 percent); thermal (69.1 percent); nuclear (1.2 percent); wind (6.1 percent) and solar (1.2 percent). So what accounts for the 15-20 percent gap between clean energy power generating capacity (30.9 percent) in place in China and consumption of clean energy (11.4 percent)?

One factor is the cost advantage of energy produced from fossil fuels as compared with wind and solar.  Another is the disaggregation of production and distribution, which also creates disincentives for the grid operators to adopt clean energy. Yet another obstacle is the lack of grid infrastructure to ship power from central and western China, where demand for power is much less than in Eastern China.   Beijing has much work to do putting that system in place. 

The renewable energy subsidy system also creates some perverse results. Beijing should not provide subsidies for the construction of renewable energy power stations, but rather should subsidize the generation of renewable energy. This slight but significant change will remove the incentive to build renewable energy to earn the subsidy regardless of whether the power is generated and consumed; earning a subsidy for building a renewable energy project, but not for the generation and consumption of renewable energy has led to renewable energy power plants closing soon after being built.   

Yet another factor is the incompleteness of technical standards, which impedes access to the grid for renewable energy and conveniently gives grid operators, who might not be favorably inclined to purchase and incorporate more renewable energy into their systems, an excuse not to.  

And so, there are now more suggestions that a compulsory system be implemented, namely, that power companies be required to produce renewable energy; that grid companies be required to place renewable energy on their grids; and that consumers be required to buy renewable energy. One wonders, however, whether, just two year’s into their tenure, the leadership’s hand is strong enough to deal with these entrenched interests?

Renewable energy technology is evolving quickly and the need for technical solutions to grid access, storage, high capacity transmission, etc., etc. reminds us that the failure of the Chinese to maintain a productive relationship with Western renewable energy companies (we all remember the disintegration of the relationship between Sinovel and AMSC) is creating a drag on technological advancements that may hasten renewable energy adoption in China. 

The “war on pollution”, which Premier Li Keqiang declared earlier this year, may be in its early stages, but a turnaround in the energy infrastructure that gave rise to the environmental mess China now faces already is well underway.  And while 2013 was an important inflection point marking China’s transformation of its power infrastructure — for the first time since China’s explosive growth commenced, the percentage of power generation coming from thermal power plants dipped below 70 percent (to 69.1 percent), there is much work left for the Chinese to solidify and expand on those gains.  To accelerate those changes Beijing must become more adroit at putting in place the myriad micro energy policy formulations to clear obstacles that have arisen as China moves to a more expansive clean energy future.  

Lead image: China sunset via Shutterstock

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Lou Schwartz is a lawyer and China specialist whose firm, China Strategies, LLC, focuses on the environmental and renewable energy sectors in China and provides its clients a range of support, including research and analysis, due diligence, merger and acquisition, private equity investment, compliance and data security. Lou has written and lectured widely about China and has taught law and development in China at the university level.

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