THE BEIJING AXIS China Business in Perfect Strokes

The Chinese government’s stimulus package set aside over a third for projects that would either directly or indirectly have a positive environmental impact. Are these green initiatives indicative of a broader strategic stance of the Chinese government on environmental issues, or just a temporary boost to the economy and the country’s image?

In the past 3 months, China has implemented a few significant environment-friendly policies. A goal of 20% of the country’s energy requirements to be generated from alternative sources by 2020 has been confirmed; subsidies and feed-in tariffs for the solar and wind power industries were announced in July by the National Development and Reform Commission (NDRC). Moreover, a few high-profile projects that were part of the stimulus spending, notably in hydropower, have been denied approval on environmental grounds – if not proof, then at least an indication that China is not willing to disregard the environmental costs of its development.

Two broad tendencies are clearly visible: the diversification of energy resources to include renewable resources such as solar and wind; and efforts to reduce the adverse effects of China’s main energy input: coal.

Renewable energy resources

The Chinese government and enterprises have been active in developing renewable and alternative energy resources for a number of years now. Competing third generation nuclear power projects with heavy involvement of foreign engineering firms have been getting more traction; projects that focus on biodiesel production from used vegetable oils have sprung across China; and use of livestock methane in rural areas is increasing. But the most significant and visible developments have been taking place in the areas of solar and wind power.

According to BTM Consult, a Danish wind power consultancy, China in 2008 has seen the fastest growth rate in the world in installed wind power capacity, and is on track to become this year the #2 market in installed capacity after the US. The new targets for wind power by 2020 look very ambitious: 100 GW of installed generation capacity, vs. 12.5 GW today. In 2009, China is set to become world’s leading manufacturer of wind turbines, according to Global Wind Energy Council.

All of China’s five leading electricity generation companies are presently busy installing wind and solar generation capacities. Both local and foreign manufacturers of wind turbines, as well as a growing number of China’s manufacturers of photovoltaic cells and solar panels have benefited from new installations.

July saw the introduction of a new set of feed-in tariffs for wind power generation for four different types of onshore wind generation projects, between RMB 0.51 and 0.61 per kilowatt hour (on average a 64% premium over feed-in tariffs for coal). In another unprecedented move, the Ministry of Finance has announced major support for new solar power projects: up to 50% of investment costs (and up to 70% for projects in remote areas) will be financed by the state.

The idea of a ‘smart grid’ is also rapidly taking hold in China, and at a recent ultra-high voltage (UHV) technology conference the State Grid Corporation of China presented an aggressive upgrade plan for the country’s electricity grid that envisions efficient UHV transmission lines to link remote energy-rich areas (for both renewable sources and coal generation) in western and central areas of China with the densely populated coastal areas. In addition, the plan will include an integrated transmission and distribution system to help balance the generation from different traditional and renewable sources, and uneven load, that reserves a big role for fleets of electric cars and charging stations in major cities.

Clean coal: putting lipstick on a pig?

The second important ongoing trend in China’s energy sector is the push for greener technologies in coal generation, which presently helps produce over 77% of China’s electricity and will likely constitute a high proportion of generation in the future. To mitigate the adverse environmental effects of coal generation, a variety of technologies are being actively implemented, ranging from simple technologies that could have been implemented a long time ago but were not due to lax controls and ‘growth at any costs’ mindset, to relatively new, advanced, and expensive technologies that promise to achieve significant efficiency gains or pollution reduction.

Many of the simpler technologies, such as advanced scrubbers in coal-burning plants and coal washing, are seeing increasing interest from the coal generation industry as smaller units are being closed down and newer and larger plants are coming online. The consolidation of the coal generation plants into larger and more efficient players is a trend that for the past few years also can be seen in other industries in China – notably, coal and iron ore mining, and steel production. Consolidation allows for more stringent environmental controls as well as higher profitability and an easier access to funds for upgrades.

Chinese electricity generation companies have been buying supercritical and ultra-supercritical coal generation equipment from global leaders such as General Electric, bringing the efficiency of Chinese coal generation industry closer to that of developed countries.

Some of China’s cleaner coal technologies are already at a level that allows their successful export to other countries. In a recent announcement, Huaneng, China’s leading integrated power utility, detailed plans to build an integrated gasification combined cycle plant in Pennsylvania in the US, utilising an advanced two-stage pulverised coal pressure gasification technology.

This brings us to the forefront of cleaner coal technologies –underground coal gasification (UGS) and carbon capture and sequestration (CCS) – as yet unproven technologies that are being developed in advanced economies around the world as solutions to global warming and pollution. China is actively piloting both of these technologies – 10 pilot projects in UGS and two pilot projects in CCS are currently either under construction or in operations.

Long-term implications for China and the world

The trends that we have outlined previously invite the conclusion that China is really serious about utilising advanced technologies in gaining efficiency and decreasing the environmental impact of energy generation.

Moreover, China is apparently pursuing another important goal in the deployment of ‘green’ technologies. It envisions domestic firms, especially in engineering and manufacturing, to join the top global rankings. We are at an inflection point for many green technologies, and the next 20 years are crucial for the emergence of new leaders in this field. It is only natural for Chinese auto makers to try and take the lead in technologies where their global competitors have no significant advantage and the playing field is level – for example, all-electric plug-in vehicles. Expect to see major investments by Chinese firms and support from the government in this area.

The same goes for wind and solar power and clean coal, where China has both manufacturing advantages and the domestic market advantage – expect the local players and the government to utilise every possible avenue to purchase and develop new technologies, deploy them at home and expand capabilities, and then aggressively push into foreign markets.