China Goes Green

A Chinese state owned enterprise in power production has a government mandate to clean its energy mix following years of air and water pollution, how well is it executing?

In March of 2016, the National People’s Congress (NPC) of China ratified the 13th Five-Year Plan establishing national goals for economic and social development for 2016-2020. One of the six pillars of the plan is Green Growth, which has significant implications for the China Datang Corporation (CDT), one of five State Owned Enterprises (SEO’s) in the country responsible for electricity production and operating in the Southern regions of the country1. The Green Growth initiative looks to achieve two things – curb rampant air and water pollution which has taken place in the country as a result of increased coal consumption to keep up with economic development and meet China’s international commitment to peak its carbon emissions by 2030 as agreed upon in the Paris Climate Agreement.

In it’s 13th plan, China announced investment of $373.1 billion investment in clean energy infrastructure, largely in wind and solar to coincide with shuttering dirtier sources of energy1. The net goal of the plan is to reduce China’s CO2 emissions per unit of GDP by 18%1. Given the structure of the Chinese economy and CDT’s role as an SEO, management is mandated to execute the goals of the announced Five-Year Plan, which will have significant implications for how the company sources and executes development of energy production projects in the country. The CDT serves major industrial regions of Fujian, which has experienced 19.7% electricity growth in the first 9 months of 2017, which demonstrates the key role CDT will play in achieving the Green Growth2. The EIA’s projections below illustrates how CDT and its piers have traditionally relied on coal as their primary fuel source and now must pivot to execute the vision of Party leaders by utilizing cleaner natural gas and renewable sources in the next five years3.

The drive for additional renewables in China’s energy mix is not new, the 12th Five-Year Plan targeted 11.4% non-fossil fuel production in the energy mix by 2015, but the 13th plan’s extension to 15% by 2020 will require ambitious investment by the state’s electricity SEO’s and CDT in particular4. Management has already began executing this vision through two actions – increasing its utilization of its natural gas infrastructure by importing more LNG from Russia and Australia and locally sourcing wind turbines and solar panels which has fed an already booming green manufacturing industry in the region.

Imports of LNG from both Russia and Australia have been increasing – as evidenced by a 51% increase in Chinese imports of LNG from Australia in the first eight months of 2017 and the Chinese signing supply contracts for off-take of Russian LNG produced in the new Yamal facility in Siberia5,6. CDT has capitalized on this increased gas supply by increasing gas thermal plant electricity production 6.3% over the course of the first nine months of 20172.

CDT has also augmented its wind production by 18.4%, mimicking the country-wide increase of 25.7% in the first 9 months of 20177,8. Because logistical challenges associated with shipping the large nacelle and blade components of the turbines encourage local manufacturing, Chinese wind turbine manufacturers have rapidly ascended global rankings and count among its members five of the top 10 largest manufacturers in the world, including the largest, Goldwind8. This phenomenon represents another Pillar of the 13th Five-Year Plan, Innovation, which looks to have Chinese manufacturing companies participate higher in the manufacturing value chain. CDT and its electricity generating SEO competitors continue to attack the challenges set out by Five-Year Plans through shifting their energy mixes towards LNG imports and locally manufactured wind and solar.

As CDT management needs to also implement grid improvements to ensure that the renewable energy being produced makes it to consumers. In its annual report, CDT Renewables noted that curtailment of its wind production increased to 21.2% in 2016 (for reference, US wind plants expect 1-3% curtailment when they are built), which thrashes the economic viability and negates the environmental impacts of clean energy production7. Investment in grid infrastructure in the form of additional transmission lines to windy regions in the east and south of China are clearly required for CDT and China at large to realize the positive impacts of the Green Growth.

As the water and air in China continue to clear thanks to cleaner energy production and manufacturing practices, the resolve of the Chinese Communist Party will be tested. A real question for CDT and China at large will be, when the immediate health interest of the Chinese people no longer requires serving, will the aim to continue green development persist? On the other hand, is it fair for developed nations like the US to expect developing countries like China to make uneconomic decisions about energy production in the interest of global warming when those developed nations were unscrutinized when largely causing the issues we face today? (799 words)

1Koleski, Katherine. “The 13th Five-Year Plan.” United States Government Publishing Office, 14 Feb. 2017. https://www.uscc.gov/sites/default/files/Research/The%2013th%20Five-Year%20Plan_Final_2.14.17_Updated%20%28002%29.pdf. Accessed November 2017.

2China Electricity Council. “January-September 2017 Power Industry Operation Profile.” CEC, 10 Oct. 2017, http://www.cec.org.cn/guihuayutongji/gongxufenxi/dianliyunxingjiankuang/2017-10-20/174187.html. Accessed November 2017.

3Energy Information Administration. “Chinese coal-fired electricity generation expected to flatten as mix shifts to renewables.” EIA, 27 Sept. 2017. https://www.eia.gov/todayinenergy/detail.php?id=33092. Accessed November 2017.

4Shen, Wei. “The Role of Business in driving and Shaping Renewable Energy Policies in China.” 10:15 (January 2016). Institute of Development Studies. https://www.researchgate.net/publication/292144496_The_Role_of_Business_in_Driving_and_Shaping_Renewable_Energy_Policies_in_China#pfb. Accessed November 2017

5Novatek. “Yamal LNG.” PAO Novatek, 2017, www.novatek.ru/en/business/yamal-lng/. Accessed November 2017.

6Russell, Clyde. “Political headaches as China sucks up Australian coal, LNG.” Reuters, September 14, 2017. https://www.reuters.com/article/column-russell-coal-lng/column-political-headaches-as-china-sucks-up-australian-coal-lng-russell-idUSL4N1LV27F, accessed November 2017.

7China Datang Corp Renewable Power. 2016 Annual Report. http://quote.morningstar.com/stock-filing/Annual-Report/2016/12/31/t.aspx?t=XBER:DT7&ft=&d=50cf798e2a3a2b2620227cd5a60ef104. Accessed November 2017

8Cusick, Daniel. “Chinese Wind Turbine Maker Is Now World’s Largest.” Scientific American, 23 Feb. 2016, www.scientificamerican.com/article/chinese-wind-turbine-maker-is-now-world-s-largest/. Accessed November 2017.

9International Gas Union. “2017 World LNG Report.” https://www.igu.org/sites/default/files/103419-World_IGU_Report_no%20crops.pdf. Accessed November 2017.

 

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5 thoughts on “China Goes Green

  1. Very cool article. A question that comes to mind is whether the top-down efforts by the Chinese state could inspire bottom up carbon emission initiatives from the population? The country that I’m from, Denmark, boast the lowest Co2 emission per capita. The way this has been achieved has been through aggressive goal setting (similar to that of the Chinese state) and by inspiring citizens to do their individual efforts to reduce Co2 footprint. For example, 36 percent of trips to work or school in Copenhagen are made by bike, and more than 20,000 cyclists enter the city center at peak hours, filling its 249 miles of cycle tracks. In addition, half of the turbines in the harbor wind farm, known as Middelgrunden, were funded by individual Copenhagen shareholders. Copenhagen also aspires to become the world’s first carbon-neutral capital by 2025 though a replacement of coal with biomass, adding more wind and solar electricity to the grid, upgrading energy-guzzling buildings, and by luring even more residents onto bikes and public transit. Denmark now generates almost 50% of its energy through wind energy and the population feel like they have a stake in this achievement. I hope China can do the same. 4

  2. Thanks much Tim and Philip. It is indeed a very interesting topic. I covered the clean energy stocks, including Goldwind and China Datang for one and a half year and would like to share more thoughts on the ‘supply chain’ involved in China’s clean energy policy.

    As mentioned, one of the biggest problem with the wind electricity is the curtailment, which is as high as 10%-15% in China vs. 1%-3% in the US vs. almost 0% in Denmark. The potential solution lies in the grid and dispatching mechanism, i.e. how the electricity is shipped along the supply chain.

    China do not have the electricity dispatcher in the network. The company which owns the national level grid also owns the local dispatching network. Since wind electricity tends to be more volatile compared with other forms of clean energy, on the national grid level, to make its job easier and the grid safer, the grid simply curtailed wind electricity instead of shipping the electricity from the Western China where electricity is produced to the Eastern China where electricity is consumed.

    If there is an electricity dispatcher, the incentive will be different because in European countries such as Denmark, the dispatcher bid for the electricity from different sources. If we look at the marginal cost for different forms of electricity, wind will be among the lowest, since we do not need to burn coal/natural gas and all we need is the ‘free’ wind. If the dispatcher only pay the price for wind electricity, which is lower, the grid has no economic incentives to ship coal/natural gas electricity any more.

    Therefore, to make sure that China can hit its target of clean energy, a smarter grid has to be built, making it safer and less volatile to ship wind electricity. On top of this, the company in charge of both grid and dispatching should be split into two independent entities, giving them the incentive to seek for the source of electricity with the lower marginal cost.

  3. I agree that the role of a dispatcher is vital to improve curtailment, but I am curious how that would work in a heavily state-owned system where mandated production targets have been the norm. Imposing free-market structures in this environment seems like a balancing act for the government.

    It is interesting that China chose to localize turbine and nacelle production due to high shipping costs. This gives them a valuable production capability, but are they able to leverage these capabilities outside of China? If the shipping costs are high to import the product, presumably it would also be cost-prohibitive to export. One possibility would be to open up wind factories outside of China, with economical access to large wind markets (such as in Europe). I wonder if their production processes would translate well to other countries, where the labor costs and other external factors are substantially different.

  4. Great article, Tim! I also enjoyed the responses from Philip and Anton and agree that China will need both a better distribution network and grassroots-type support to build on recent progress and continue the move toward more sustainable energy supplies. On the question of fairness, I think China is actually making a lot of the decisions it is making for sound economic reasons rather than as a result of pressure from the international community. China’s tourism industry has grown significantly in the past decade and a large portion of that growth stems from China’s ability to improve air quality. As Anton pointed out, the marginal costs for solar and wind energy are very small and China can capture those benefits.

    I’d also like to comment on your point about how Western countries historically benefited from cheap, dirty energy without the same international scrutiny that exists today. I think it’s also important to consider the context: until relatively recently, there weren’t cleaner alternatives to coal plants (economical or otherwise) and there wasn’t the same understanding of the effects of pollution on global climate change. It certainly doesn’t change the fact that many of the issues we face today were caused by Western countries but I wonder how the US and other developed countries might choose to generate power differently if they had to start over in today’s world.

  5. Tim, great read! CDT is interesting because they are in fact a state-owned enterprise and so there is more than competition and more than just regulation driving their decisions. It seems like they are taking proper action to decrease CO2 emissions, particularly in using locally sourced wind and solar energy. This alternative appears sustainable. Importing liquified natural gas from Russia and Australia does not seem like a sustainable, long-term solution, because of the very nature of imports. Essentially, CDT is far from a key component used in its supply chain and this key component endures many processes before it is received by CDT; these many processes implies increased chance of inefficiency and process fail. It seems that CDT is exposing itself to non-local risk by using LNG as an alternative. I wonder what other long-term solutions there may be besides locally sourced wind and solar energy.

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