I am really excited.
On May 10 (incidentally, but fittingly, Pangea Day) at the Xiamen Climate Change Symposium held at Xiamen University in Xiamen City, Fujian, I was introduced to an exciting opportunity for Xiamen City to undertake what has potential to be a truly groundbreaking project.
A consortium comprised by CHORA (an urban planning, architectural and research organization based in London), Atelier Liu Yuyang Architects (a Shanghai-based architectural firm), Caspervandertak (a Beijing-based CDM consulting firm) and Xiamen University, each joint-hosts of the symposium, are pitching the idea of establishing Xiamen as an “climate change incubator”—i.e. the creation of an institutional structure for the promotion and development of a series of climate change mitigation projects that will the take the form of renewable energy (RE) and energy efficiency (EE) installations. A key feature of the proposal is the use of financing from the clean development mechanism (CDM) under the Kyoto Protocol.
Architects Raoul Bunschoten of CHORA (right) and Liu Yuyang of Atelier making the pitch in Xiamen.
In basic terms, the CDM is a program in which developing countries, like China, who are not bound by carbon emission reduction obligations, are encouraged to undertake projects in their jurisdiction that result in carbon emission reductions through financing provided by developed countries, who are themselves bound by such obligations and can credit such emission reductions to their obligations, even though those reductions have taken place in the developing country.
Up to now, CDM projects, shaped by the complicated rules that govern them, have almost always taken the form of single large installations, e.g. a biogas plant or a wind farm. However, two alternative forms of CDM exist—“bundling” and “programme of activities” (POA)—which may be better suited for the urban environment. Bundling, as the name implies, consist of a series of small-scale installations can be bundled together under a single umbrella CDM structure. POA is similar, with an emphasis that a private or public body coordinates the implementation of a series of policies or measures that result in emissions reductions. The rules for POA were only recently promulgated at the end of last year.
Bundling and POA allow, for the first time, RE/EE projects that traditionally would not have qualified for the CDM due to not meeting the required threshold size to obtain CDM funding. Examples of bundling projects include the Kuyasa EE projects in South Africa and the distribution of photovoltaic kits in Morocco, while examples of POA projects that are now in the pipeline as a result of these new rules include solar home system installations in rural India through the organization, Grameen Shakti, and biogas projects in Brazil by the meat company, Sadia.
And soon, it is hoped that Xiamen can use CDM as the springboard for a green leap forward. Said Joost van Acht of Caspervandertak:
Coordination between all stakeholders and the engagement of specialized expertise will be crucial to cut through the complexities of the rules governing CDM. This is where the City of Xiamen can play a leading role as an incubator that brings together developers and specialized knowledge on RE/EE technologies and the carbon market which will be the key to successfully take advantage of the opportunities offered by CDM.
Raoul Bunschoten, director of CHORA and the brainchild of this vision for Xiamen, further observes that the use of POA and bundling is perhaps better suited than the vanilla CDM structure for urban greening initiatives:
[U]rban planning is complex by nature, has to address many stakeholders and touches economy, culture, politics and society in many ways, so is closer to a population in a way, but also is inherently complex in terms of management, or should be. This complexity seems to match or map the complexity of POA and bundling [under the] CDM, or at least they can be tuned to each other. New urban planning methods can be a vehicle for POA and bundling applications and processes, and these may need the urban environment to be effective, to get a critical mass of projects and to become visible.
Xiamen, formerly Amoy, is a port city in the southeastern province of Fujian. Metropolitan Xiamen covers an area of 1565 square kilometers and is home to just under 3 million residents. One of the earliest designated special economic zones (SEZs) in China and one of the top ten busiest ports, Xiamen is very visibly not only one of the more prosperous cities I have visited, but also one of the most thoughtfully landscaped, with tree-lined boulevards that remind me a lot about my hometown, Singapore. It is clear that the people of Xiamen place value quality of life, and derive a great sense of pride of the city that they have built.**
[**It was noted by a participant of the symposium that the people of Xiamen have a great sense of pride about their city. It was later explained to me by Dahpon Ho, a Fulbright Scholar doing historical research in Xiamen that a large part of that pride stems from the fact that for several decades after the founding of modern China until only the early/mid 1990s, Fujian and the rest of southeast China did not figure in the economic development plans of the central government and were considered the backwaters of China. As a result of this historical political neglect, there is a feeling among Xiamen residents that the prosperity they enjoy today was accomplished largely on their own.]
Over the past decade, Xiamen has garnered numerous awards for being a green and healthy city. Hitherto, however, none of these awards have likely included the city’s carbon profile into their evaluation criteria. The consortium’s proposal thus represents an excellent opportunity for Xiamen to redefine what it means to be a green, sustainable city, using carbon as a key metric.
As Bunschoten puts it, given the complexities of the CDM, especially bundling or PoA structures, “talking about environmental pilot projects made sense in a city with a desire to be the cleanest city in China.” A recent incident in mid-2007 also underscores the probable acceptance of the people of Xiamen to such a project—a proposal to build a chemical plant was scrapped after significant public outcry over its environmental ramifications.
Not Just Any Other Eco-City Project
The Xiamen proposal is unique because unlike some other China eco-city projects such as Dongtan-Shanghai and Singapore-Tianjin (see previous post), it does not aim to build an sustainable city on a bare piece of land from scratch, but to retrofit an already existing medium sized metropolitan area, a much more complicated endeavor given the need for re-engineering not only incumbent urban infrastructure, but also social and political mindsets of the city’s stakeholders. After all, the implementation of the project will have to be undertaken by these very stakeholders, all of whom have already established a pattern of living, behavior and beliefs.
Furthermore, the consortium seeks not only merely to turn Xiamen into an “eco-city” (a buzzword that is being thrown around a lot lately but is in sore need of a precise definition), but to also consciously redefine how urban planning and governance is carried out. According to Raoul, the Xiamen proposal is driven by the “Urban Gallery” concept—an urban planning methodology developed by Chora. Under this methodology, the relationship of an urban planner to a city is analogized to that of a curator to a gallery. Says Bunschoten, it is a relationship
that links an interactive management of knowledge with negotiation methods for prototypical urban projects. The Urban Gallery is managed by “Urban Curators”…The Urban Curator designs the linking of processes, or in other words designs the organisational form of the dynamics or behaviour of an urban environment, in essence a cybernetic practice…the programmatic CDM process proscribes clusters of projects rather than one large one needing a Curator.
This emphasis on process and social/political dynamics in a context of urban development is profound in that it recognizes a concept of innovation that I have been harping on previously, i.e. the need for social innovation in addition to technological innovation, and the need for disruptive systems over disruptive technologies. Indeed, during the half day symposium, there was scant notion of specific energy technologies that should be considered for the project.
The real challenge at hand, especially given the complexities of a bundling or POA project, is creating the vision, organizational structure and administrative processes to execute a long-term low carbon strategy through the full engagement and coordination of the strengths and interests of all stakeholders. These stakeholders include, but are not limited to, property developers, renewable energy technology developers, R&D institutions, businesses that want to be perceived as green, media, and general public (including minority and underprivileged groups).
Although a full explanation of the parenthetical in the preceding sentence is beyond the scope of this article, it is worth acknowledging that there is an emerging recognition that an eco-city is not self-sustaining if it is built merely with eco-hardware. Eco-software, i.e. values and beliefs systems and practices consistent with sustainability, equity, and public participation, must also be installed. Indeed, this recent comment by a reader of this blog makes exactly this point.
Architects and Urban Planners as Climate Initiators
It is significant that it is architects such as Bunschoten and Liu Yuyang of Atelier that are leading this initiative as it. Said Liu:
This project is exciting and significant because architects and urbanists are playing a much more proactive role as “initiators” or “enablers” of a larger development mechanism as opposed to just being hired as consultants or service providers. So what architects do well: realization of a built structure and environment by integrating different needs, desires, and constrains, can now be quantifiable into not just how many more apartment units they help to sell, but how many tons of carbon emission they help to reduce and how that brings in certain financial return.
In the same vain, Bunschoten believes that, the practice of urban design and planning will change radically in due course because climate change is a problem that all learning and professional institutions have will have to address with growing awareness or the problem globally.
Why Xiamen Should Say Yes
The consortium’s proposal is ambitious and complex and will require much effort, dedication and resources. Yet, if it is executed well, it has the power to energize and increase wealth, both psychic and economic. The direct benefits are obvious—CDM revenues; a lower carbon profile that imply greater natural resource utilization efficiency that can, especially in these times of spiraling commodity prices, translate into tangible costs savings; and the environmental and health benefits that comes with an economy that relies on cleaner and more efficient uses of energy. But this is just the beginning. There are also tremendous spin-off effects. Aside from the psychological benefits to the people of Xiamen that come with a sense of pride in living in China’s greenest city, and the increased quality of life and general “happiness” that comes with living in a cleaner environment, there are very real economic multiplier effects that the government of Xiamen should appreciate:
- RE/EE projects will create jobs. Not just any jobs, but green jobs—jobs that labor that is highly skilled and technical in nature, which will also enhance educational and training standards in Xiamen in order to meet the job supply.
- Green businesses, and newly formed institutions that are created as a result of implementing the RE/EE projects will have to set up offices in Xiamen, creating an influx of potential tax revenue and desirable brain power.
- The reputation and branding of Xiamen as a RE/EE hub and low-carbon city will attract other green and cleantech businesses to locate offices or operations in Xiamen as these businesses like to be established in a geographical context that is consistent with their business mission.
- Xiamen can be an eco-tourisim destination, providing a showcase to eco-tourists on how to successfully retrofit (and integrate into) a small to medium sized Chinese city with low carbon hardware and software.
- A cleaner environment results in healthier residents, resulting in reduces health care costs and lower rates of absenteeism (and hence increased productivity).
What is not to like?
From Excitement to Action
If you have read everything up to this point, I hope that my enthusiasm for this project has infected you. The task ahead for the consortium is to build on the momentum generated by the symposium to get buy-in from the key decision makers in the Xiamen government, and move forward with developing a detailed time table and action plan. There would be a lot of work ahead—lots of brainstorming and discussions; technical assessments of Xiamen’s baseline carbon profile and forecasting under different scenarios; perhaps the administration of a tendering system to RE/EE project developers; figuring out how to allocate the revenues generated from the project, project monitoring, supervision and consultation, but just to mention a few aspects.
But the end result may be something that is not only economically and socially self-sustaining, but can serve as a prototype for urban development across China and beyond.
The Chinese wind sector is booming and should continue to in the long run, but some discussions at the recent Renewable Energy Finance Forum-China 2008 in Beijing suggest some challenges ahead in the short to medium term.
Late last month, a Shanghai Daily article reported that the National Reform and Development Commission was considering almost tripling wind energy targets for 2020, from 30 GW to as much as 100 GW. To put that number in context, realize that current installed wind capacity is about 94 GW…globally.
A wind farm in the northwestern province of Xinjiang
Although some warn against drawing hasty conclusions, there has more talk in the market recently to back up that report. At the Renewable Energy Finance Forum on May 14, Jens Olsen, newly minted CEO of Nordex China, talked about the NDRC’s renegotiation of the 2020 wind energy target. According to Olsen, a 60 to 100 GW target is being considered, so 100 GW is really at the upper range. Still, a few panelists at the forum expressed bullish sentiments that 60 to 80 GW of installed wind capacity would be achievable. Olsen himself thinks that the wind supply chain in China is capable of manufacturing 80 GW by 2012-13. One industry executive went so far as to suggest that 120 GW of installed capacity by 2020 would be possible.
All these giddy projections have been cast in the background of a flurry of large scale wind projects announced recently. China Power International will spend RMB 6 billion over five years for at least 600 MW in wind projects along the coast of Guandong. Elsewhere, JiuQuan city in the northwestern province of Gansu is poised to take Chicago’s moniker as ‘the Windy City’ by adding 28 new wind farms for a whopping total 10 GW of wind by 2015.
What accounts for the big wind surge in China? According to Liu Qi, the Vice General Manager at Sewind, the Chinese wind market is blessed with supportive government policies (e.g. the Renewable Energy Law of 2006, national targets for wind, etc.), a good foundation of wind developers and a growing components industry (fostered by regulatory requirements that 70% of wind turbines have to be made of components manufactured domestically). Domestic component makers like China Transmission, which commands 90% of the China market for gearboxes, are poised to benefit from these policies as they quadruple capacity over the next two years.
Another supportive government policy has been the refunding of value-added tax and import duties on core wind power turbine materials to ease the supply chain bottle necks and also plans to cease its tariff-free policy on the import of whole turbines with a capacity of less than 2.5 MW. The combined effect is to encourage the import of foreign-made components and more advanced foreign turbine technologies (the average capacity for turbines installed in China is 1 MW).
Short-Medium Term Bottlenecks on the Horizon
Supply Chain Hiccups
Whatever China buys becomes more expensive—such is the buying power of any Chinese industry because of its sheer scale. In the wind industry, turbine prices have been increasing consistently for the past four years, said a Morgan Stanley analyst in the audience. Paulo Fernando Soares, CEO of Suzlon’s China operations, attributes this to the increasing costs of components. Indeed, the wind market globally has been facing a supply chain crunch, and any raising of national targets will only serve to stretch the global wind supply chain. Yet, not everyone considers supply chain issues as the main concern. At least domestically, expected manufacturing output rates for 2008 are expected to increase and thereby reduct the backlog in turbine orders ranging to a manageable11-12 months, says Sebastian Meyer of Azure International.
Moreover, while Soares observes that only 55% of wind farm projects awarded since 2004 have been built, he does not attribute this bottleneck to a turbine or component shortage. Indeed, it is the view of Paul Eveleigh, group CEO of Honiton Energy, that turbine overcapacity will be a problem in China unless there is a massive drive for export; the top four Chinese turbine manufacturers are projected to have 9GW of capacity by 2010 (compared to the just under 6 GW of installed capacity at the end of 2007!).
Rather, the bottleneck, according to Soares, is the unattractive tariff structures, which are the lowest in the world for wind and makes it tricky for foreign players with a vastly different perception of cost. Such tariffs in China are typically only half of what a developer could get in a Western market, says Eveleigh. Of course, the cost structure of business inputs in China is vastly different as well, though this gap is surely narrowing as of late with domestic inflation.
Lower tariff rates are better than zero tariffs, however. Yet, said KK Chan of Climate Change Capital at the forum, some wind developers are getting stiffed by tariff payment delays.
It is also argued that a move towards a German-style feed-in-tariff system should be adopted. In fact, this was originally contemplated in the Renewable Energy Law of 2006, as a reader to my last blog post commented. However, this policy tool was abandoned in favor of a bidding system. A full discussion of this issue is beyond the scope of this post but can be found here, although I suspect that the debate has cooled off a bit over the course of the pass 12 to 18 months given the explosion of installed capacity over the same period.
With a proliferation of new entrants, competition in the China turbine market is stiffening, and domestic players are growing from strength to strength. For the first time, Chinese turbine manufacturers now have the majority of the Chinese market at 56%, said Soares, with Sinovel and Dongfang gaining market share recently, while every other player lost some of theirs. A consolidation in the wind turbine manufacturing market is surely imminent.
The competition picture is different in terms of wind developers and the grid transmission—with different implications. The biggest wind farm developers are the big five national utilities. Ironically, the price squeeze in coal (i.e. the inability of these utilities to pass on the increasing costs of raw coal inputs to retail customers due to mandated price controls) is not working to the advantage of the wind industry. All big five utilities experiences a net loss in Q1’08, observed Meyer, largely due to the coal price squeeze. In the long term, if the leading investors in wind farms are not profitable, Meyer went on to say, their ability to invest in wind is negatively impacted.
The dominance of the big 5 utilities in wind development, coupled with the duopoly of the two national grid transmission companies—State Grid Corporation and China Southern Power Grid, make it difficult for small wind farm developers to negotiate with the grid transmission companies for interconnection.
It seems to me, then, that the wind development sector is facing the opposite situation as turbine manufacturing—the dominance of few big players rather than a fragmented market with too many new entrants. Wind development is capital intensive and carries its unique risk profile and there are limited players up to the task. Will the government recognize the need to create a favorable policy environment to attract new entrants, especially foreign developers?
Access to debt capital is getting tougher. As discussed in my last post, bank credit is tightening due to the mandated increase in bank reserve ratios. Moreover, observes Sebastian Meyer of Azure International, that the cost of capital is going up as global interest rates, including those in China, are climbing, making it more expensive to borrow. Justin Wu, a senior analyst at New Energy Finance, observes that the belt tightening in the credit market has also affected the ability of wind farm developers to pay their turbine suppliers on time, and this is in turn cutting into the margins of turbine manufacturers.
Also described in my last post was the lack of reliable wind data raises the risk profile of wind projects, which makes lenders hesitant to offer more flexible loan packages, and insurers less willing to offer business interruption insurance.
Currently, rules governing clean development mechanism projects in China prohibit foreign developers from owning majority interests in CDM projects. The CDM is crucial in making wind projects in China financially viable. An easing of this prohibition may encourage foreign players to make further inroads into the China market, and create more competition amongst developers. According to some observers, including Jacob Jacobelli of Merrill Lynch, this easing of this prohibition on foreign-controlled CDM projects is imminent.
Separately, if what the World Bank says is true about an impending carbon credit crash, then there may be tough times ahead for wind development in the medium term given how instrumental the CDM is in making wind projects profitable
I have not mentioned other potential bottlenecks such as the shortage of skilled talent and intellectual property concerns. But I don’t want to take the above list of industry challenges out of context and lose the forest for the trees. Wind energy has its skeptics, but the reality is that the wind industry in China is powering ahead compelled by the three forces Jacbobelli described in my last post (logistical energy security, environmental protection and poverty alleviation). The announcement of Texas-based GreenHunter at the forum on May 14 to build a 300 MW wind farm near Shanghai, using turbines manufactured by Mingyang Electric, is just a portents of things to come.
On May 14 and 15, I attended the Renewable Energy Finance Forum (China) 2008 at the Ritz Carlton Hotel at Financial Street. My next couple of posts are inspired by some of the discussions that took place at this forum. Today’s post are mostly drawn from the first two sessions on May 14.
RE Looking Bullish in the Long-Term
The sentiment at the forum on the renewable energy (RE) industry in China was overwhelmingly bullish. The government’s targets for renewable energy are well known—15% of primary energy from renewable sources by 2020—and there is little to suggest that this will not be achieved. Perhaps the wind industry, more than any other RE sector, is emblematic of China’s fast growing RE industry–the national targets to install 30GW of wind power by 2020 will be easily exceeded by as much as another 30 to 50GW according to some of the forum’s panelists.
A recent paper (excerpt here) by Eric Martinot of Tsinghua University and Li Junfeng, a conference panelist and head of the Chinese Renewable Energy Industry Association paints the sunny state of China’s RE industry.
Joseph Jacobelli, a senior banker at Merrill Lynch, put forth three reasons at the conference why the RE industry was on an unambiguous march towards growth:
- Logistical energy security (especially in the wake of lack of domestic sources of conventional energy supply, and rising oil and coal prices)
- Environmental protection (this one is obvious)
- Poverty alleviation (where distributed power generation, especially wind, solar and biomass, have advantages over centralized fossil fuel supply)
As Li pointed out in his keynote speech, China has, since the release of the energy white paper last year, modified the presumption of a “coal-based energy structure.” Renewables, energy efficiency, and even nuclear (gasp!) will have an increasing part to play. The Renewable Energy Law of 2006 and the impending comprehensive Energy Law (currently in draft form) reflects this shift.
But Coal to Remain King
But make no mistake, coal will continue dominate China’s energy structure for years to come, unless major breakthroughs in utility-scale or distributed solar occur. Coal is an entrenched energy choice at the moment because of distorted price signals (the health and environmental costs of coal are not reflected in its price) and huge sunk costs of coal infrastructure. The sheer scale of coal use, accounting for some 70% of electricity production in China, is what, in the eyes of venture capitalist and entrepreneur-in-residence at Qiming Ventures, Brian Curtis, presents the greatest investment opportunity. Increasingly, it looks like these investment opportunities in China will be undertaken by RMB-denominated funds, rather than offshore US or European funds, due to the evolving regulatory landscape governing China investments.
Curtis did not elaborate on specific opportunities that coal presented, but one would have to imagine they would include efficiency technologies such as gasification, co-generation or poly-generation. I personally wonder, however, if the capital-intensive nature of “clean coal” technologies lend itself well to venture capital-type equity investments. As we shall soon see, bank credit in China is tightening as well, leaving “clean coal” in a temporary bind.
What perpetuates the coal industry is the continued government subsidies on energy. Despite repeated calls by international policy makers to reduce subsidies and allow market forces to determine prices, concerns of inflation means that in the short term, price controls will remain in place. However, the draft energy law and recent moves to allow increases in the price of gasoline indicate an unavoidable, even if not complete, shift towards market prices some time down the road.
The Need for Progressive Policies
In the mean time, RE will need the aid of policy and finance to change the status quo. KK Chan, of Climate Change Capital, laments that long term power purchase agreements (PPA) between RE generation companies and utilities, which are so crucial to assuring investor certainty, are simply not an option in China.
Gao Guansheng of the National Coordination Committee of the National Development and Reform Commission (NDRC) went as far as to suggest that a serious consideration should be given to German-style feed-in tariffs, whereby all RE power must mandatorily purchased by utilities at a preferential tariff rate, and with the cost of such tariff premium being spread across all end-users. Such a policy would not only provide a de facto PPA (since utilities would be required to purchase all RE power produced for as long as the law provided, and tariffs would be set over a fixed period of time), but also provide the necessary incentives for RE producers and necessary certainty for investors in RE to spur RE development. Feed-in tariffs has been the most successful RE policy tool in Europe.
If this is coming from the mouth of an NDRC official, can we expect feed-in tariffs to become reality in China?
KK Chan would probably say “first things first.” At least twice over the two day conference did he point out that RE project developers have had tariff payments held back without cause, increasing the risk profile of doing projects in China.
Financing and Insurance
Policy issues aside, RE projects will have to deal with financing issues. Jonathan Drew of HSBC pointed out that the availability of bank credit to finance RE projects has been drying up as of late; in attempts to stall inflationary pressure and soak up excess liquidity, the central government has increased bank reserve requirements. In other words, banks are required to increase the amount of assets they hold in reserve, thus reducing the amount they can make loans for, with the result that RE project developers are finding it increasingly difficult to take out the necessary debt to fund their projects. Furthermore, Li Weirong, a senior manager of China Merchants Bank, one of the major state-owned enterprise banks, explained that in terms of project scale, domestic banks are reluctant to stomach projects that are too large, reflecting a limit to their risk appetites.
But RE projects can perhaps take advantage of quasi-public money in the form of equity made available by the International Finance Corporation. Dana Younger, of IFC, was on hand to explain the growing emphasis on the RE sector by IFC. Specifically, Younger said that IFC is increasing its investments in RE by 20% over the course of the next five years, and suggests that even this figure may be upped. Additionally, IFC is spreading money across a several cleantech funds across China and the rest of Asia. It has already invested in a fund run by Aloe Private Equity.
Another panelist, James Maguire, a managing director at the Asia infrastructure division of Marsh, a major insurer, laments that there is a lack of understanding of the role insurance can play in supporting wind development projects in China. For instance, business interruption insurance is seldom purchased. The dearth of accurate and high quality wind data is also blamed by Drew (HSBC) and Maguire for the stricter terms in the security package of financing agreements and inability to secure proper insurance for wind projects, respectively. This suggests an opportunity for reputable wind data providers to help boost the immature market in wind data collection, and wind industry in general.
Next Wave of Reforms to be Price Centered
My sense is that the most effective and immediate set of actions that the central government can take to boost RE development and deployment is to begin a conscientious but gradual shift towards price reforms. Jocobelli (Merrill) believes that in the long run, retail electricity prices cannot be artificially suppressed. Several panelists, including Gao Shixian of the NDRC, exhorted the transition to a more market-oriented system, and I take price reform to constitute the heart of that transition. Inflationary concerns, especially in light of the Sichuan quakes which may cause a temporary jolt to energy supply (and hence prices) will probably delay this transition, but the march towards price liberalization is inevitable.
It’s the only way forward. A green leap forward.
Next: An update on the outlook for the wind industry.
The Green Leap Forward joins the people of China and the rest of the world in these few days of mourning over the victims of the Sichuan earthquake (see all the coverage on China Daily here). We also join arms with our brothers and sisters in Myanmar who are dealing a horrific natural catastrophe of their own.
For those of you who would like to donate to the China quake relief efforts, CNReviews provides a pretty comprehensive relief and donation guide. Google has also set up a useful interactive earthquake relief site.
The claim on human lives in China, some 35,000 by now, in addition to the 225,000 injured and more missing, has shook the nation and comes in the wake of a tumultuous year so far—the ice storms in the southern provinces earlier this year and the clashes in Tibet in March.
The economic effects of the quake, so far, seem to be slight. The energy impact, on the other hand, may be a little more far-reaching.
According to a BusinessWeek article:
Sichuan is a major onshore gas producer and the country’s largest hydropower generating region. The quake’s destruction has affected natural-gas exploration and production and has hit hydropower operations hard. Sichuan’s electricity grid is running at 76% of pre-earthquake levels, with 27 power stations shuttered, China’s State Power Grip announced on its Web site on May 19.
China can ill-afford severe disruptions to the gas and hydro industries, which are vital to fueling the country’s double-digit GDP growth. Sichuan supplied some 27% of the country’s national gas production in 2007. While natural gas still only accounts for 3% of the national energy mix, Beijing plans to raise that proportion to 10% by 2020, with Sichuan’s rich reserves playing a key role in that expansion.
The International Business Times substantiates the BusinessWeek report:
The area subjected to the quake produces about 22 percent of China’s natural gas supplies and contains many coal mines and hydro-electric dams which generated about 62 percent of the provinces total electricity production. Many of the 396 power stations on the river system and their dams were damaged. Several major reservoirs are being drained to prevent their dams from failing. Beijing ordered coal mines, oil and gas wells, and chemical plants affected by the quake to shut down until the situation could be assessed. Twenty-two coal mines in Sichuan, Chongqing and Gansu provinces were affected by the quake.
Loss of significant amounts of natural gas, coal, and electricity production for an indefinite period suggests that China will have to step up imports of coal and oil products. Already some 700,000 barrels of emergency fuel supplies have been dispatched to the area.
The IBT report goes on to suggest that world energy prices will be under pressure during the summer as China imports more oil to prepare for the Olympics and the support recovery from the earthquake. Already, the state-owned oil company PetroChina is halting petroleum exports based on “robust domestic demand” and the central government has acted to release oil from its state reserves.
This other report tells of a spike in nonferrous metal prices, especially zinc, after the quake.
Dongfang Turbine Badly Hit
The operations of Dongfang Turbine, China’s largest steam turbine producer, were virtually wiped out. According to BusinessWeek, Dongfang, which produces 30% of China’s locally made turbines, estimates direct losses from the earthquake will reach $1 billion. Its parent company, Dongfang Electric Corp., has seen its stock price plummet as the steam turbine business accounted for 20% of its operating revenues in 2007.
Incidentally, Dongfang Turbine is also the third largest domestic manufacturer of wind turbines. Although some reports suggest that facilities for its wind turbine business was unaffected (e.g. South China Morning Post:”The company said the earthquake had little impact on other production facilities, including those that made hydroelectric turbine generators, steam-power generators, power station boilers, wind power and nuclear power equipment and engine generators.”), an industry source has told me that most of their wind business’ senior engineers have unfortunately perished and one their a wind components factory was badly damaged. The quantifiable impact to its overall business, or wind industry in general, is unknown at this time.
Assessing the Dam-age
The impact on the region’s dams and hydropower are potentially even more serious. According to BusinessWeek:
On May 14, the Water Resources Ministry announced that 391 dams were believed badly damaged. “There are major safety issues right now with the reservoirs, hydropower stations, and lakes in the earthquake zone,” Minister Chen Lei said in a statement released on the ministry’s Web site. “The area has numerous reservoirs and lots of damage, and the extent of the danger is unknown.”
Unlisted SinoHydro, China’s largest hydro company, has announced that close to 100 of its employees have died, 500 have been injured, and 10,000 made homeless following the quake. Estimated property damage: almost $250 million, with $330 million needed for reconstruction, the company says.
Even more alarming is the possibility of one of China’s earthquake-weakened dams or reservoirs bursting…Even before the quake, Beijing had admitted there are major flaws in many of the country’s 87,000 dams. “Roughly 37,000 dams across the country are in a dangerous state,” [Ministry of] Water Resources deputy minister Jiao Yong said earlier this year, noting that many had been built decades ago.
In the wake of the earthquake, the New York Times reports that the military has been dispatched to shore up weakened infrastructure, such as the almost 400 dams damaged or weakened in the region that pose a public safety threat. One such dam is Zipingpu Dam, up the river from the earthquake-hit city of Dujiangyan, is featured in this video:
This piece by TreeHugger, while recognizing that the Sichuan quake was a result of natural geologic forces, calls for a careful look at the ability of large dam projects, such as the Three Gorges Dam, to trigger earthquakes of their own. See also this this piece by China Economic Review.
Nuclear Facilities Unaffected?
There are reportedly a few nuclear facilities in the quake zone, including two nuclear fuel production sites and two atomic weapons sites in Sichuan province, where the quake struck, between 40 and 90 miles from the epicentre. The official word, according to a senior military official, is that all nuclear facilities are safe…but western experts are monitoring the situation closely.
Regardless, the quake does put a dent on Sichuan’s nuclear ambitions.
Carbon Credit Crunch?
In terms of the carbon markets, it is feared that some 5% of the country’s carbon credits supply could be reduced as a result of the quake, as clean development mechanism projects totaling some 15 million tons worth of carbon lie within a 150 km radius of the epicenter.
However, this reduction in supply may be more than offset by an impending fall in demand for carbon credits, as the World Bank warns.
It is an understatement that to say that China’s building codes are not always followed. The large number of school buildings that collapsed have attracted attention to the systemic failure of meeting prescribed building codes, prompting the promise of governmental action. But it should come as no surprise that the need to “build things faster and cheaper”, especially in the rural areas, have come at the sacrifice of a few things, such as regulatory compliance.
An op-ed in the China Daily urges governments to see the massive rebuilding needs in the wake of the earthquake as an opportunity to incorporate higher levels of energy efficiency and environmental standards, in the wake of an impending construction boom that could otherwise have derailing environmental consequences.
It is hard to imagine that amidst the chaotic frenzy to restore a sense of normalcy across the region, that such far sighted considerations will be given much weight over the immediate needs of those affected. When the dust settles, however, there will be an opportunity to consider, and not without international cooperation, what it means to rebuild a more sustainable set of infrastructure.
Newsy tidbits on green developments in China, sans analysis.
HK Introduces Green Tax Cuts. Hong Kong to provide attractive tax deductions (20% for construction and 100% for new purchases) for installations of environmental technologies. Closer to the mainland, China Environmental Law Blog ponders what the more macro tax reform proposals by the central government mean for environmental governance.
China’s Telecoms Industry Greens. “China Mobile has created a “Green Action Plan” focusing on energy conservation and reducing emissions…Nokia Siemens Networks, one of China Mobile’s four major suppliers, says its recent Flexi GSM base stations are the smallest and most energy-efficient GSM base stations in the market…Other suppliers including Ericsson, Huawei and Alcatel-Lucent have also introduced various leading cards for energy-efficient solutions.”
Huaneng to Boost Renewables… China Huaneng Group, the country’s largest power producer, said it will boost the development of renewable energy sources such as wind, solar and biomass across China. Late last year, it was reported that Huaneng would embark on a GreenGen project to build the world’s first near zero-emissions coal power plant (with carbon capture and storage) in Tianjin in collaboration with Peabody Energy of the U.S.
…So Will JIC Tech. Not to be outdone, Hong Kong’s J.I.C. Technology, a manufacturer of LCDs but recently acquired in March by HKC, a Hong Kong-based property developer and alternative energy company, will invest $207 million in three renewable energy projects across China, including two wind farms and a pilot cellulosic ethanol plant.
Methane Plants: China’s Clean Energy Alternative. NPR runs this powerful story on the potential of the harnessing of methane as a by-product of coal mining to decrease the demand for coal.
A Legal Leap Forward. And it is green, and evolving. This China Daily story charts the evolution of Chinese environmental law
The Green Leap Forward is just over six months old. First formerly introduced to the China blogosphere by ResponsibleChina, GLF was also recently featured as an editor’s pick by the China Economic Review. In addition, GLF has today made it to both the China and Green lists under Alltop, the brainchild of Guy Kawasaki.
I am also please to announce that GLF and has tied up with AsiaIsGreen to syndicate some China content to a broader audience. The first piece that GLF has syndicated to AsiaIsGreen is last month’s story on biodiesel.
In the coming weeks, look forward to more stories on wind, the city of Xiamen, and next week’s Renewable Energy Finance Forum in Beijing.
Thanks to all for your continued readership and support!
Gridlock in Chongqing: Is this what they call progress?
While one can take heart that what seem liked unabated proliferation of SUVs just a few years ago is giving way to a range of smaller, more fuel efficient passenger vehicles (see last post on my review of the Beijing auto show), the fact remains that China is adding some 20% or more vehicles to its roads per year. In fact, Jack Perkowski of Asimco Technologies points out that the growth rate of vehicle manufacture in China since 2001 has been somewhere between 20 to 50% per year. I had the chance to listen to Jack speak to a group of Tsinghua MBA students last Friday. Jack and his business exploits in China with his founding of Asimco in the early 1990s is featured in Tim Clissold’s bestselling book Mr. China. Jack himself is currently on a speaking tour to promote his book, Managing the Dragon (sharing same name as his blog), which talks about all the lessons he’s learnt in building a successful business in China and has already received glowing reviews.
Although Jack is very cognizant of China’s ecological challenges, he and I do not see eye-to-eye on the ecological challenges that the auto industry poses to China. During to the Q&A session, I expressed the profound pessimism that I felt as I walked away from the Beijing auto show just a few hours earlier. Even though there were small cars and hybrid cars and electric cars, etc., its clear that at the end of the day, all of this is GREENWASHING. The same companies that tout their hybrid or electric cars also sell gas-guzzling SUVs, which have higher profit margins. Even if every single vehicle sold from tomorrow onwards was a hybrid/electric car, the fact would remain that China would be putting at least another 20% new vehicles on the road each year, and not to mention the continued build out of highways all across the country. Oil consumption would not cease its upward trend, and neither would oil imports, creating a threat to both the environment and energy security. I then asked Jack what he thought of the apparent contradiction between China’s promotion of the auto industry and the the imperative to tackle its environmental and climate problems.
While Jack agreed that solving its environmental crisis was a matter of survival for China, he is convinced that China had no alternative but to continue to develop its auto industry and transportation links in order to grow its economy. “The Chinese want the freedom of owning their cars, just like Americans” he would say. Taking as a given that nothing was going to stop the development of the transportation industry in China, he acknowledged that the key question was whether China would do things differently, and started to rattle a few technological solutions such as clean diesel and some others that I frankly tune out. He ended by saying:
Both India and China will have to face the same problem; that’s 1 billion pus 1.3 billion people, a total of 2.3 billion people working on this problem, someone will figure it out. I’m a little more optimistic.
I just don’t see any solution in Jack’s response. First, let’s be clear that the promotion of China’s auto industry in the way that the US has works at direct cross purposes with any climate policies that China adopts. Not only do cars gobble up oil, but the manufacture of cars is a highly inefficient and energy intensive process that consumes loads of increasingly expensive mined metal commodities. Couple that with the mega-tons of asphalt and concrete needed to build and maintain city roads and intercity highways (and please remember that the cement industry is one of the most carbon intensive there is), you start to appreciate the enormity of the auto industry’s multiplier carbon effects.
I recently read Chapter 19 (“Sustainable Urban Transport”) of the landmark book, The Natural Advantage of Nations, which delved into statistics available on the Millennium Cities Database for Sustainable Transport. The database is not the most current (dated 2001), but it did provide some interesting insights into the relationship between wealth and car use. At this point, I will just lay out a few selected quotes that struck me:
Less prosperous Asian cities already have a rate of car ownership relative to wealth that is virtually equal to cities in Australia/New Zealand. Chinese cities, despite an average GDP of only US$2400, have almost the same rate of car ownership per dollar of GDP as Western European cities (11 compared to 13) which have an average GDP per capita of US$32,000.
[A]mongst high-income cities there are considerable differences in car use that are not explained by differences in wealth. For example, US, WEU [Western Europe] and HIA [High-income Asia] countries have average GDPs per capita that are almost identical, yet their car use varies by around a factor of six.
When lower- and higher-income cities are included together in cross-city comparisons,a moderate positive association between urban transport energy use, greenhouse gas emissions and GDP is observed. Amongst higher-income cities, however, there is no statistically significant relationship between energy use, greenhouse gases and wealth despite a wide range of GDP per capita…Explanations for such differences in transport energy use (and by implication CO2 emissions) are strongly linked to the modal share between private [i.e. privately owned passenger cars], public [subways, bus systems] and non-motorized modes [bicycling, walking].
While these observations are not a slam dunk, it does suggest a strong possibility of decoupling car ownership or use from per capital GDP. We should challenge the dogmatic assumption that cars = wealth. To be fair, this was not Jack’s assertion. He was making a more basic point that the development of China’s economy is dependent on the development of transportation infrastructure in general. This is hard to argue against, but what it easy to debunk is the notion that car ownership is a necessary indicator of national/municipal wealth and that technological solutions, by themselves, will help make transportation systems more sustainable.
Disruptive Systems over Disruptive Technologies
Bus-Rapid-Transit system in Beijing
The fact is that “disruptive technologies” such as plug-in electric vehicles or utlra-clean biodiesel engines are not going to make a difference. Time and time again, I have heard the rhetoric technologists and their unfettered faith that technology will save the day. Such an approach misses the forest for the trees. As my good friend Ivan Urlaub, Executive Director of the North Carolina Sustainable Energy Association likes to say, we need to employ whole systems thinking and create “disruptive systems” to really get at the heart of our climate challenges. Aside from improving vehicular design through battery, engine and emissions improvements, a more macro view on urban form must be taken. Rather than lay out a comprehensive prescription, I present my thoughts in a series of questions:
- How thoughtfully are road networks laid out?
- How compact and dense are buildings and people situated, so as to reduce the need and/or distance (and influence the form, i.e. from driving to cycling or walking) required for traveling and mitigate the propensity for urban sprawl?
- What is the best way of encouraging a shift of private to public and/or non-motorized modes of transportation?
- Can Chinese cities increase public and non-motorized options while discouraging car ownership and use through a Singapore-style real-time electronic road pricing and car quota systems (through the auctioning of certificates of entitlements ).
- How can mass rapid transit systems (i.e. subways and light rails) be effectively financed and implemented, as we’ve seen in Hong Kong, Singapore, Shanghai and now Beijing?
- What about bus-rapid-transit systems, which offer dedicated road lanes to public buses, that the cities all across China are considering?
- How can pedestrianization be encouraged, as has been done in the prominent retail districts of WangFuJin in Beijing, Beijing Road in Guangzhou, and Mong Kok in Kowloon, Hong Kong?
- Looking beyond single-cities, how can different cities and counties work together to create integrated and seamless inter-municipality/province public transit systems?
I am clearly just scrapping the surface here in terms of what forms disruptive systems would take in terms of sustainable transportation. But my point is, all the hybrid and electric vehicle technologies in the world will hardly make a dent if car ownership and use continue to increase, if oil (or coal, in the case of electric cars) continues to be burnt, and if roads and highways continue to be built out with reckless abandon. We need disruptive sustainable transportation systems implemented in China and the rest of the developing world if we are to avoid the mistakes made by my country, the US.