Peggy Liu, founder and Chairperson of Joint US-China Cooperation on Clean Energy (JUCCCE) , an innovative bilateral public-private partnership based in Shanghai, speaks to The Green Leap Forward.
Energy cooperation was one of the key issues that underpinned the fourth US-China Strategic Economic Dialogue held last week. Vice-Premier Wang Qishan, the head of the Chinese delegation released a statement calling for increased cooperation between the two sides on several fronts, including R&D, coordinated energy policies and increased bilateral dialogue. The energy discussions culminated in a commitment to negotiate a ten year energy and environment agreement.
Encouragingly, however, a handful of individuals and organizations have not waited for any ink to be spilled in the diplomatic arena before jumping into action. One such individual is Peggy Liu and her organization called Joint-US Cooperation on Clean Energy (JUCCCE).
The Juice on JUCCCE
JUCCCE was founded in April 2007 by Peggy Liu, a former McKinsey management consultant and COO of Mustang Ventures, a Shanghai-based venture capital firm. The organization was launched out of the MIT Forum on the Future of Energy in China held last year in Shanghai, where JUCCCE is also now based.
JUCCCE is a non-profit incubator of cleantech and energy efficiency capacity building institution initiatives seeking to serve, as Liu describes it in the video below, “a single bilingual and bicultural organization that will act as a hub of information exchange and cooperation” on clean energy in China. Based on the observation that China’s rapid development has it compressing 30 years of industrialization in the space of ten, JUCCCE has set itself a ten year mandate to create a legacy of self-sustaining, local capabilities. Tapping into Liu’s vast network of top minds whom she has become acquainted with as a result of her stints at consulting and venture work, JUCCCE conducted a comprehensive study of the Chinese energy industry and identified a dozen key projects designed to create the greatest impact in the shortest amount of time. What I love is the Chinese name for the organization, which is 聚思 (jǘ sì), which is not only a phonetic translation of the acronym, but by itself literally, and appropriately, translates in English to “collective thought” or “coalition of thinkers.”
Underpinning JUCCCE’s philosophy are three fundamental observations (the need to accelerate information flow, need for integrated urban planning and need to strengthen supply chains) which Liu describes in the following video:
Based on these observations, JUCCCE has formulated a three-pronged approach of education (skills building and leadership development at every level through effective channels), collaboration (with international and local institutions, taking advantage of web-based communications) and deployment (of customized green strategies for specific industrial sectors).
On education, Liu elaborated in an exclusive interview with The Green Leap Forward:
China doesn’t have an energy policy problem [GLF note: see, e.g. the various progressive policies that this blog has highlighted in its maiden post], rather, it has an energy workforce problem. We can have all the solar panels we need free of charge and that will not be enough if we don’t have the necessary skilled people to install these systems and maintain them. So, we believe that people matter…Education and skills building are very important.
Liu continued to explain that the ability to implement these progressive energy and environmental policies or programs is most effectively achieved through the strategic targeting of “channels of decision makers” rather than individual decision makers. Because Liu wants to teach the Chinese how to fish rather than catch the fish for them, JUCCCE’s programs are designed to be replicable and scalable. Let’s take a look at two of JUCCCE’s programs that Liu described for The Green Leap Forward, and that targets the decision-making channels of mayors and schools, respectively.
Mayoral Training on Energy Efficiency
One program is the Mayoral Training for City-level Energy Efficiency Programs, which was announced as a one of the commitments under the Clinton Global Initiative in 2007. As the name of the program implies, JUCCE is planning workshops to equip mayors of cities nationwide with energy efficiency solutions to deploy in their home jurisdictions. JUCCCE will partner with international experts and energy efficiency solution providers (many of which are multinational corporations) in order to build a web-based database of best practices and products, sector-by-sector, that can be presented to, and easily deployed by, the workshop participants.
The importance of focusing on cities is obvious. I have previously highlighted a McKinsey report on China’s rapid urbanization to facilitate the largest scale of rural-to-urban migration in history—approximately 350 million by 2025. “In China, city mayors are the kings of their fiefdoms, so it is really important to target them,” explains Liu, referring to the broad authority of city mayors in determining economic and development policy. This acceleration of information flow of best practices/products targeting mayors as key channels of decision making becomes even more effective when coupled with the State Council’s new policy to include environmental and energy efficiency criteria in the promotion evaluation of local and provincial bureaucrats, as well as the national goal of increasing energy consumption per unit of GDP by 20% by 2010 (see here).
Shanghai Lighting Program
Another noteworthy JUCCCE program involves the replacement of 10 million conventional incandescent light bulbs with energy efficient compact fluorescent light (CFL) bulbs in Shanghai. The brilliance of this lighting program is two-fold. First, it targets youth by directly enlisting the help of Shanghai school children for distribution. Each student will receive up to 18 CFL bulbs and will be asked to bring back an incandescent bulb for every CFL bulb they replace it with. Liu conservatively estimates that the program will reduce approximately 2.2 million tons of carbon dioxide emissions over the lifespan of the CFL bulbs. This is environmental education at its best— empowering the young to recognize that little actions can make a difference by coordinating and aggregating individually small efforts into part of a large-scale city wide program with substantive results.
Second, the method of financing the program is highly innovative. The purchase of the CFL bulbs will be made by proceeds from advertising on the packaging of the CFL bulbs and by the clean development mechanism (CDM) under the Kyoto Protocol. JUCCCE and its partners are exploring the possibility of structuring the project as a programmatic CDM, which I have previously described in the context of Xiamen’s ecocity efforts. Although Liu recognizes the legal and technical complexities involved in structuring such a CDM project, she is hopeful that such a program would be approved by the CDM authorities as it would represent of the first energy efficiency lighting programs to ever use the CDM.
Liu expects the program to launch in the next six to seven months, but JUCCCE has in the meantime partnered with Citi and GE to hold a pilot program distributing 10,000 CFL bulbs last November (pictured). The hope is that the success of this larger CFL lighting program can be adopted and replicated in cities across the country.
Why JUCCCE Matters
What makes organizations like JUCCCE so important in tackling the energy and climate challenges of our day is that it effectively bridges the gaps between the public and private realm. In the vocabulary of an economist, it helps correct market failures such as free rider problems and information asymmetry and creates incentives or platforms for businesses and policy makers to undertake clean energy initiatives that they would not normally undertake. This is demonstrated well in the two projects described above. In the case of the mayoral training program, information asymmetry is overcomed by the creation of a web-based database. In the case of the Shanghai lighting program, financial barriers are overcome through the use of innovative financing techniques.
China, and the rest of the world, needs institutions like JUCCCE to “fill in the gaps” because of the limitations to motivations/incentives inherent in political and commercial institutions to take action. The Green Leap Forward looks forward to profiling more innovative organizations like JUCCCE that are breaking silos to redefining how all stakeholders can think about tackling our energy and climate crisis.
China will raise the prices of gasoline and diesel prices at the pump by 17 to 18% and aviation kerosene by 25% starting today (June 20), and of electricity by some 4.7% starting July 1, according to the website (Chinese only) of the National Reform and Development Commission (NDRC). See also the news report by Xinhua.
These dramatic announcements coincide with the week-long high level fourth US-China Strategic Economic Dialogue (SER) in Anapolis, Maryland, USA, perhaps partially as a symbol of goodwill on China’s part. (Incidentally, the announcements also coincide with China’s annual publicity week for energy conservation.) The parties also committed to negotiate a 10 year cooperation agreement on energy and the environment. China Environmental Law reviews the basic framework of the agreement.
Pump and electricity prices in China are set by the government. These prices have been criticized as being artificially low, subsidizing China’s growing appetite for energy, and have been blamed (perhaps a little unfairly) for fueling the hike in world energy prices. Other than an 11% in crease in prices at the pump in November of last year, the government have been largely reluctant to raise prices for fear that it may exacerbate inflationary woes and hit the pockets of the poor.
On the other hand, we have already received indication from government policy statements and the draft Energy Law that some form of energy price liberalization can be expected. Though Beijing has stopped short of saying that it would allow energy prices to be completely subject to supply and demand, it will take such market prices into to account in setting its prices. The announcements come two days after China Environmental Law ran an excellent review of a recent and prescient Caijing article lamenting the missed opportunities in electricity price reform. Recently, I have also discussed to the need for energy price reforms.
So the NDRC has responded. It is not a complete liberalization of energy prices, but it is a better than expected start, i.e. a green leap forward.
Surging Crude Oil Prices
The recent precipitous run-up of oil prices from US$100 to nearly US$140 per barrel since February and the continued massive losses incurred by state oil refiners, especially Sinopec, which has to purchase crude oil on the open market at market prices but can only sell refined gasoline in the China market at fixed, low prices, is perceived as a major impetus to NDRC’s price hike move.
The NDRC has assured the public that the fares for railway passenger transport, urban public transport, rural road passenger transport and taxis will not be affected. These safeguards are to be commended as it sends a policy signal that public mass transit (okay so taxis don’t count) are energy saving transportation modes to be encouraged. The NDRC also made clear that liquefied petroleum gas, natural gas prices would not be affected.
Coal Power Also Getting More Expensive
On the electricity side, a Q&A (in Chinese only) on the NDRC website reveals that part of the rationale of electricity price increases is the reflection of the increased adoption of renewable energy power by the grid, and the need to cover the higher costs of such energy sources. If that is indeed true, I am encouraged. I have previously argued that central to the policy adopting feed-in tariffs, which is considered the most successful renewable energy policy as proven by its track record in Europe, is the sharing of the higher costs of renewable energy power across all users of power. This cited rationale for the electricity price hike send the message that the government is indeed willing to push the sharing of the cost burdens of renewable energy, true to the black letter law of the Renewable Energy Law of 2006, and gives me optimism that we shall one day see feed-in tariff policies in China.
The other stated reasons for the electricity price hike are the to rising costs of the country’s power plants, including rising coal prices (the NDRC also announced that it will cap coal prices starting at the end of this year, leading some analysts to forecast increased Chinese coal exports), increased costs on desulphuration facilities and investment in grid upgrading. The cynic in me believes these direct pressures on the coal power industry is a more likely reason for the electricity price hike (coupled with the coal price caps) than the desire to promote renewable energy. Still, I am not complaining.
To mitigate inflationary concerns, the electricity price hikes are also subject to significant exceptions. Urban and rural residents and sectors of farming and fertilizer production, as well as the quake-hit provinces of Sichuan, Shaanxi and Gansu, will be exempt from the electricity price rise. Thus, the hoped for behavioral changes really target commercial and industrial enterprises rather than individual consumers. Nevertheless, consumers may still feel the pinch to the extent that businesses are able to pass the increased energy costs of producing/providing their products/services to consumers.
Inflation Concerns and Opportunity for Productivity Gains
However, one observer believes that rather than hurting the pockets of cosumers, higher energy prices offer an opportunity for industry to boost productivity. Says Robert Bohlm, an investment banker, in a China Daily op-ed:
Will high oil prices cause China’s economic growth to slow? … Not unless the high oil prices are inflationary, in other words, not unless they increase too fast the demand for money whose supply is controlled by the central bank and is reflected in how low interest rates are. But China is capable of further massive improvements in efficiency (think of the huge potential for eventual large-scale industrial farming) that can more than make up for the impact of any price increase on inflation..Accordingly, companies have two ways to face cost increases—raise prices to customers (and risk inflation) or increase efficiency and productivity.
The more companies can pass through cost increases by raising prices, the greater the risk of inflation. The more companies can offset cost increases by increasing the amount of output per unit of higher-cost input, the less likely inflation is…China has huge still-untapped productivity improvement potential far more basic than the benefits of the Internet economy. These should enable China to experience non-inflationary domestic price increases, while rising income from the growing economy enables consumers to pay higher prices and still consume and save more.
My question is–can’t we have our cake and eat it too? Can’t we increase productivity and energy efficiency, while also consuming less?
UPDATE 7/2: Daniel Ikeman of the Cato Institute says these price hikes are simply not enough in The Far Eastern Economic Review.
A full transcript in Chinese of the proceedings is available here.
A recurring theme was the need to develop China’s domestic PV market. Although China is among the largest producers of solar photovoltaic (PV) cells in the world, over 90% of such PV cells are exported, leading Shi Dinghuan (石定寰), the Chairman of the Chinese Renewable Energy Industries Association (CREIA) to lament that China ships out its clean energy only to leave pollution (i.e. coal fired power generation) behind. At the end of last year, just 80 MW of solar PV was installed in China compared to almost 6,000 MW of wind energy. But more on this paradox later. Let’s first see how Chengdu (成都）and Shuangliu (双流) in Sichuan province are seeking to leapfrog Jiangsu province and Baoding (in Hebei province) as the solar PV manufacturing hubs of China.
Sichuan: the Solar Gateway to the West
Sichuan is pushing solar as its next pillar industry. The governments of Chengdu and Shuangliu have established the Chengdu/Shuangliu Photovoltaic Industrial Park. The goal is to turn the region into a “Western Solar Valley” (“西部光谷”) and achieve RMB 100 billion in annual output. On the first day of the conference, some 17 agreements amounting to RMB 14.5 billion in investments into the Solar Valley were penned.
China has abundant solar resources, with solar irradiation comparable to areas of corresponding latitudes in the US, and comparing favorably over areas of corresponding latitudes in Japan and Europe (click here for Greenpeace’s China Solar PV Report 2007). Tibet, in particular, boasts the best solar irradiance of all of China, in part due to its elevated altitudes which greatly reduces irradiance diffusion. The development of a vibrant solar industry in the western regions is also consistent with the national “Go West” policy of developing China’s interior western and remote regions that have traditionally lagged behind the coastal economies. Incidentally, it is these very western remote regions that are homes to a significant portion of the estimated 15 million people in 2006 with no access to electricity. Distributed energy solutions such as solar PV, among others, can be the most cost-effective sources of power in these regions. But as alluded to earlier, these regions are not where the PV panels are being deployed.
In terms of solar PV manufacturing, Sichuan, and Chengdu/Shuagnliu in particular, boasts certain strategic advantages, such as favorable investment policies, an abundance of hydroelectric power and affordable electric power in general, and the availability of skilled labor from surrounding universities. It also a relatively well developed logistics supply chain given the pioneering work of the aviation industry which Chengdu/Shuangliu has up to now built its economic base around. But take a read at this post for a devil’s advocate point of view on shifting supply chains to the western regions.
Some anchor companies at the industrial park include Tianwei New Energy Resources and Apollo Solar, both of which are taking vertically integrated approaches in developing their operations in Sichuan. Tianwei New Energy Resources Southwest Industry Park, a subsidiary of Tianwei Group, will channel some RMB 3 billion into building solar production facilities with a capacity of producing 200 MW of silicon ingots, 50 MW of solar modules and 100 MW of solar cells and a solar research center.
Another recurring theme of the conference was thin-film PV technologies. The solar industry as a whole has hitherto been anchored on silicon based technologies. The recent explosion of solar demand, however, has cause a short to medium term bottle neck on silicon feedstock supplies, providing a boon to so-called “thin-film” technologies which use little to no silicon. Apollo Solar is striving to be the foremost vertically integrated thin-film PV module manufacturer. The competitive advantage of Apollo is that it has mining rights to certain quarries such as Dashuigou (大水沟) and Majiagou (马家沟) within Sichuan province that gives them access key precious metals such as telluride, bismuth, indium, selenium and others that go into making thin-film modules. Some conference attendees told me that the rumor on the market is that it is Apollo which is providing First Solar, the world’s biggest think-film manufacturer based in Arizona, U.S., with its supply of these precious metals. A factory visit to Apollo’s plant revealed metals processing infrastructure and a think film module manufacturing line in place, but nary an employee in sight. Reportedly, operations are to commence this October.
Quantity AND Quality
Anthony Chia, Vice President of Quality Control at Trina Solar based in Changzhou, Jiangsu province, said at the conference that the way to set Chinese module manufacturers apart from the competition is through quality. Until recently, Chinese modules have suffered from an image problem of having lower quality. Although that has quelled somewhat with established Chinese brands such as Trina and Suntech Power gaining increased global market shares, Chia envisions a world market where it is Chinese, rather European or North American institutions that set quality certification standards. In a very real sense, China’s PV module industry is vulnerable to the whims of these quality certification bodies (or if one might dare read into it, protectionist measures to protect local PV industries). For example in Europe, it currently takes three to six months for newly developed module to be approved for sale by one of these quality certification bodies in the European market, explained Chia. Even minor amendments to certification criteria may threaten to extend the approval process to up to a year. The essence of Chia’s message is this: If China is going to be the world’s leading producer of PV modules, does it not also make sense for it to be the standard setter for quality certification? (I suppose critics might gripe against a potential conflicts-of-interest.)
Domestic Solar Adoption: A Chicken and the Egg Problem?
But I come back to the key issue of developing China’s domestic solar market. There is no doubt that China will have continued success in producing homegrown companies that have mastered the process of low-cost manufacturing and dominate the global PV manufacturing market. But rather than exporting all this clean energy, the Chinese solar industry should think about how it can take steps to develop the local solar market as well.
In my few months of talking to industry professionals, I have gotten the overwhelming sense that everyone is waiting for the government to enact the right policies to spur development. In turn, I have also gotten the sense that the government is waiting for the cost of solar (which in the US costs about 20 to 30 cents per kwh compared to 5 cents for coal-fired power) to drop before it goes all out to push the solar power in the same way it is pushing wind. But the price of solar is not going to achieve these dramatic cost reductions without a scaling up of solar technology deployment, and what better market (for sheerly physical reasons) to scale up solar than in China?
Here’s a preliminary policy prescription from The Green Leap Forward:
- Enact feed-in-tariffs. The National Reform and Development Commission should promulgate comprehensive feed-in tariffs which require grid companies to purchase solar power at preferential tariff rates. These tariff premiums are to be fixed, but also gradually decreased over a period of, say, 20 years. As a possible “safety valve”, these fixed tariff rates can be reexamined periodically to adjust for changing market conditions. The German government, for example, recently reevaluated the feed-in tariffs for solar. The premium that the grid company paid to solar power producers should be spread across all end-users, per the Renawable Energy Law of 2006. The hesitation of Chinese policy makers in adopting feed-in tariffs is something I hope to explore a little more in future posts.
- Strengthen Solar Lobby. Chinese solar companies should actively lobby the government to push ahead with solar policy reform. It is to their advantage, afterall, to develop a broader customer base. The newly established New Energy Chamber of Commerce may provide an avenue for such activities.
- Financial Innovation. Think about innovative ways of providing financing for solar installations. Given the early development of consumer credit in China, it may be some time before we can think of mass solar deployment in the residential sector, so continued advances along the credit front should be encouraged. For now, we should think about how third-party financing arrangements—whereby a facility engages another institution that installs and continues to own the solar panels, but sells the solar-generated electricity to the facility owner just like a utility, thereby relieving the user of prohibitive upfront costs of installing and owning the solar panels—can positively alter cost perceptions to solar power. Such third party financing institutions should target commercial and industrial entities, perhaps with the support of provincial and municipal governments which have energy efficiency and renewable energy goals to meet.
- Technical Capacity Building. Develop the necessary capacity and technical expertise for all steps of the PV value chain, but especially for downstream solar activities such as systems integration, installation, and after-sales services such as performance monitoring and system repairs and upgrades. This will require significant investments in education, but also lead to significant positive externalities such as job creation and spill-over benefits to other electrical engineering sectors.
- Government Procurement. Initiate mass procurement and deployment of PV in government facilities. Not only does the central government setting a right example work in China, but it provides a necessary starting point for the scaling up of PV deployment. The central government is large enough a bureaucracy after all.
- Strategically Increase R&D. Much hype is generated whenever announcements on breakthroughs in PV conversion efficiencies or silicon wafer thickness are achieved. But there are plenty of cost reductions to be gained in other parts of the solar value chain. Increasing efficiency of polysilicon production, module assembly, balance-of-systems or even installation are all avenues that R&D dollars can be channeled to increase technological (and hence cost) breakthroughs.
These merely represent my initial thoughts on how to push to PV adoption agenda in China. What are your thoughts? Please leave a comment!
If China’s Green Leap Forward fails for whatever reason, it won’t be because of the lack of cash. Generally speaking, it has never been better to be a clean tech entrepreneur or project developer. Investment dollars are pouring in globally from hedge funds, private equity and venture capital funds, multinational corporations and development banks. Take these recent developments, for example:
- The clean development mechanism (CDM) under the Kyoto Protocol, for example, provides the much needed financial lifeblood to take IRRs of wind farm projects over the “hurdle rate.” There has been some criticism about the use and abuse of CDM by some camps, such as a front page article by The Guardian, but I thought China Environmental Law’s response was spot on. China is by far the world’s biggest market for CDM projects, accounting for a whopping 73% of transactions in 2007. Hong Kong joins the CDM fray as well.
- Sycamore Ventures and the China Association of Resources Comprehensive Utilization (CARCU), which operates under the State-owned Assets Supervision and Administration Commission, are to launch a US$ 1 billion dollar Greenstar fund to invest largely in China’s environmental sector.
- The World Bank will provide additional $440 million in loans for three energy efficiency projects. This will constitute one-third of the bank’s loan portfolio in 2008 to China. The three projects consist of energy efficiency financing, desulfurization in Shandong and infrastructure in medium-sized cities in Liaoning.
All this is not to say that China is reliant on external sources of funding. In fact, according to a Reuters report, Gao Guangsheng of the National Development and Reform Commission expects China to fund 90% of its renewable energy development by domestic sources of funding. Separately, Don Ye, founding partner of Tsing Capital’s China Environment Fund, for seven years, and still, China’s only fund 100% dedicated to clean tech investments told The Green Leap Forward, “There’s a trend to self sufficiency both in terms of talent as well as investments. By the end of this year, we expect to see quite a few RMB-denominated investment funds come to the market.”
Provincial and municipal governments are also investing big in renewable energy. The northeastern municipality of Tianjin has committed to invest RMB 200 million a year into mergers and pre-IPO deals in solar, wind and energy storage businesses. The southwestern province of Sichuan is pushing solar development in a big way, as evidenced by last weekend’s Western China PV Conference held in the province’s biggest city, Chengdu (成都). The governments of Chengdu and adjacent Shuang Liu (双流) county, together constituting the aviation hub of China, have now have established the Chengdu (Shuang Liu) Photovoltaic Industrial Park with the goal of becoming China’s “solar PV valley.” I’ll write more about the Western PV Conference in my next post.
There will be occasional bottlenecks to capital availability. Last month, the central government raised bank reserve ratios yet again to reduce liquidity in the market so as to combat inflation. The series of bank reserve ratio increases has resulted in a tightening in the availability of bank loans for renewable energy projects (although these have tend to affect foreign project developers, which are typically last in line, more than the major state-owned enterprise developers, which get priority access to capital) . But such a phenomenon does not detract from the favorable patchwork of investment policies enacted by the central, provincial and municipal governments for clean energy. If I were a betting man, my money would be on the red (the color of RMB 100 notes) to continue chasing the green (energy).