In it to Win: How China is developing its Clean Energy Economy through Markets, Finance and Infrastrucuture
Yesterday on March 4, my colleagues and I finally released this long-awaited report “Out of the Running? How Germany, Spain, and China Are Seizing the Energy Opportunity and Why the United States Risks Getting Left Behind” (picture of the report cover, pictured right). As the title implies, it is a survey of how three countries with very different political economies are each adopting comprehensive policies to develop their clean energy sector in a way that the United States isn’t. The table of page 5 of the report really sums it all up. Germany, Spain and China have comprehensive and coherent and long-term approaches to developing their clean energy industries, while all the United States has for the most part are state-by-state and temporary policies. The result? The United States ranks only 19th in the world in clean energy product sales as a proportion of GDP compared to Germany at third, Spain at fourth, and China at sixth.
The report was launched at a major event co-sponsored by the Center for American Progress and Apollo Alliance on March 4th (conference agenda here) in which I spoke on a panel, walking through the main elements of the report. The report was picked up by the New York Times.com, which featured a few nice quotes from me.
I re-post the chapter on China below (look at the full report for an equally thorough examination of Germany’s and Spain’s policies). The first part of the chapter looks at China’s accomplishments thus far across the clean energy value chain of innovation, manufacturing, deployment, exports and job creation. The second part takes a closer look at the policy tools, using the three-pillar framework of market creation, financing and infrastructure that I have previously articulated in a conference at RETECH 2010 last month (but also take note in that lecture that I point out that the fourth and fifth pillars of information transparency and international collaboration will be important for China’s future development of its clean energy economy). Here’s the China section:
China is commonly viewed as pursuing an uncompromising economic growth model without consideration for the environment or public health. But China’s leaders fully grasp climate change’s threat to the country’s water and food security and the strategic economic and energy security benefits provided by deploying clean-energy solutions at a massive scale.
China’s GDP in 2008 was $4.3 trillion-less than one-third that of the United States in absolute terms and just 7 percent of U.S. GDP in per capita terms. China’s economy comprises three primary sectors: industry, services, and agriculture. Industry makes up the largest share of china’s GDP at 48.6 percent. Services follow close behind at 40.1 percent, and agriculture is third at 11.3 Percent. China’s strong manufacturing and industry sectors, aided by what some believe to be a deliberately undervalued currency, drive its robust global trading position and resulted in a global trade surplus of more than $400 billion in 2008.
China eclipsed Germany in 2009 as the world’s largest exporter. But the economic downturn that began in 2008 caused a temporary but dramatic dip in its exports. This dip prompted China to seriously consider rebalancing its growth with increased domestic consumption. This rebalancing would also diminish China’s global trade surplus.
Clean-energy deployment in China China boasts the most installed renewable electricity capacity of any country in the world. At the end of 2008, its 76 GW of installed capacity of renewable electricity-which excludes large hydropower for environmental impact reasons-was nearly twice the amount installed in the United States. While the European Union is aiming to produce 20 percent of its energy from renewable sources by 2020, and the U.S. Congress considers adopting a 20 percent renewable electricity standard by the same year, China produced fully 16 percent of its electricity from hydropower and wind power alone by the end of 2009-numbers that will certainly increase over the next decade.
In fact, nonfossil fuel sources are expected to account for as much as 30 percent of China’s overall power supply by 2020. The country expects to meet a big portion of this new market by building seven wind megabases of at least 10 GW each strategically sited across the country.
China’s leaders fully grasp climate change’s threat to the country’s water and food security and the strategic economic and energy security benefits provided by deploying clean-energy solutions at a
Wind power is definitely China’s current favorite in its renewable energy race. The country possesses more than 20 GW of wind capacity, which gives it the third-largest installed wind power fleet behind the United States and Germany. Solar PV, in contrast, accounts for only about 0.3 GW of installed capacity, compared to a total installed capacity-renewable or nonrenewable-just over 800 GW. The solar sector, however, is poised to grow exponentially to a targeted 20 GW by 2020 as a result of new major incentives announced in 2009 for domestic deployment. One caveat worth pointing out: Installed capacity, especially in China’s case, is not necessarily the best way to measure the success of a country’s renewable energy development. As many as one-third of China’s wind farms are not connected to the transmission grid due to the lack of incentives for grid companies to build out transmission lines to interconnect with clean-energy projects in remote areas. At the same time, the capacity factors of domestically made wind turbines-typically in the 20 to 30 percent range-are generally inferior to those of leading foreign-made turbines, which are above 30 percent.
The good news is that policymakers recognize these problems and have introduced new measures to address them. They have clarified rules and offered incentives that require grid companies to connect to renewable energy projects, and they have removed domestic content requirements to allow increased penetration of foreign-made wind turbines into the Chinese wind market.
CHINA’S ACHIEVEMENTS ACROSS THE CLEAN-ENERGY VALUE CHAIN
“We should see scientific and technological innovation as an important pillar and make
greater effort to develop new industries of strategic importance. Science and technology is
a powerful engine of economic growth . . . We will make China a country of innovation. . .
We will accelerate the development of a low-carbon economy and green economy so as to
gain an advantageous position in the international industrial competition.”
- China’s Premier Wen Jiabao at the World Economic Forum, September 10, 2009.
Innovation and R&D have not been traditional strengths of Chinese industry, which is better known for its ruthless efficiency in cost cutting and manufacturing productivity. However, the central government views science and technology as key drivers of social progress as China develops a more modern economy. Fostering “indigenous innovation” is a long-term strategy of China’s economic planners.
The Medium-to-Long-Term Science and Technology National Plan, unveiled in 2006, established the Chinese government’s strategic role in innovation activities through 2020. The plan includes tangible benchmarks such as achieving global top-five rankings in patents generated and citations in international science publications. It also identifies five more general targeted growth industries with top priority given to technologies relating to “energy, water resources, and environmental protection.”
Even more specifically, the Ministry of Science and Technology, or MOST, has identified three priority clean-energy technologies to target with policies and investment for the five-year period ending in 2010: energy-saving technologies, 2-3 MW wind turbines, and high-voltage electricity transmission technologies.
China’s most noteworthy government-funded clean-energy R&D initiatives include:
• Key Technology R&D Program: This is China’s first national R&D program to support innovation in a broad range of socioeconomic sectors including environmental pollution control and efficient resource utilization for energy and water. Over the five-year period of 2001 to 2005 almost $1 billion in funds have been invested programwide, making it the third-largest source of national government R&D funding over that period-just behind the 863 Program (discussed below) and the National Natural Science Fund.
• 863 Program: The 863 Program is more formally known as the State High-Tech Development Plan, and it is the most well-funded government innovation program, receiving some $3 billion from 2001 to 2005. Managed by MOST, the 863 Program was created in March 1986-hence the name-to stimulate development of a wide range of technological fields. China’s current national Five-Year Plan-2006 to 2010-identifies
energy technologies as a focus area of the 863 Program, and it further identifies hydrogen and fuel cells, energy efficiency, clean coal, and renewable energy as targeted beneficiaries of some $172 million in funding.
• 973 Program: This program is also known as the National Basic Research Program and focuses on more fundamental basic research. It complements the 863 Program, whose focus is more on the commercialization of high-technology applications. Sustainable development and energy have been key areas of the 973 Program since its founding at the third meeting of the National Science and Technology Committee in 1997. Between 1998 and 2008 the program funded 382 projects for a total investment of $1.3 billion-with 30 percent of the funding going toward energy and resource protection projects.
The absolute dollar amount invested through these programs is not by itself impressive given the scale of investment needed to truly transform China to a clean energy economy, and it isn’t clear after-in some cases-more than two decades of existence that these programs are yielding the hoped-for results. What is clear, however, is China’s long-term commitment to innovation through sustained programmatic funding rather than an ad hoc approach such as providing funding through legislation that is subject to annual unpredictable appropriations. As an example, China announced in December 2009 the establishment of 16 new energy R&D centers that will work in key sectors such as nuclear power, wind power, high-efficiency power generation and transmission, and facility materials.
But innovation does not originate in a vacuum. One of the historical features of China’s technology innovation is the role of foreign technology in the innovation chain. To achieve its goals of indigenous innovation, China’s government has adopted a model of “import/assimilate/re-innovation.” Thus, the early stages of all technology development include heavy reliance on foreign technologies.
These technology transfer opportunities sometimes result from intergovernmental cooperation-as was the case with energy conservation technologies made available to China through the auspices of the Japanese Green Aid Plan to China between 1992 and 2003. They can also result from purely commercial negotiations, as in the case of Goldwind, a Chinese wind company that acquired much of its intellectual property and know-how by licensing foreign technologies and ultimately outright acquiring a German wind company. Goldwind was virtually unheard of two years ago. Now it has gone public and is the
eighth largest wind turbine manufacturer in the world.
Today, China continues to increase its R&D capacity by welcoming international expertise. Applied Materials, the world’s biggest supplier of solar manufacturing equipment, is opening a new major R& D facility in China and is relocating its chief technology officer from Silicon Valley to China. Applied Materials’s move follows on the heels of DuPont, another American company that expanded its solar R&D facilities in Shanghai last summer. The relocation of innovation activities to where the manufacturing and market are growing makes sense because of the synergistic benefits of co-locating activities from different
links of the value chain. But it also represents a potential threat to American innovation because clean-energy manufacturing activities and the clean-energy market are growing
more rapidly abroad.
China’s reputation as the “factory of the world” holds true in the clean-energy technology sector. It is currently the world’s leading supplier of solar PV panels and solar hot water heaters, and until recently more than 90 percent of Chinese-made solar PV panels were shipped overseas for export markets. Altogether, China produces a third of the world’s solar panels. Almost all of these are exported to countries or regions with strong incentives for solar deployment, especially Germany, Spain, and California. China had just 0.3 megawatts of installed solar PV capacity at the end of 2009. In the same year, however, two major policies-the Solar Roofs Program and Golden Sun Program-were adopted to spur the domestic market, which will further support the solar manufacturing sector. Suntech, China’s largest solar manufacturer
with an annual production capacity of 1 GW, is poised to overtake Germany’s Q-Cells as the world’s largest manufacturer of silicon-based solar panels. Its domestic competitors, Yingli and Trina, are also among the world’s largest solar PV producers. All three are publicly traded global companies that are listed on the New York Stock Exchange or NASDAQ.
The wind manufacturing sector has grown as well, tracking the domestic wind power market’s growth. China had few major wind manufacturers just five or six years ago, but it was home to 70 of these firms by the end of 2008.84 China’s top three wind turbine makers have combined annual production capacities of 4 GW, and total annual manufacturing capacity by Chinese makers may reach as high as 20 GW by 2010.
This upward trend is the result of a concerted and comprehensive policy to develop China’s domestic capacity to manufacture wind components for its own burgeoning wind energy market. The domestic market is vast. In 2007, China set a national target of 10 GW and 30 GW of installed wind capacity for 2010 and 2020, respectively. By the end of 2009 approximately 20 GW were already installed. As a result, China’s National Development and Reform Commission is reportedly revising these targets to 35 GW by 2011 and 150 GW by 2020-truly staggering numbers by international standards.
The leadership of local, city, and provincial governments in creating low-carbon development zones has been another catalyst for clean-energy technology manufacturing. In these regions, clean-energy industries are the backbone of economic development, creating jobs through innovation, manufacturing, and assembly activities. There are many examples of publicly supported low-carbon economic clusters, including Baoding in Hebei province, Tianjin municipality, Wuhan city in Hubei province, and the “solar belt” of cities found throughout Jiangsu province. Growing academic and real world evidence demonstrate
that this type of cluster-based approach to economic development can lead to higher rates of innovation and entrepreneurship and better wages.
A closer look at China’s wind power sector provides a useful illustration of its manufacturing policy at work. It adopted several measures in recent years to promote a manufacturing nfrastructure of wind energy components that has transformed the sector from one heavily dependent on foreign technology to one where China is becoming increasingly self-reliant and ultimately export oriented. The government enacted targeted policies to promote the domestic manufacture of wind technologies, including:
• A mandatory requirement that all wind power projects have 70 percent of the equipment manufactured domestically (This requirement has recently been lifted to address
international concerns of trade protectionism, but has nonetheless served its purpose.)
• A tariff and value-added tax rebate on imports of parts and raw materials used in manufacturing wind turbines
• The elimination of tariff-free importation of wind turbines less than 2.5 megawatts in capacity
• Strong market demand created by ambitious national targets for installed wind capacity supported by robust financial and tax incentives, as described above
Clean-energy exports and jobs
As Chinese investment in innovation begins to bear fruit, the “Made in China” label is slowly losing any stigma of inferior quality. Chinese clean-energy hardware is increasingly receiving warm reviews. At the same time, the Chinese commitment to manufacturing, stimulated by a market both at home and abroad, is becoming a job creation engine throughout the country.
The poster child for China’s clean-energy exports is undoubtedly its solar sector. As mentioned earlier, Chinese solar PV panels account for 30 percent of the world’s global production, with almost all of that-until recently-targeting overseas markets. Top Chinese solar manufacturers have established sales offices in lucrative European markets as well as targeted American markets like California. China’s Suntech has gone one step further by announcing it will open a manufacturing facility in Arizona with an annual capacity of 30 MW-able to fully serve 8 percent of the United States’ solar market.
China’s large domestic demand for wind power means that most manufactured turbines are installed in China. But with Chinese manufacturers rapidly increasing their annual production capacities, there are now concerns of wind manufacturing overcapacity. So Chinese wind firms such as Sinovel, Goldwind, and A-Power are now starting to flex their global muscles by aggressively seeking overseas markets for their wares. The relatively more mature hydropower sector is becoming a strategic export sector as well.
State-owned Sinohydro is building hydropower dams in other developing countries such as Cambodia, Laos, Ecuador, and Botswana. China’s technology leadership position in advanced coal combustion, electric vehicles, and high-speed rail are also starting to win orders from overseas.
Employment in the Chinese renewable energy sector reportedly numbered 1.12 million by the end of 2008, with that figure increasing by 100,000 a year. A recent report by the Global Climate Network concluded that by 2020 the fulfillment of China’s domestic renewable energy targets will lead to an additional 1 million new jobs in hydropower, between 670,000 and 1 million jobs in wind power, and between 860,000 and 880,000 jobs in solar PV. Together, these three sectors alone could create up to 2.88 million jobs by 2020 solely by meeting domestic demand. Any concerted clean-energy export strategy will lead to even
more new jobs in China’s clean-energy industries.
CLEAN-ENERGY POLICY TOOLS
Expanding markets and driving demand
Recently, China announced that it would reduce its carbon dioxide emissions as a proportion of each unit of GDP produced by 40 to 45 percent of 2005 levels by 2020. But this is just the latest in a vast array of national-level, clean-energy targets that China has set for itself.
All the countries discussed in this report engage in some level of national economic development planning, but China does so to an extreme. It develops its future economic growth strategies through a series of five-year plans. Its current five-year plan (2006-2010) contains the country’s most ambitious environmental targets to date, including reducing energy consumption per unit of GDP by 20 percent from 2005 levels. Each provincial level jurisdiction must meet a share of the national energy intensity target, and provincial governors are promoted in part based on their fulfillment of these goals.
In support of this five-year target, the Medium- and Long-Term Energy Conservation Plan released in 2004 sets extensive targets for energy and resource efficiency across two dozen specific industrial sectors and equipment types and identifies 10 priority energy conservation projects in coal, petroleum, buildings, lighting, transportation, and other areas. These energy conservation targets have attracted major government and private sector investment, and preliminary studies indicate that China will achieve or come close to achieving most of its energy conservation goals.
One major national energy conservation program that sets energy efficiency standards for the top 1,000 energy consuming enterprises in China achieved its stated goal of reducing energy use by 100 million tons of coal equivalent two years ahead of its 2010 target date. In the process of fulfilling this target, some $7.3 billion in energy efficiency technologies and measures was invested in 2007, and another $13.2 billion was invested in 2008.
The Medium- and Long-Term Development Plan for Renewable Energy sets out medium (2010) and long-term (2020) targets for renewable energy. China aims to generate 15 percent of its primary energy from nonfossil fuel sources by 2020. While it is unclear whether this share includes nuclear power-various government investments indicate that it probably does-the hydropower, wind, and solar sectors are expected to benefit as well.
A range of complementary policies support these national goals. The Renewable Energy Law of 2006 requires grid companies to purchase electricity from renewable sources, and other policy initiatives require those companies to clarify how the additional costs of producing and connecting renewable energy is to be shared across all power consumers.
Similar policies require power generators to supply a certain percentage of their power from renewable energy sources. In a program called the mandated market share, or MMS, power generators with an
installed capacity of more than 5 GW must produce 3 percent of their electricity from nonhydro renewable sources by 2010 and 8 percent by 2020. Because the MMS is binding, it is more similar to the “renewable portfolio standard” common in the European Union and the United States than the 2020 nonfossil fuel target.
All these national standards and policies were not driven by climate change considerations, but by a national focus on domestic energy security. But with climate change rising in importance in its socioeconomic agenda, and armed with a new goal to reduce carbon intensity, China is poised to enact new domestic legislation that curbs the growth of carbon emissions and will spur further growth of China’s clean-energy industries.
China is also embarking on a gradual yet indispensible initiative to reform energy prices. Traditionally, energy prices have been artificially suppressed to promote universal access to electricity and fuel. But the environmental and public health consequences of unfettered fossil fuel use have proven unsustainable. Through a combination of easing price controls, taxation, differential pricing, and standards setting, oil and coal have been made steadily more expensive for consumers, thereby increasing the competitiveness of traditionally more expensive nonfossil fuel counterparts.
A good illustration of these policies’ impact on consumption is the evolution of transportation fuel and energy-efficient vehicle use by Chinese consumers. In 2008 Chinese authorities doubled the tax rate on engines above 4 liters from 20 percent to 40 percent while lowering the tax rate from 3 percent to just 1 percent for cars with engines less than 1 liter. These tax policies were combined with an automobile fuel economy standard that is one-third higher than the United States, the linking of gasoline prices to global crude oil prices, and the implementation of China’s first gasoline taxes in 2009. The result: In the first three quarters of 2009, cars with engine sizes of less than 1.6 liters accounted for 70 percent of new car sales-up from 62 percent for all of 2008. And in its efforts to manage its heavy reliance on coal, China is now beginning to address the pricing of electricity by, for instance, recently raising electricity rates for nonresidential customers.
Financing research, development, and deployment
The Chinese government understands that creating a new clean energy economy requires a decisive and strategic mobilization of finance for innovation, infrastructure, manufacturing, and deployment. Government investments are made through various channels, including state-owned investment vehicles and financial institutions, economic stimulus programs, and financial and tax policies.
Central government leadership has certainly recognized that “scientific development” requires a public investment in clean-energy technologies. The aforementioned 863, 973, and Key Technologies R&D Programs represent significant public investment in cleanenergy innovation. And China has employed a comprehensive suite of government policies to grow the low-carbon energy sector.
A look at the range of policies promoting China’s wind sector is instructive:
• Concession programs. Through a bidding process, renewable energy developers are awarded project concessions at a preferential tariff rate
• Feed-in tariffs. In the wind sectors, concession programs have evolved to feed-in tariffs ranging from $0.07 to $0.09 per kilowatt-hour, depending on the region. Solar concessions, which started this year, are similarly moving to a feed-in tariff system
• Carbon markets. The clean development mechanism under the Kyoto Protocol has been instrumental to the wind sector’s growth. Carbon credits generated under the CDM enable returns on investment, which make wind projects attractive to broad private sector participants
• Mandatory grid connection and electricity purchase. Grid operators are required to build transmission lines that connect renewable energy sites and purchase electricity generated from these sites. This requirement is supplemented by a subsidy to grid operators-varying by distance-for the build out of transmission lines
• Cost sharing. The national government set up a renewable energy fund by levying a 0.015 to 0.03 cents per kwh surcharge on all electricity users. The funds are disbursed periodically to renewable energy developers as a financial incentive. From 2006 through 2008, some $320 million was channeled to renewable energy developers under the costsharing
• Mandated market share. Power generators with an installed capacity of more than five gigagwatts must produce three percent of their electricity from non-hydro renewable sources by 2010 and eight percent by 2020
• VAT reduction. Wind power generators are entitled to a 50 percent discount on their value-added taxes
On top of these national-level incentives additional carrots are dangled at the provincial and local levels in the form of added tariffs, tax breaks, and favorable land pricing, among others.
State-owned enterprises are another critical driver of clean-energy deployment. China’s Power Investment-are all major investors in renewable energy projects. They accounted for 55 percent of all domestic installed wind capacity as of the end of 2008.
China Investment Corporation, or CIC, a recently formed state wealth fund with $300 billion of managed assets, is now making major investments in Chinese clean-energy companies.
In November 2009, it announced investments of $400 million in China Longyuan Power, China’s largest wind energy generator, and $700 million in GCL-Poly, a diversified energy company specializing in cogeneration, wind, and polysilicon production. In the same month CIC also invested $1.6 billion in AES, a U.S.-headquartered global utility with one of the largest foreign operations in China, including investments in hydro and wind power projects.
The China Energy Conservation Investment Corporation, a state holding company in operation since 1988, invests widely across a broad range of energy conservation, pollution control, and renewable energy businesses. Partnering with Suntech, the CECIC recently completed China’s first 10 megawatt solar PV power plant project in Ningxia Autonomous Region. CECIC now has more than 90 subsidiaries and employs more than 20,000 workers. By 2012 it plans to reach $15 billion in total assets, $7 billion in total revenue, and $750 million in total profits. In the same time frame, the company projects an annual energy conservation capacity of 4.25 million tons of coal equivalent and annual reduction of carbon dioxide of 12 million tons. It also aims to install 1.4 GW of grid-connected solar power capacity and is now beginning to set its sights on overseas utility-scale solar projects in Europe in alliance with several other Chinese companies.
Building physical and economic infrastructure
China’s government announced a $586 billion economic stimulus plan in November 2008. Some $100 billion of this will be allocated to infrastructure, particularly to the country’s
rail and transmission grid systems. These systems will serve as the backbone to China’s emerging clean energy economy. China, like the United States, must modernize its national grid infrastructure to accelerate its uptake of renewable energy. It is an emerging world leader in ultrahigh-voltage, or UHV, transmission technology, with more than 100 domestic manufacturers and suppliers participating in the manufacture and supply of UHV equipment. A transmission line from Shanxi to Hubei boasts the highest capacity in the world and is able to transmit 1,000 kilovolts over 400 miles. The State Grid Corporation will invest $44 billion through 2012 and $88 billion through 2020 in building UHV transmission lines. And in the coming months, China will unveil new plans to build an extensive smart grid by 2020.
But its infrastructure investments are not confined to the power sector. As American economic history shows, transportation links are the backbone of a nation’s economy. Cars will probably remain out of reach For the majority of Chinese households for the foreseeable future despite the country’s rapidly growing automotive market, which is now the biggest in the world. Mass transit-particularly intracity subways and long-distance, high-speed rail-will remain the mobility solution of choice for many Chinese. Recognizing this, China is embarking on the largest railway expansion in history and plans to spend almost $300 billion expanding its railway network from 48,000 miles today to 75,000 miles in 2020.105 Of this, 8,000 miles will be comprised of high-speed rail. The 800 mile Beijing-Shanghai line is under construction and will reduce travel time between those destinations by nearly two-thirds-from 14 to 5 hours-when it opens in 2011. This will attract an estimated 220,000 daily passengers and should dramatically offset air
travel between the metropolises.
China is second in the world in electrified railways with a reported 16,000 miles. This figure accounts for an impressive 32 percent of China’s total railways, and electrified rail is responsible for 50 percent of overall passenger and cargo volume.107 What’s more, China is poised to have the world’s largest network for intracity urban rail transit. Eleven cities currently have urban rail routes totaling 520 miles, and by 2015 approximately 1,300 miles of railway lines will be laid and operational in 19 cities.
China is proving to be a quick learner of international best practices, too. It has adapted successful policies from Europe such as clean-energy standards and feed-in tariffs to the Chinese situation while creating unique policies of its own, thereby creating the market signals and channeling the finance necessary to spur long-term innovation and deploy
clean-energy installations on a mass scale.