External costs (i.e. cost not accounted for in the price tag, such as environmental, public health and other social costs) of coal in China totaled RMB 1.7 trillion (about US$250 billion) in 2007, equivalent to 7.1% of China’s 2007 GDP, according to a landmark report commissioned by Greenpeace, Energy Foundation and World Wildlife Fund released yesterday. “The True Cost of Coal” (Chinese version; English version) is the second high profile report on the Chinese coal industry to be released this month, following one by a group of MIT researchers which we previously discussed here.
Pictured (L-R): Ms. Yang Ailun of Greenpeace, Professor Mao Yushu of the Unirule Institute of Economics, and Dr. Yang Fuqiang of the Energy Foundation at the press conference announcing the release of “The True Cost of Coal” on October 27 at the Swissotel, Beijing.
Professor Mao Yushi of the Unirule Institute of Economics and chief author of the report summarized the rationale of the study:
Environmental and social damages are underestimated while using coal in China, as a result of market failures and weaknesses in government regulations. In order to address these problems, China needs to count these external costs and make the coal price reflect its true costs.
So what makes up this RMB 1.7 trillion bill of external costs? Read the full story
Coal-fired power plants account for some 70 to 80% of China’s total power generation. A group of MIT researchers have released a preliminary report on a comprehensive survey of China’s coal power plant industry entitled “Greener Plants, Grayer Skies: A Report from the Front Lines of China’s Energy Sector” (press release here; full report here), revealing surprising conclusions that make the report a must-read for any China energy analyst. In short, their findings, based on a survey of 85 power plants consisting of 299 separate generating units across 14 provinces, accounting for some 5% of China’s coal-fired generating capacity, challenges certain long-held assumptions that outside observers have harbored about China’s coal power industry.
In fact, the report’s findings illustrate very well Read the full story
More on the Green Olympics. Just one more day to the opening ceremonies! In our last post, we examined some of the stopgap measures that Beijing embarked on to deliver on its Green Olympics promises. Louis Schwartz, one of my favorite commentators on China’s clean tech scene, provides some juicy details of the kinds of renewable energy systems being deployed in the Olympic venues. He ends his article with a thought which must be on every green observer’s mind:
As is so often the case in China, the Summer Olympics in Beijing present two contradictory views of China’s environmental and energy stewardship. Will China’s future development realize the promise of the enlightened environmental and energy infrastructure now on display at the Olympic venues or will the Olympic Village turn out to have been just a Potemkin Village? Stay tuned.
Environmental exchanges launched. Shanghai and Beijing plan to launch exchanges that will facilitate the trade of emission credits, once regulatory approvals are granted. China Environmental Law Blog provides a good breakdown on what the respective exchanges hope to achieve.
Receiving less media attention are Changsha’s (of Hunan province) efforts to engage in emissions trading. Reuters reports that Changsha has drawn up a plan to assign credits for “dust, carbon dioxide and chemical oxygen demand (COD)” with the view of facilitating the trade of those credits “as early as next year.”
New energy body starts work. The newly approved China National Energy Administration (NEAR) has begun operations. Ominously, one of the NEA’s first pronouncements was to project that nuclear power will constitute 5% of China’s total power generating capacity by 2020, one percentage point more than was originally projected by a 2007 national nuclear energy plan.
Siemens sees green in China. Siemens, the German industrial conglomerate, expects more than 50% of its growth in China to come from the environmental sector. “More than half of our 1 billion euro mid-term investment in China until 2010 will go into energy-saving and environmentally friendly technologies and solutions,” said Richard Hausmann, president and CEO of Siemens China, to China Daily. And why not? GE’s doing it.
Siemens Energy will deliver the first two of five coal gasifiers to Shenhua Ningxia Coal Industry Group Co. Ltd. (SNCG), a subsidiary of Shenhua Group, China’s largest coal supplier. The coal gasifiers, each with a thermal capacity of 500MW, are destined for the Ningxia coal-to-polypropylene (NCPP) plant in Ningxia Province in northwest China. As Green Car Congress explains:
In the gasification process hard coal, lignite and other substances such as biomass, petcoke and refinery residues will be converted to syngas, and environmental pollutants such as sulfur and carbon dioxide subsequently removed. The syngas can then be used for power generation in integrated gasification combined cycle (IGCC) plants or as a raw material in the chemical industry, for example in the production of synthetic fuels.
Click here for a power point presentation on Siemen’s coal gasification technhologies.
New EE rule for fixed-asset projects. Such projects by Siemens should have no problems meeting a new regulation proposed by the government to condition the approval of fixed-asset projects by meeting specific energy efficiency criteria. The new regulation is drafted in line with China’s Energy Conservation Law, which took effect on April 1 and has received good coverage by China Environmental Law Blog.
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.
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