Totten_solartoday_china Feature Article Mar 07

China’s bold initiative Is the world’s largest coal consumer, in its bid to respond to spiraling demand, poised to become the global leader in renewable energy?

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By Michael Totten

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hina is constructing a new coal plant every week and the electriccapacity equivalent of a Three Gorges Dam — 18 gigawatts — every 16 months. The nation is projected to surpass the United States as the world’s largest emitter of greenhouse gas (GHG) emissions in 2009, a decade earlier than expected. And one of the most biologically rich rivers in the world, the Yangtze, with an aquatic species lineage that goes back 400 million years, is facing “ecological desertification” in the words of one prominent Chinese scientist.

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of coal, large-scale hydro and nuclear power plants pose an obvious barrier to the success of these goals? This question is especially critical when recognizing the immense task of educating, training and retooling the vast cadre of professionals essential for achieving this societal shift. Encouraging signs, many newly emerging, lead a number of analysts to believe that positive changes are on the cusp of reshaping the energy paradigm in China. This optimism is due to several notable factors: increasing numbers of businesses, scientists and nongovernmental organizations advocating for public policies, incentives and regulation enforcement that accelerate implementation of these goals; an increasingly strident civil society demanding cleaner air and water and less industrial contamination; and the steep adoption curve of

ANDREW KAELIN, AIS AQUA FOODS

Daily some 14,000 cars are added to already congested urban roads, displacing millions of bicyclists. Pollution levels greatly exceed World Health Organization health standards, causing respiratory illnesses to become chronic and smoky skies the norm. Most of China’s rivers are severely contaminated, and thick, blackened waters emitting fetid odors now flow through the wealthiest of China’s urban regions. Drought affects 66 million acres of agricultural land, and desertification afflicts some 750 million acres of mainly grasslands, with winds whipping sandstorms that travel all the way to North America. Melting glaciers driven by climate change threaten long-term water scarcity for 250 million people. China’s past three decades of double-digit economic growth are incurring massive costs, calculated by the World Bank to be 8 percent of China’s annual gross domestic product (GDP). These costs are projected to double by 2020, resulting in some $400 billion in annual health and environmental damages — if business as usual continues. But this bleak reality and even darker future are being challenged by Chinese leaders. They recently have enacted laws that, for the first time ever, set as the nation’s top priorities aggressive pursuit of the 4Es (efficiency of energy, water, resources and land), pollution prevention and waste reduction, and rapid growth of renewable energy. China has set a goal of reducing the energy intensity per dollar of GDP by 4 percent per year through 2010 (compared to the Bush administration’s goal of 1.8 percent per year, roughly business as usual). Are these ambitious laws and goals — which well exceed any U.S. efforts — for real? More explicitly, don’t the entrenched bureaucracy and national industries with vested interests in capturing the $10 trillion of revenues from the planned construction

”LUCKY” LU, AIS AQUA FOODS

To fuel double-digit growth, China is constructing a new coal plant every week. Shown, construction in the city of Wuhan, Hebei, China, amid the ever-diminishing older neighborhoods.

”LUCKY” LU, AIS AQUA FOODS

Pollution levels greatly exceed World Health Organization health standards, causing respiratory illnesses to become chronic and smoky skies the norm.

digital technologies that enable rapid sharing and accessing of knowledge resources. More than 350 million Chinese have e-mail access, with this number projected to reach one of every three citizens by 2010. Although China’s new goals range from environmental protection to aggressive efficiency efforts, let us consider just two areas: energy efficiency and wind power adoption. These examples offer a glimpse of the promise and the challenges represented by China’s goals.

Efficiency Gains Depend on Strong Policies Given the colossal opportunities of the 4Es to deliver energy and water services at a cost several factors lower than much of the current supply-expansion plans, one of the most exciting changes afoot is several provinces’ adoption of integrated

Integrated resource planning and investment in energy-saving technologies could help avoid half of the $10 trillion China will spend on power plants built between now and 2030. March/April 2007

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China’s Bold Initiative

JODIE ROUSSELL, ACORE

for 9.5 trillion gallons of water per year. Spearheading the IRP/EPP regulatory innovation in China for the Energy Foundation during the past six years has been David Moskovitz, former commissioner of the Maine Public Utilities Commission and cofounder of the Regulatory Assistance Project (www.raponline.org). For nearly two decades, Moskovitz has championed a paradigm shift in utility thinking, effectively turning many utilities’ opposition to efficiency into excitement for promoting EPPs. This shift is achieved by departing from the traditional method of setting utility earnings based on revenue growth. EPPs reduce revenues, hence earnings under the conventional model. By decoupling earnings from revenues and allowing recovery of lost earnings due to revenue declines, regulators give utilities an incentive for helping customers to capture EPP opportunities. So although revenues go down, earnings increase, and while customer utility rates increase to cover utility earnings, their bills decrease.

energy resource planning (IRP). For more than a decade, the Energy Foundation (www.efchina.org) and the Natural Resources Defense Council China program (www.chinacleanenergy.org) have been building understanding among Chinese ministry officials for implementing a more complete IRP process that enables aggregated demand-side efficiency options to compete with new power plants. Through this concept, an “Efficiency Power Plant” (EPP) — a bundle of investments in energy-conserving technologies — fills the same power needs as a conventional power plant by saving electricity rather than producing it. Shanghai and Beijing provinces have joined Jiangsu province, the first to innovate, in adopting IRP. The fundamental strength of IRP with EPPs is the transparency it brings to decisions now often made without comparison of costs, risks and benefits against the full portfolio of options. For example, 60 percent of China’s electricity is consumed by industrial drive systems — motors, pumps, compressors and fans. Utility incentive programs in many U.S. states have shown that efficiency upgrades to these systems can achieve 30 percent savings at five times less cost per kilowatt-hour (kWh) than building new generation to power the inefficient ones. Worldwide, an initiative for transforming the motor market would save 2 trillion kWh per year, equal to one-fourth of all coal plants to be built through 2030, while reducing global energy bills by $240 billion per decade. Chinese motor experts are fully engaged in this process, hosting the 2007 conference of the recently launched SEEEM initiative (Standards for Energy Efficiency of Electric Motor Systems, www.seeem.org). Potential savings in China are worth $100 billion per decade by eliminating the need for 378 terawatt-hours of energy per year — equivalent to 63 EPPs each 1,000 megawatts (MW) in size. This initiative also would avoid the shipment of 147 million tons of coal each year in nearly 1.5 million railroad cars, prevent the annual release of 420 million tons of carbon dioxide and 2.3 million tons of sulfur oxide and nitrogen oxide pollutants, and eliminate the need

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JODIE ROUSSELL, ACORE

China has enacted laws to spur energy efficiency and rapid growth of renewable energy, such as this photovoltaic manufacturing plant.

Despite encouraging signs, China’s entrenched bureaucracy and national industries with vested interests in conventional energy sources threaten its new goals.

On the big picture level, IRP/EPP could help avoid an estimated half of the $10 trillion China will spend on power plants built between now and 2030 to be operated over 30-plus years. How? Given the anticipated fourfold growth in the Chinese economy during the next two decades, including the projection for China to build half of all new buildings in the world, there is every opportunity for regulators and policymakers to provide incentives for this growth to promote radical gains in energy (and water and resource) efficiency. Providing the incentives and technical assistance for manufacturers to install high-efficiency motors, pumps and compressors and produce higher efficiency goods; for builders to design and construct zero-net-energy “green” buildings; and for builders, retailers and customers to install the top 10 percent most efficient appliances, lights, consumer electronics and office electronic equipment, could reduce by half the electricity services otherwise provided by power plants powering inefficient devices, equipment and buildings. www.solartoday.org SOLAR TODAY

Some $5 trillion in power plant construction costs could be used for other purposes, with perhaps $1 trillion required as incentives and technical assistance to achieve the savings investments and the other $4 trillion freed up from the utility sector for additional economic activity. As importantly, this energy savings could avoid several times this amount in health and environmental damages, including preventing 16 billion tons per decade of carbon dioxide emissions and some 90 million tons of acid rain and urban smog pollutants. Although the figures are impressive, actual results hinge on implementing not only a highly effective IRP/EPP regulatory process, but one also reinforced by other key policy tools and regulatory actions. With China annually producing several hundred million appliances and constructing 20+ billion square feet (2 billion square meters) of new buildings, the Chinese market needs more stringent standards and effective enforcement mechanisms and the transfer of more efficient technologies for appliances. Introduction of international best practices in enforcement and monitoring of standard compliances is also critically needed.

Unfavorable Rules Threaten Wind Adoption In 2005 the Chinese government established a goal of achieving 30,000 MW of installed wind capacity by 2020. An increase of 10,000 MW from the goal of just a year earlier, this goal raised the targeted annual growth rate from 20 percent to 24 percent. However, wind industry experts are confident that 170,000 MW of capacity (generating about 340 TWh per year) is economically feasible. The 39 percent annual growth rate is achievable, they argue, if utility pricing policies can be reformed. The National Renewable Energy Laboratory (NREL) recently conducted wind-resource mapping of vast areas of eastern China at 50-meter (164-foot) height for the United Nations Environment Programme (http://swera.unep.net). Roughly 4 percent of the mapped land area had good-to-excellent wind resources (Class 4 to 7) that could support 580,000 MW of capacity at a conservatively estimated 5 MW per square kilometer. NREL estimates the windy marine sections could support more than 660,000 MW of additional installed capacity. Including moderate wind resources would quadruple these figures. More studies are required to accurately assess the wind electric potential, considering factors such as shipping lanes, water depth and the existing transmission grid and accessibility. A recent policy glitch has raised questions about the pace of wind power growth. According to a new report jointly released by the Chinese Renewable Energy Industries Association, Greenpeace and the Global Wind Energy Council, the current regulatory practice of pricing through public tendering is causing too much uncertainty, price volatility and risk for wind developers, investors and manufacturers (download “A Study on the Pricing Policy of Wind Power in China” at www.gwec.net/index. php?id=70). For a young industry to scale up significantly requires a well-designed payment mechanism based on a realistic feed-in tariff. China’s draft Renewable Energy Law gave every indication that a feed-in tariff would be implemented, but that has not occurred. Copies available for public comment in late 2005 stated that the grid price for wind power would reflect the “nominal tariff of local de-sulfurized coal-fired power plants,” plus an incen-

March/April 2007

China’s targeted 39 percent annual growth in wind power is achievable, experts argue, if utility pricing policies can be reformed. tive of 2.8 cents (¥0.23) per kilowatt-hour. These incentives were absent from the enacted law. Wind farm concessions go to the bidder with the lowest price and highest domestic content (the minimum was recently increased to 70 percent). Almost all of the bidders in the recent fourth round were state-owned companies whose bids were so low that private and foreign investors did not want to invest. The low bidding not only has slowed wind farm expansion, but also has curtailed research and manufacturing of domestic turbines and production of components. Chinese manufacturing of wind components has been increasing, but a huge gap remains between domestic and international technology, and Chinese companies are not yet capable of large-scale production of wind turbines. Only one Chinese company, Xinjiang Golden Wind Co., has reached a significant scale to date. Another adverse impact of China’s current rules is that the government-set payment for wind power (i.e., the price decided by a winning bid) applies to any other wind farms proposed in the same region. As a result, unreasonably low prices resulting from the bidding will affect even unrelated projects. Speaking at the Great Wall World Renewable Energy Forum 2006 in October, Mark Raymont of the international law firm Pinsent Masons identified five key changes in Chinese government policy required to encourage foreign investment: a long-term pricing/investment policy; reforms to the tendering (bidding) program; a more transparent, more certain legal/regulatory regime; flexibility in the approval regime for large-scale projects; and a “level playing field” for foreign investors. Expansion of wind power in China is also challenged by the preferential treatment accorded large-scale hydro and nuclear power. Requiring all options to undergo the transparent scrutiny of an IRP process would demonstrate that wind is highly competitive with many proposed hydro and most nuclear plants. China plans 40,000 MW of nuclear capacity, which will probably deliver electricity at 50 percent higher costs than would wind. At the recent East Asia Investment Forum 2006, Xu Dingming, deputy office director of the State Council Energy Leading Group, said that China will invest $100 billion by 2020 to achieve renewable energy goals. Currently, this investment focuses on bringing six times more new capacity from large-scale hydropower than wind, despite wind being cost-competitive in many cases. ● Michael Totten, the senior director of Climate, Water and Ecosystem Services at Conservation International, resides in Denver and works in China. Contact him at [email protected].

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