China's power play

Beijing has made a strong start in establishing a lower-carbon economy, but it's facing some formidable obstacles on the path to expanding its renewable energy industry.

FT.com

Step off an aircraft in Datong, the city at the heart of the coal belt in north China’s Shanxi province, and it is not long before the eyes sting and the throat is dry from the very noticeable levels of coal dust in the air. But drive an hour or so north towards Qahar in neighbouring Inner Mongolia and the horizon is dominated by hulking wind turbines, part of a network that is rapidly becoming one of the biggest in the world.

If the countdown to the Copenhagen climate change talks in less than two weeks’ time has been shrouded in disappointment – especially after US President Barack Obama and the leaders of the Asia-Pacific Economic Co-operation forum announced this month that the conference would not produce a legally binding agreement – it is China that has provided much of the limited good news.

In the space of only a few months, international perceptions of China, currently the largest emitter of carbon dioxide into the atmosphere, have changed dramatically – the equivalent of the journey from Datong to Qahar. Ed Miliband, UK energy and climate secretary, says Beijing is taking "huge strides forward”, while Todd Stern, US special envoy for climate change, has been stressing China’s progress on energy efficiency and renewable power. Beijing’s fear that it would find itself diplomatically isolated at Copenhagen has evaporated.

While China was only recently much criticised, now it is held up as an example with which to shame the US over its own halting efforts to adopt a low-carbon policy. "On the face of it, China has made remarkable progress towards its energy intensity goals,” Taiya Smith of the Carnegie Endowment told a congressional hearing in Washington last week.

Such a sharp turnaround reflects the strong start that Beijing has made in establishing a lower-carbon economy. But bringing Chinese emissions under control is an exercise likely to take a couple of decades – not years. As Beijing starts to look to the longer term, it also faces big questions about whether its current policies can be sustained – and if they will make enough of a difference.

The initiatives that have won praise this year have in fact been several years in the making. The centrepiece is a campaign to make better use of energy, including improving energy efficiency by 20 per cent between 2006 and 2010 – a target that the authorities stand a good chance of meeting.

In a much-heralded speech at the United Nations in September, President Hu Jintao committed his country to making a "notable” reduction in carbon intensity by 2020. That is not the same as actually reducing emissions, but it does mean that the amount of carbon dioxide that China produces for each unit of economic output will fall sharply. "The world expects us to make a decision in the face of climate change, an issue which bears on mankind’s survival and development,” said Hu.

China is also quickly building up one of the world’s biggest renewable energy sectors – of which the Qahar wind farms are one small part. The country now produces around 30 per cent of the solar panels used in the world and has set a target of drawing 15 per cent of its energy from renewable sources by 2020. "At the moment, the wind industry is only a small fraction of its potential size,” says Kerry Zhou of Goldwind, China’s largest wind turbine manufacturer. "The potential is much larger than anyone can imagine.”

Indeed, lost in the noise of Obama’s recent visit to China were a number of eye-catching business deals. Suntech, China’s largest solar panel maker, announced that it was building its first US manufacturing facility in Arizona, aiming to capture 20 per cent of the American market. General Electric and Shenhua Group, the leading Chinese coal producer, are forming a joint venture to develop clean coal technologies.

Beyond large-scale industrial projects, China is also the world leader in installing solar water heaters on house rooftops and around 30 million of its households already use such systems.

But while the scale of Beijing’s plans, and its initial steps, are impressive, it faces some significant tasks in implementation. A lot of the easier efficiency gains have already been achieved. Economic planners in Beijing know that every year, their efforts will get harder. The current energy efficiency drive is based on a very Chinese, top-down bureaucratic initiative called the "top 1,000 enterprises programme”. These – mostly state-owned – companies account for nearly half of industrial demand. The government has set efficiency targets for each company and an "energy manager” has been placed in many of them to monitor progress.

But for the next five-year plan, covering 2011-15, state planners know they have to broaden the net to include much smaller companies and bring local governments into the process. As China’s persistent food and product safety scandals have shown, the authorities are much less effective at enforcing standards and implementing new policies when it involves tens of thousands of smaller companies. Negotiations over the next five-year plan, which will be unveiled next year, have moreover included fierce resistance from cities and other local governments about the targets they are being asked to meet.

"It is a big challenge to move beyond the big companies into the broader economy,” says Deborah Seligsohn at the China office of World Resources Institute.

Yang Ailun, Greenpeace’s climate change campaign manager in China, says that over time the sort of administrative measures that Beijing favours will become less effective. "China needs to start thinking about the coal pricing system and introduce taxes that will take into account all the other costs associated with using coal,” she says. "This sort of approach will be more effective than simply relying on administrative orders.”

Formidable obstacles stand in the way of the plans to expand renewable energy. The windiest parts of the country are in the north-western provinces of Inner Mongolia and Gansu and that is where many of the largest wind farms are being built. But these areas are also far from the main population and industrial centres where the energy is required – and investment in expanding the grid has not kept pace with the increase in capacity.

According to Paulo Soares, who runs the Chinese operations of Suzlon, an Indian wind power company, more than 40 per cent of the installed wind turbines in China are standing idle because they are not connected to the grid. "Turbines are being manufactured much more quickly than the grid can be put into place,” he says. The solar industry in China is facing similar connection problems.

The tendering system adopted in China has led to the introduction of low-quality wind farms, he adds. The bidding process is often based purely on the initial cost of the equipment, with no reference to maintenance costs and other measurements of overall return, which makes the projects less efficient.

The State Council, China’s cabinet, warned last month that wind power and solar energy were among the industrial sectors facing significant over-capacity problems. There are widespread predictions that a number of companies will be forced to close.

Beijing still faces plenty of scepticism about the energy use data that it reports, especially in the US. According to Derek Scissors of the Heritage Foundation, a conservative Washington think-tank: "Any environmental agreement that permits the People’s Republic of China to report its own progress is not worth the tree chopped down to print it.”

All the hype about Chinese renewables aside, coal will remain the backbone of the country’s energy network for decades to come, as it is the one resource China has in abundance. The government has been closing small and inefficient coal-fired power stations and the new capacity being installed mostly uses state-of-the-art technology, but still runs on coal.

As a result, the policies laid out so far are designed only to restrain the increase in emissions, not to reduce them, and officials have yet to set a date when they expect emissions to peak. A group of Chinese scientists from leading institutes released a report this year that said emissions could peak by 2030, but they calculated that this would require massive additional investments over and above the current, uncosted policy commitments – rising to $US284 billion a year by 2030.

Arguably, the key to whether Beijing can rein in its emissions lies not in the details of its energy strategy but in the broader question of rebalancing its economic model. China’s energy demand and emissions began to explode in the early years of this decade not just because the economy was growing quickly but also because of a surge in investment in energy-intensive heavy industry such as steel, aluminium and cement. "The increase in energy demand was no accident: it came from a decisive shift in the structure of the economy,” says Dan Rosen, a China specialist at Rhodium Group, a New York consultancy.

China’s leaders have long talked about the need to move away from a dependence on industrial investment and exports and move more towards domestic consumption and services – Wen Jiabao, premier, described the economy two years ago as "unsteady, unbalanced, uncoordinated and unsustainable” – and improving energy efficiency would be one of the benefits. "The objective of a low-carbon economy fits very well with the other objectives China has set for its economy,” says Stern, an expert on climate change economics.

Shifting China’s growth model would therefore not only help rebalance the global economy and establish a sustainable recovery, as China was urged to do last week by Obama and others. It would also make a huge contribution to reducing future carbon emissions. That is a manifesto to make the world notice.

Related Articles