|April 23, 2014|
Previously published on April 17, 2014
Emerging economies, especially China, will have a particularly significant impact on world energy both in terms of scale and pace. In terms of scale, China’s population is larger than the combined populations of the US, Canada, the EU and Russia. In terms of pace, China is expected to install more generation capacity in the next 15 years than the entire existing US fleet. It is estimated that China will use more coal than the rest of the world combined in the upcoming years, and will increase coal investment accordingly. China is and will remain the world’s largest emitter of greenhouse gases. At the same time, China is leading the world in nuclear, clean tech and solar investment. There are a multitude of reasons for this -- creating energy independence, abating climate change and pollution -- but the results of this investment extend beyond China's borders. The country's sheer size -- not only geographically but in terms of market-share -- means that their industry choices have a huge global effect.
A love-hate relationship with coal
Although China is rich in natural resources and reserves, China is seeing a dramatic depletion of its non-renewable resources, particularly in the sector of coal and natural gas. China’s decades of domestic coal production and supply changed in 2009 when China started to import coal for its increased needs of coal consumption. China also began finding itself in short supply of domestic natural gas in 2007 and has since begun to import through pipelines or LNG (liquefied natural gas).
In 2013, China consumed 3.76 billion tons of standard coal (about 2.63 billion standard oil), with its installed capacity amounting to 1.25 billion KW, surpassing the US in both measures. The massive consumption of coal has led to severe air pollution and respiratory problems in major cities of China, particularly in Beijing, where rampant coal emissions are said to be causing an increase in lung cancer.
A strong push for renewables
In recent years, China realized the severity of consequences incurred with such high energy consumption and emissions and has endeavored to, on one hand, save energy, and on the other hand, encourage and develop clean and renewable energy such as wind, solar, and nuclear power.
By the end of 2013, China's renewable energy system stood at just over 1 trillion kilowatt-hours -- nearly as large at the electrical energy produced in France and Germany combined, and increased its proportion of electrical energy generated from renewables (hydro, wind and solar) to almost 30 percent. In that same time period, the country also installed more solar panels than the US and beat out Germany and Japan (among others) on an Ernst & Young Renewable Energy Country Attractiveness Index report.
China has also become the world's largest generator of wind power, with 75 gigawatts (GW) currently installed (as a reference point, the EU countries combined have just over 90 GW) and plans to install 200 GW by 2020. Although in absolute terms, Chinese wind power is huge, the most recent data from 2012 shows that only 2 percent of China's electricity came from wind. Coal -- at 75 percent -- is still king. But the potential is booming, and as the wind industry picks up -- and the Chinese government continues to provide subsidies -- more wind turbines will be produced, mass manufacturing will lower prices, making Chinese-manufactured wind turbines a significant export for the country.
If China continues along these lines, it can transition to an 80 percent renewable power system by 2050 at less cost that relying on coal, according to a February 2014 report from the World Wildlife Federation, thereby reducing carbon emissions without compromising the electric grid or economic growth. Whether or not it goes down this path is another question, but how China chooses to balance its business, regulatory and environmental goals will be watched by other governments and industry worldwide.
Trade costs of Chinese renewable energy production
However, the Chinese government's role in the production of renewable energy -- particularly the large subsidies it provides -- has raised the ire of producers in the EU and the US. We have seen this play out in the solar industry, where trade disputes have been broiling for the last few years.
Just recently, in April 2014, the EU allowed for the imposition of large fines (due to take effect in May 2014) on imported Chinese glass used in solar panels, after trade groups alleged that Chinese producers receive illegal subsidies, allowing them to charge prices far lower than those of European manufacturers. These fines are unlikely to put much of a dent into the Chinese export market. In 2012, the EU imported 290 billion euros ($402 billion) worth of Chinese glass, compared to the EU solar glass market of 200 million euros ($276 million).
This decision followed on the heels of a similar trade dispute last year started by European solar panel producers who claimed that Chinese manufacturers were "dumping" solar panels at an unreasonably low prices -- basically half the cost -- into the market, requesting levies to bring the Chinese prices up to European "break even" levels.
Eventually an amicable solution was reached in August 2013 between the European Commission and the Chinese exporting producers of solar panels with the offer of a price undertaking. This settlement of the largest ever EU anti-dumping case awarded 70 percent of the EU solar panel market to Chinese exporters at a set price, with the deal lasting until the end of 2015 aiming to cap the level of imports.
By way of background, price undertakings are a form of amicable solution in trade defence proceedings entrenched in the WTO and EU laws. It is an alternative measure, which replaces a duty to be paid with an undertaking based on a minimum import price. Price undertakings are company-specific and those Chinese companies participating in the price undertaking will have to respect the minimum price and, as a result, will be exempted from the anti-dumping duties. The purpose of the undertaking is two fold: on the one hand, it removes the harmful dumping of solar panels and, on the other hand, allows for a stable solar panel supply to the EU market.
The solar panels undertaking set a minimum price of 56 cents for every watt peak capacity of a solar panel. (In contrast, the average price of a German-made solar panel was reportedly 77 cents per watt peak capacity in July 2013.) The minimum price, as set, applies to the first 7 GWs of capacity sold in the EU.
The settlement was not without controversy. While China generally welcomed the European Commission's acceptance of a price agreement, it was not seen as a positive by European producers who argued that the minimum price set is close to the “dumped” price at which Chinese exporters were selling. On the other hand, the Chinese producers weren't happy with the Commissions methodology, disagreeing with its consideration of solar panels (“cells” and “modules”) with “wafers", which are thin slices of silicon that do not generate an electric current when exposed to sunlight, unlike cells, and its assessment of the “normal value” of solar modules based on Indian production information.
In retaliation, China threatened to impose its own punitive levies on European imports of polysilicon -- a material used in making solar panels -- and wine. However, as time passed and tensions eased, China withdrew the threat in March 2014.
These trade disputes, their pros and cons, winners and losers, show the glaring gaps in European unity on trade issues and potential for tension between major markets.
China's energy outlook
As the world's most populous country and one of the world’s fastest growing economies, China has become the largest energy consumer and producer in the world. It is the second-largest consumer of oil and, as of September 2013, the largest net importer of petroleum and other liquid fuels (surpassing the second-largest importer, the US). As of 2011, China was the world's largest power generator, with fossil fuels -- particularly coal -- continuing to be the largest source of the electricity.
But because of the country's size, growth and need, how it chooses to navigate the energy path can change the course of the energy industry worldwide. China's concerted effort to improve and increase renewables will have lasting effects on how the rest of the world tackles energy issues today and in the future.