While the world’s environmental community was gathered in Cancun, we headed out east to see what was really happening in China – which is likely to be the fastest growing low-carbon market in the next decade, according to our estimates (Sizing the climate economy, September 2010).
China is a giant in both carbon emissions and low-carbon technologies – the world’s largest source of greenhouse gas emissions (GHGs) as well as the largest market for wind turbines and the largest manufacturer of solar PV.
The new 'magic 7'
Three of the country’s seven emerging strategic industries (ESIs) have an explicit low-carbon focus: energy-saving and environmental protection (including waste and recycling); new energy (biomass, nuclear, solar PV and solar thermal, wind power, smart grid); and clean-energy vehicles (plug-in hybrid and full electric vehicles and battery technologies). But the other four ESIs are also broadly consistent with a low-carbon economy: next generation IT; biotechnology; high-end manufacturing (including high-speed rail); and new materials (including rare earths). The overall goal is to make these sectors account for 15 per cent of GDP by 2020 – up from 3 per cent in 2010 – a market size of 15 trillion yuan ($US 2.2 trillion) by 2020.
Clean energy targets
The 2020 carbon intensity target implies a 31 per cent improvement in energy intensity and a 15 per cent non-fossil fuel share of total energy consumption by 2020. This translates into the following targets:
– Hydro capacity of 280GW plus pumped hydro of 37GW by 2015, with 330GW plus pumped hydro of over 50GW by 2020;
– 90GW of wind installations by 2015 with 150GW by 2020;
– Nuclear targets for 2020 have been upgraded as well, from 60-70GW to 80GW;
– 5GW of solar PV installations by 2015, with 20GW by 2020;
– Annual low-carbon vehicle sales of 1 million units and car-battery production capacity of 10bn watt-hours by 2015; the number of EV pilot cities has been doubled from 10 to 20.
Our forecasts for 2015 and 2020 for wind and solar are around 50 per cent and 65 per cent above the official targets. Also, local governments are currently planning to build nuclear, rail and wind infrastructure that far exceeds national targets (see Zhi Ming Zhang, Inside the growth engine, 8 December 2010).
Wind: curtailment or continued growth?
China's wind industry has expanded rapidly, but it is now experiencing growing pains in the form of grid constraints, concerns over increasing competition, and concerns over wind farm returns and expectations of slowing growth.
Private (and therefore return-focused) developers in China rely, in many instances, on the Certified Emission Reduction revenues generated by CDM status on a given wind farm. It is possible to forward sell CERs after 2012, but the price that is being offered is in the region of €7-8 per tonne, and wind farm operators are reluctant to sell at these lower levels, in spite of the uncertainty.
The key issue for ongoing wind installations remains grid connectivity, grid stability and grid structure. China suffers from a mismatch between the supply of wind and the available points of demand. Wind developers in China have built new installations at such an impressive rate (installation doubled almost every year between 2006 and 2009), that the grid has struggled to keep pace, with between 30-40 per cent of installations at any point in time not grid connected.
Solar: How soon is now?
China accounts for between 45-60 per cent of global PV manufacture but less than 3 per cent of global demand. We estimate that Chinese PV demand in 2010 will be in the region of 450 MW. However, as the world’s largest producer of PV modules with an estimated total capacity of 15-17GW, or equivalent to expected global demand for 2010, the key question for China is, at what point would the Chinese government start to stimulate the local market?
We found that Chinese producers continued to be incredibly optimistic in spite of expected overcapacity, and there was an expectation that solar in China could be very significant but that the domestic market may take at least a year, or more likely two, to take off. Responses on the expected "take-off" date of the Chinese solar market varied from rampant enthusiasm to healthy scepticism.
More realistically, we expect that while European subsidy-driven markets remain open and sizeable (which we expect that they will remain – even if a little down on 2010 in 2011), Chinese manufacturers will be encouraged to export.
We believe that solar is likely to be big in China, but only in the mid-term, and the resultant boom can only come at the expense of lower prices and profitability. China has a solar target of 5GW by 2015 and 20GW by 2020, although the solar companies we met with suggested the country could see between 3-5 per cent of its electricity produced by solar in 2020. Assuming a total installed base of 1,800 GW in 2020, this suggests to us that the Chinese solar PV installed base could be between 50-90GW by 2020, from a base of almost nothing today. Our forecast is currently 40GW by 2020e.
How real is China's commitment?
Beijing's 12th Five-Year-Plan will be finalised in March 2011 and will focus on transforming the country's growth model, both to boost domestic consumption, and also to cut carbon intensity. Over-capacity in traditional sectors will be curbed and reform will be introduced for energy and environmental factors.
Will China's wind surge continue? China's wind industry is starting to experience growing pains, and after five years of strong growth, we believe that there are now downside risks to expectations for installations in 2011 and 2012.
The big winner for the next decade is set to be the solar sector, in our view. We expect the government's target of 20GW by 2020 to be exceeded by as much as 3 to 5 times. The question is when the government will introduce the necessary incentive programs to drive growth.
This is an edited extract of a report by HSBC Global Research, 'Low Carbon China: Peering through the smog at a cleaner future', by Robert Clover, HSBC's Global Head of Alternative and Renewable Energy. Reproduced with permission.
While the world’s environmental community was gathered in Cancun, we headed out east to see what was really happening in China – which is likely to be the fastest growing low-carbon market in the next decade, according to our estimates (Sizing the climate economy, September 2010).
China is a giant in both carbon emissions and low-carbon technologies – the world’s largest source of greenhouse gas emissions (GHGs) as well as the largest market for wind turbines and the largest manufacturer of solar PV.
The new 'magic 7'
Three of the country’s seven emerging strategic industries (ESIs) have an explicit low-carbon focus: energy-saving and environmental protection (including waste and recycling); new energy (biomass, nuclear, solar PV and solar thermal, wind power, smart grid); and clean-energy vehicles (plug-in hybrid and full electric vehicles and battery technologies). But the other four ESIs are also broadly consistent with a low-carbon economy: next generation IT; biotechnology; high-end manufacturing (including high-speed rail); and new materials (including rare earths). The overall goal is to make these sectors account for 15 per cent of GDP by 2020 – up from 3 per cent in 2010 – a market size of 15 trillion yuan ($US 2.2 trillion) by 2020.
Clean energy targets
The 2020 carbon intensity target implies a 31 per cent improvement in energy intensity and a 15 per cent non-fossil fuel share of total energy consumption by 2020. This translates into the following targets:
– Hydro capacity of 280GW plus pumped hydro of 37GW by 2015, with 330GW plus pumped hydro of over 50GW by 2020;
– 90GW of wind installations by 2015 with 150GW by 2020;
– Nuclear targets for 2020 have been upgraded as well, from 60-70GW to 80GW;
– 5GW of solar PV installations by 2015, with 20GW by 2020;
– Annual low-carbon vehicle sales of 1 million units and car-battery production capacity of 10bn watt-hours by 2015; the number of EV pilot cities has been doubled from 10 to 20.
Our forecasts for 2015 and 2020 for wind and solar are around 50 per cent and 65 per cent above the official targets. Also, local governments are currently planning to build nuclear, rail and wind infrastructure that far exceeds national targets (see Zhi Ming Zhang, Inside the growth engine, 8 December 2010).
Wind: curtailment or continued growth?
China's wind industry has expanded rapidly, but it is now experiencing growing pains in the form of grid constraints, concerns over increasing competition, and concerns over wind farm returns and expectations of slowing growth.
Private (and therefore return-focused) developers in China rely, in many instances, on the Certified Emission Reduction revenues generated by CDM status on a given wind farm. It is possible to forward sell CERs after 2012, but the price that is being offered is in the region of €7-8 per tonne, and wind farm operators are reluctant to sell at these lower levels, in spite of the uncertainty.
The key issue for ongoing wind installations remains grid connectivity, grid stability and grid structure. China suffers from a mismatch between the supply of wind and the available points of demand. Wind developers in China have built new installations at such an impressive rate (installation doubled almost every year between 2006 and 2009), that the grid has struggled to keep pace, with between 30-40 per cent of installations at any point in time not grid connected.
Solar: How soon is now?
China accounts for between 45-60 per cent of global PV manufacture but less than 3 per cent of global demand. We estimate that Chinese PV demand in 2010 will be in the region of 450 MW. However, as the world’s largest producer of PV modules with an estimated total capacity of 15-17GW, or equivalent to expected global demand for 2010, the key question for China is, at what point would the Chinese government start to stimulate the local market?
We found that Chinese producers continued to be incredibly optimistic in spite of expected overcapacity, and there was an expectation that solar in China could be very significant but that the domestic market may take at least a year, or more likely two, to take off. Responses on the expected "take-off" date of the Chinese solar market varied from rampant enthusiasm to healthy scepticism.
More realistically, we expect that while European subsidy-driven markets remain open and sizeable (which we expect that they will remain – even if a little down on 2010 in 2011), Chinese manufacturers will be encouraged to export.
We believe that solar is likely to be big in China, but only in the mid-term, and the resultant boom can only come at the expense of lower prices and profitability. China has a solar target of 5GW by 2015 and 20GW by 2020, although the solar companies we met with suggested the country could see between 3-5 per cent of its electricity produced by solar in 2020. Assuming a total installed base of 1,800 GW in 2020, this suggests to us that the Chinese solar PV installed base could be between 50-90GW by 2020, from a base of almost nothing today. Our forecast is currently 40GW by 2020e.
How real is China's commitment?
Beijing's 12th Five-Year-Plan will be finalised in March 2011 and will focus on transforming the country's growth model, both to boost domestic consumption, and also to cut carbon intensity. Over-capacity in traditional sectors will be curbed and reform will be introduced for energy and environmental factors.
Will China's wind surge continue? China's wind industry is starting to experience growing pains, and after five years of strong growth, we believe that there are now downside risks to expectations for installations in 2011 and 2012.
The big winner for the next decade is set to be the solar sector, in our view. We expect the government's target of 20GW by 2020 to be exceeded by as much as 3 to 5 times. The question is when the government will introduce the necessary incentive programs to drive growth.
This is an edited extract of a report by HSBC Global Research, 'Low Carbon China: Peering through the smog at a cleaner future', by Robert Clover, HSBC's Global Head of Alternative and Renewable Energy. Reproduced with permission.