In April twenty-twenty-four the US Treasury Secretary, Janet Yellen took a week-long trip
to China during which she criticized Beijing’s economic policy and warned President Xi and his
colleagues that their current level of industrial capacity is very much viewed
by Western nations as a dangerous OVER-capacity that could pose a risk to the rest of the world,
by which I think she means the United States and Europe, but you know, mostly the United States.
The most pressing issue on Secretary Yellen’s agenda appeared to be China’s rather irritating
recent habit of building lots of really very good quality electric cars and selling them to
the public at prices that average working people can afford. Over here in the United Kingdom our
government regards that sort of skullduggery as just not cricket you know! And in the two
largest EU economies, France and Germany, the prospect of cheap Chinese cars flooding
their domestic markets has prompted something of a meltdown among well-established legacy automakers.
And it’s the same problem with other energy transition hardware like solar panels,
wind turbines and batteries. The message that ordinary folks like you and me are
getting here in the West is that the stirring Dragon in the East is one of the great evils
of the modern age, and it needs to be put back in its, in its…dragon box?
So, we should maybe have a think about that, shouldn’t we?
Hello and welcome to Just Have a Think.
China has pledged to reach net zero emissions by 2060 at the latest.
About fifteen years ago, China’s leaders realised that decarbonisation was not only an important
global goal but also an extremely urgent priority for improving air quality and public health in
their rapidly growing urban centres. They also recognised that the economic revolution that was
enshrined in their five-year plans would probably not be helped by building internal combustion
engine vehicles that would struggle to compete with already well-established global brands
and would lock the country into decades of expensive oil imports. So, China decided
to dive enthusiastically into the development of battery powered electric vehicles instead.
Meanwhile, here in the West, despite a very clear and obvious directional nudge by Tesla Motors,
the major automotive manufacturers pretty much completely ignored the writing on the wall
and elected to stick with old technology that they understood and were tooled up to produce.
As a result, China has gained the so-called ‘First Mover Advantage’ over its Western competitors.
According to the data website EV Volumes, of the fourteen million or so electric vehicles
sold globally in twenty-twenty three, about eight and a half million were sold in China,
seventy percent of which were fully electric, and thirty percent were plug-in hybrids.
And the country is also revolutionising most other forms transport too.
“I’ve been tracking China’s renewables stats since 2014.”
That’s Michael Barnard, a global technologist who spent decades working for one of the world’s
largest tech consultancy firms operating in a hundred and twenty-eight countries,
and who now advises companies and policymakers in key markets INCLUDING South-East Asia and China.
“They’re electrifying their everything vastly faster than the rest of the world combined. “
They have 1.2 million electric trucks and buses on the roads, and now 43,000 kilometres
of high-speed, grid-tied electric rail, which is displacing enormous amounts of aviation.”
By 2022, 27% of the buses on China’s roads had some kind of electric
propulsion system. Eighty-four percent of that new fleet was pure electric,
and that proportion is rising as the economics of hybrids and hydrogen fuel cells continue to
make less sense to fleet buyers. That’s an astonishing rate of adoption. As recently
as 2015 almost 80% of Chinese urban buses were running on diesel or gas.
According to the World Resources Institute, if China stays on its current trajectory,
then greenhouse gas emissions from road transport in that country will peak well
before twenty-thirty, ahead of the European Union and the USA.
And of course, as we’re all hearing so regularly in the news nowadays, having honed their craft
and produced a range of extremely high-quality products, Chinese automakers now have their
sites firmly set on global expansion. Chinese brands are already commonplace in Australia and
South East Asia, and now they’re making a move into Europe and looking for ways
into the United States. And that is definitely causing ‘a level of concern’ to put it mildly.
At the IAA Mobility auto show in Munich, Germany in September 2023,
Renault’s Chief Executive, Luca De Meo, 4was quoted as saying…
“It’s clear that they are very competitive in the electric car value chain. I think
they are a generation ahead of us. We need to catch up very, very quickly.”
Over in the States, Jim Farley, CEO of the mighty Ford Motor Company,
recently said "If you cannot compete fair and square with the Chinese around
the world then 20% to 30% of your revenue is at risk" over the next several years.
A big complaint about Chinese EVs that’s often amplified in the western media is
that they’re being kept artificially and unfairly cheap by massive state
subsidies. But how accurate is that allegation?
According to a recent Bloomberg NEF analysis, incentives do exist, both for Chinese producers
and consumers. EV buyers in China don’t pay any vehicle purchase tax for example. And Chinese
automakers have received production subsidies over the last decade or so to incentivise
them to prioritise EVs over internal combustion engine vehicles. Chinese firms have historically
been allowed to purchase land at discounted prices too, and access low interest loans and
research grants from local governments keen to attract new industry and jobs to their
regions. America’s response has been to provide its own suite of incentives to US manufacturers
as part of the Inflation Reduction Act and apply a twenty-eight percent tariff to Chinese EV imports.
According to a recent Reuters report, the US government is also putting huge pressure
on Mexico to prevent Chinese suppliers setting up productions facilities there
to take advantage of the North American Free Trade agreement, or NAFTA. Meanwhile,
over here in Europe, in September 2023, the European Union launched a formal investigation
into Chinese subsidies, claiming that “dumping” unfairly cheap
EVs in foreign countries is in violation of international trade rules and anti-free market.
“How exactly is China subsidising stuff today, when they created an industrial policy that led
to cheap products that are necessary now, by keeping their eye on where the ball would be?
“So, right now, these decarbonisation necessities of the future : wind turbines, solar panels,
high voltage direct current, batteries, heat pumps, you know, electric trucks,
electric trains, erm it has massive economies of scale for all that stuff, because of stuff
that China started doing in the ‘80s and ‘90s. Their domestic supply chains are very short
geographically. Part of that is, what they do is they create clusters for industries.
When I was looking at the electric bicycle market prior to COVID,
one district of one city is building a third of all the electric bicycles that
China manufactures. One district. Which means that purchasing power parity is 40% better
than the United Stated or Europe. That means every Yuan you spend, goes 40% further in your
domestic supply chain. Some of that is wages, but wages have been increasing substantially.
You know if they need a part, the depot is right beside them. If a small firm gets a big order,
they can assemble five other firms to fulfil that order in a way that just isn’t possible
in North America or Europe, where the growth was more organic and more dispersed. Europe’s
not going to find significant subsidies of these firms in 2024. The investment
by the government and the focus by the government was 10, 15, 25 years ago.
“Basically we’ve got a situation where Europe and
the United States have taken their eye off the ball on fundamental technologies.
They lost track of the industrial policies. They thought that innovation was funding
start-ups and research, not industrial policy.
So, what about the other Elephant in the room then – greenhouse gas emissions? One of the
most common questions I get asked is ‘why should we bother reducing our emissions in
the West when China is the worst polluter on the planet, and it keeps using more coal every year.’
According to a respected data analytics organisation called Global Energy Monitor,
or GEM, China currently has just over 1,100 gigawatts of operational coal power capacity.
That’s a lot of coal! In fact, according to this chart from Statista, it’s one and a half
times more capacity than the next nine largest coal burning countries combined. It also has 268
gigawatts of announced new capacity, about 136 gigawatts of which is in construction.
So, there’s no room for complacency here. That’s a frightening amount of coal and
it does indeed propel China to the top of the global emissions league table. But it’s worth
scratching the surface a little bit here to get a slightly more nuanced picture. GEM also tells
us that in the last few years China shelved, retired, mothballed or cancelled 775 Gigawatts
of capacity based on old, less efficient technology burning dirtier forms of coal.
Those older plants emitted roughly one-point-four tons of carbon dioxide per megawatt-hour. Cleaner
forms of coal burnt in new, more efficient facilities emit about zero-point eight tons
per megawatt-hour. That’s more than a forty percent reduction in emissions.
“beautiful, clean coal” Yeah, I know! I don’t think any RATIONAL observer
is suggesting that going from ‘dirty’ coal to ‘clean’ coal is any reason for celebration! A
forty percent reduction on a massive number is still a very big number, isn’t it?
So, China is working towards energy independence. They’ve been very honest about this. They said
20 years ago, 10 years ago, ‘yes, climate change is real, it’s serious,
it’s caused by us, and China’s a big polluter. But we have hundreds of millions
of people that are living in abject poverty. We need to bring them out of abject poverty
before we can fully decarbonise. “They’ve got their cities built.
They’ve got all their subways built. They’ve got all their airports built.
They’ve got all their highways built. They’ve got 177,000km of highway. Second only to the Unites
States. But that demand curve is flattening out. And so, their domestic demand for coal,
for energy for infrastructure is going to flatten and diminish.”
And there’s another important detail to take into account here. Total system capacity is
NOT the same as real-world operational output. “China uses its coal plants the way the United
States uses its gas plants. The United States is running its gas plants at about 49% capacity
factor. So, 49% of the total possible generation from their gas plants is how much they use. And
China’s stats for the coal plants are virtually identical. They use coal for
peak demand. United States in its merit order uses natural gas for its peak demand. And so,
if we think about them as peaker plants and we think about the merit order for electricity which
is – if there’s renewables or low carbon stuff, let’s use that first, and then at the end of it,
oh there’s this other stuff, the fossil fuels, lets use that last. That’s the
merit order. And China has one as well.” In fact, according to David Fishman,
in this article from September 2023, all new coal-fired power plants in China now have to
have the technical ability to reduce their power output to only 30% load during periods
of low demand. That’s not a profitable way to run any kind of power generation facility.
State subsidies will be the only lifeline that keeps those plants running as a back-up firm power
source to fill the gaps in intermittency while the country continues to build out its wind, solar,
hydropower and energy storage capacity. But that expansion is happening so rapidly that while some
new coal power plants may survive for a couple of decades, many will become stranded assets,
and their owners will exit the market at a loss. So, although the charts look a little alarming
right now, David Fishman’s article concludes that… “If hydropower pulls its weight and renewables
maintain their blistering growth, it’s likely China’s coal consumption will tick upward to
peak in 2023, plateau in 2024, and begin its long decline thereafter.” In China,
there’s just been this accelerating curve of wind, water and solar in China.
While nuclear has flatlined. Even China can’t scale nuclear, but they’re scaling wind and
solar at a tremendous rate. So now we’re at the point where the IEA is calling for China
to build over the next few years, 30% more wind and solar than the rest of the world
combined.” “The three big things. Electrify everything. Build lots of renewables. Build
lots of transmission, mostly high voltage direct current, and build some storage.”
One of the things I looked this year was the statistics globally on pumped hydro. This is
finally getting the attention its due. A gigalitre of water – that’s a billion litres of water – at
500 metres difference, is a gigawatt-hour of storage. And the ponds are a square kilometre
a piece. The amount of land space used is miniscule compared to the energy storage.
So, what’s China doing? Is it putting in lots of batteries? Yeah,
of course it is. But it has 19 GW of power capacity in pumped hydro in operation today.
It has 68GW in construction today. And in total, planned and in construction, it has 365GW
of pumped hydro in its current plans, and it’s expecting to have most of those launched before
2030 and many of them complete before 2030. That’s probably 8 to 15 terawatt-hours of energy storage.
This is where China’s going. They’re going to grid storage. They’re going
to broad transmission across their space. And let’s remind people. Europe is about
10 million sq.km. The United States is about 10 million sq.km. China is about 10 million sq.km.
And so that means they can move sunshine from the West to
the demand centres in the East quite nicely for the evening demand peaks.
And they’re going there very rapidly. They’re increasing electrical demand insanely rapidly.
They’re increasing renewables incredibly rapidly. But in the meantime, they have
this transitionary backstop of burning less and less and less coal every year.”
According to a survey by the European Investment bank,
seventy-three percent of the Chinese population regard climate change as a major threat to
society. That means Chinese leadership is pushing at an open door when it comes to
the incredibly disruptive changes required to rapidly accelerate their energy revolution.
Not every Chinese citizen enjoys the same
freedoms though, of course. Political opposition is aggressively subdued,
and disturbing human rights abuses, particularly among the Uyghur community in Xinjiang Province,
have been widely publicised over here in the West.
These are all part of the frustrating contradictions that China often produces.
I would assert that the biggest advances in human rights in the past forty years,
has been China bringing 850 million people out of abject poverty into the lower middle class and
middle class. China is already strategically positioning itself to be able to get credit,
to decarbonise its economy, electrify its economy, run everything on renewables,
carbon price everything, so that when it’s shipping to the second largest economy in
the world and one of the biggest import economies in the world, they’ll still be cost competitive”
So, how should the West respond to the Chinese juggernaut? Do we ostracize and demonize them
and put up impossible trade barriers that will inevitably be reciprocated and might cause more
pain than gain to western economies, or do we embrace China’s technological revolution, allow
some of their production to come to our own shores to provide well-paid jobs for our own workers, and
cooperate with them commercially and politically so that we can continue to apply pressure on
issues that we find to be completely at odds with our western philosophy of democratic freedom?
Well, you know what? I’m going to leave that one for you to have a think about. I’m quite sure
there will be extremely strong views either way on this one, and I will be fascinated to see how the
consensus view pans out. So, if you’re currently itching to offer some of your own wisdom,
then, as always, the place to leave your thoughts is in the comments section below.
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