Navigant Research Blog

Urban Population Growth Drives the Need for Smart Cities

— July 15, 2014

The latest update from the United Nations on global urbanization trends is a powerful reminder of the most important of all drivers for smart city development: population growth.  World Urbanization Prospects, the 2014 revision reaffirms the core findings of previous studies but also further highlights the dramatic changes that will occur over the next 3 decades.

Today, the world’s urban population is close to 3.9 billion.  It will reach 6.3 billion in 2050, by which time two-thirds of the world’s population will be living in cities.   Nearly 90% of the increase in urban population will occur in Africa and Asia, and three countries alone – China, India, and Nigeria – will account for 37% of the 2.5 billion new urban dwellers.  Although more than half of the world’s urban citizens live in Asia today, the continent is only 48% urbanized and only 40% of Africans live in cities.  By 2050, Africa will be 54% urbanized and Asia will have reached 64%.

Percentage of Population in Urban Areas: 1950-2050

(Source: United Nations)

China and India Focus on Urban Infrastructure

China’s response to these pressures has been well-publicized.  The central government plans to invest up to $1 trillion in urban infrastructure during the 12th Five-Year Plan.  China’s Ministry of Housing and Urban and Rural Development (MOHURD) is currently assessing plans from 193 cities that are competing for up to $70 billion in investment to smart city development programs. In March 2014, the Ministry of Finance released details about the National New-type Urbanization Plan (2014-2020).  The government has stated a desire to develop a more inclusive path to urbanization that will benefit more citizens, improve the quality of life, and reduce the environmental impact of new developments.

India has taken longer than China to embrace urbanization as part of national policy.  As a result, despite the rapid growth of cities, like Mumbai and Delhi, and the global role of Indian technology suppliers, investment in the urban infrastructure has lagged economic development.  After decades of attempts to hold back the tide in favor of the traditional role of rural communities, there is a now a greater focus on the needs of the expanding urban population.

100 New Cities

India’s main smart city initiative to date has been the Delhi Mumbai Industrial Corridor (DMIC).  The development is intended to spur manufacturing and urbanization across a broad swath of northern India, with seven new cities planned and a total investment of $90 billion.  The new Indian government elected in May 2014 has put urban development at the core of its program and declared a target of building 100 new cities by 2022.  It has allocated around $1 billion for the program in its first budget.   According to M. Venkaiah Naidu, the new urban development minister, the planned cities will employ the latest technology and infrastructure, including advanced waste management and transportation systems.

The vast expansion in the urban population and growing expectations among city dwellers for better quality services and infrastructure will drive demand for smart city solutions across Asia Pacific over the next decade.  Navigant Research’s latest Smart Cities report estimates that a total of $63 billion will be invested in smart city technologies in Asia Pacific between 2014 and 2013, more than one-third of a global investment of almost $175 billion.

 

China’s Coming Property Crash

— June 6, 2014

The sheer magnitude of building growth in China has been remarkable.  According to the Financial Times, China produced more cement in just 2 years, 2011 and 2012, than the United States produced in the entire 20th century.  China’s unprecedented urbanization has resulted in hundreds of millions of migrants flocking to China’s cities to manufacture the country’s exports and build its infrastructure.  This, in turn, has driven an unsustainable combination of a gravity-defying growth in construction coupled with rapidly rising housing prices.   If China is indeed in a property bubble, the correction could be painful.

Concerns about a Chinese property bubble were raised as early as 2010.  Ordos, a city in Inner Mongolia, undertook an ambitious project to develop a 12-square-mile area of empty land outside of the city into a thriving metropolis.  Rather than a thriving metropolis, the $1 billion project resulted in a ghost town when the project failed to attract residents.  In early 2011, when banks tightened credit, coal companies, upon which the resource-rich city depended, consolidated.  As a result, property sales stalled, precipitating a collapse in prices.  Ordos wasn’t the only casualty.  Several other major cities throughout China experienced price declines, leading many, including The Wall Street Journal, to declare the end of the property bubble in China to be imminent.

Impact on Smart Buildings

Indeed, prices did retreat in 2011.  But rather than burst, they rebounded, buoyed by sustained demand in China’s top cities.  But recent weakness in Chinese economic indicators has again raised concerns of a burst.  Economists at the Japanese bank Nomura have declared, “it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be.”  Newly started construction for the first 4 months of 2014 is down 22.1% compared to a year earlier.  Even Pan Shiyi, a real estate tycoon and chief of Soho China, thinks China’s property market is headed for catastrophe.

The exceptional growth of construction in China has been a strong driver of building controls and automation in recent years.  A property bubble burst could, therefore, have disastrous consequences on the market for smart building technologies.  However, if there is softness in the Chinese market, no one seems to have informed the leading global manufacturers of building controls.  Honeywell, Johnson Controls, Schneider Electric, and Siemens have all reported a continued strong market in China for the first quarter of this year.

A Series of Collapses

Part of the story is momentum.  A collapse in construction activity will lag a collapse in land and property prices.  Controls equipment manufacturers may even lag behind construction activity.  Also, although indications of a plunge in construction prices are strong, it hasn’t occurred yet.  China has been in the position of having economic data pointing to it being on the cusp of a property bubble burst before.  Its chronic oversupply and perpetually buoyant prices may be unsustainable, but the market can remain irrational longer than you can remain solvent.

When the burst does come, advanced controls may prove to be more resilient than the overall market.  China has a significant proportion of aging buildings.  If the country is to reach the energy efficiency goals laid out in the 12th Five-Year Plan, advanced controls will need to be part of the equation.  Those aging buildings will be prime candidates (and great revenue sources) for energy efficient retrofits.

 

Coal Reduction in China a Long Struggle, Not a Great Leap

— May 2, 2014

For years, air pollution in Beijing was considered a minor annoyance by Chinese citizens and foreign residents, something to be put up with and joked about, akin to Hong Kong’s fogs, Bangkok’s traffic jams, and Jakarta’s monsoons.  It was part of the cost of getting in on the China boom.

In the last year, that has changed.  Partly as a result of the airpocalypse in September 2013 that made Beijingers virtual prisoners in their apartments, air pollution is now recognized as a deadly threat and a serious impediment to continued economic growth.  At the Coaltrans conference in Shanghai in early April, more than one executive told me that expatriates have begun to flee the Chinese capital for Hong Kong, Singapore, or their home countries.  “You can’t pay people enough to live in Beijing anymore,” was a common remark.

The Chinese government responded with an ambitious plan to reduce air pollution specifically by curbing coal consumption.  The world’s largest consumer of coal, China burns nearly as much coal every year as the rest of the world combined.  This matters not just to inhabitants of China’s coastal metropolises, but also to the world: “China’s coal consumption has become the single most significant determinant for the future of the world’s climate,” wrote Greenpeace in an April report.  In other words, it doesn’t really matter what the rest of the world does; if China can’t control its rampant coal burning, our chances of  limiting catastrophic global warming are virtually nil.

Hurrah, Maybe

That’s why the government’s plan has been met with cautious applause from climate researchers and environmentalists.  The plan called, for the first time, for specific coal consumption targets in China’s provinces.  So far, 12 of China’s 34 provinces have pledged to implement absolute coal consumption targets, and six have said they will reduce their coal use by 2017, with greater Beijing cutting coal use by 50% in the next 3 years.  If successful, these measures could reduce CO2 emissions by 700 million tons (MT) in 2017, according to the Greenpeace report, The End of China’s Coal Boom, and 1,300 MT in 2020 – an amount equal to total emissions from Canada and Australia combined.

That would be a huge victory.  Unfortunately, it’s unlikely.  For one thing, the provinces pledging to reduce coal use are mostly strung along China’s east coast, and they do not include the major coal-producing regions of Shanxi, Xinjiang, and Inner Mongolia.  The other part of China’s plan for its coal industry is to move power plants closer to the mines of the interior, creating enormous coal clusters where power plants will burn coal to make electricity and send it, via massive ultra high-voltage transmission lines, to the cities of the coast.  The coal clusters will also include coal-to-liquid and coal-to-gas plants, chemical factories, cement plants, and other heavy industry, along with coal cities for workers.  (This report from Inside Climate News provides a detailed look at China’s coal bases.)  This plan will most likely increase the country’s overall coal use, not reduce it.

Not Enough Nukes

What’s more, China’s demand for power is certain to keep growing in the next decade.  That power has to come from somewhere.  According to a new report from consultancy Wood Mackenzie, the majority is still going to come from coal over the next 2 decades.

China’s central government has set a goal of increasing the country’s nuclear power capacity from 14.6 gigawatts (GW) in 2013 to 200 GW by 2030.  While the nuclear industry in China will make significant progress, the 200 GW target is unreachable, says Wood Mackenzie; 175 GW is more plausible.  The pace of nuclear technology development, a lack of skilled personnel, a shortage of uranium fuel fabrication capacity, and public opposition will all slow nuclear progress.

The result?  Power generation from coal will still account for 64% of China’s supply in 2030, close to the current figure.  That view counters the encouraging trends in certain provinces.

“China’s coal story,” says Gavin Thompson, chief of Asia Pacific gas and power research for Wood Mackenzie, “is far from over.”

 

China’s ‘Solar Bubble’ a Coal Bubble in Disguise

— March 14, 2014

Tremors rippled through global financial markets this week after Shanghai Chairo Solar Energy Science and Technology defaulted on its corporate debt.  The first Chinese company to default on domestically issued bonds, Shanghai Chairo is seen as a signal of the over-inflation of China’s red-hot solar market – and, worse, as an indication that the whole edifice of “shadow banking,” shaky corporate debt, excessive property lending, and unsustainable economic growth in China could come crashing down, leading to another global financial meltdown.

That seems overly alarmist.  China’s leaders have for some time been forecasting a modest slowdown in economic growth for 2014, to the 7%-8% range, which would still be the envy of any Western economy.  And Chinese premier Li Keqiang warned on Thursday that future corporate debt failures are “unavoidable” as the country deregulates its financial markets and the government stops propping up unprofitable enterprises.  China’s economy is maturing beyond export-led growth based on cheap commodities, and some regrettable bankruptcies aside, that’s good not only for the Chinese people, but also, ultimately for the stability of the global financial system.

At least that’s the official, reassuring line.  In the energy sector things are slightly more complicated.

King Dethroned

There’s no question that the Chinese solar industry finds itself in a situation of overinvestment and overcapacity.  The spectacular bankruptcy of Suntech, previously headed by China’s “Solar King,” Zhengrong Shi, signaled clearly that the dot-com phase of China’s solar power boom is officially over and a period of sober reassessment – and disinvestment – must inevitably follow.

Still, overseas solar markets, particularly the United States, are enjoying sustained growth, largely thanks to innovative leasing models.  And last month the Chinese government upped its target for new solar installations for 2014 to 14 gigawatts (GW) – a mark that would surpass last year’s total of 12 GW, which itself was the most any nation had added in a single year.  China’s solar industry must adjust to market realities going forward; but the market is growing.

That’s not necessarily true of the coal sector, which could be the real bubble now threatening China’s sustained economic growth.  Nearly 40GW of new coal-fired power generation capacity was added last year, and it’s no longer obvious that demand will continue to grow to soak up all that power.  China has actually closed down more than 80 GW of coal capacity in the last dozen years, and the government reportedly plans to shutter another 20 GW in the coming years.

Wobbly Steel

Indeed, within 5 years there may well be a nationwide cap on coal consumption in China – an extraordinary development in a country whose economic miracle of the last 20 years has been powered almost completely by coal. The less-noticed default of Haixin Steel, a steelmaker based in the coal-producing region of Shanxi Province, China’s Appalachia, could be a more troubling episode than Shanghai Chaori.  Haixin was involved in “triangular debt” arrangements with coal producers and other investors, and its failure could forebode turbulence in China’s heavy industry – and its commodities markets, including coal.

“The truth is Chinese coal consumption is peaking,” writes Justin Guay, of the Sierra Club, “and its plans to build the world’s largest coal pipeline is a bubble that may have already burst.”

If the coal/steel nexus that has fueled China’s growth turns into a bubble, concerns over solar companies going belly up will look minor by comparison.

 

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