Navigant Research Blog

In Shanghai, Carbon Goes on the Market

— August 30, 2012

This month Shanghai began an ambitious emissions trading system (ETS) intended to curb carbon dioxide emissions.  Approximately 200 local companies will participate in the program, which targets industrial firms that produce more than 20,000 metric tons of carbon annually, and non-industrial firms that produce more than 10,000 metric tons a year.  Carbon permits will be free during the program’s initial phase, but then market forces will set the price.  The scheme will be based on the mechanics of the Shanghai Environmental and Energy Exchange, with significant funding from the Asian Development Bank.

Similar programs are planned in Beijing, Chongqing, Hubei, Guangdong, Shenzhen, and Tianjin.  While the nuances of each program will vary, these initiatives will act as pilot projects for a nationwide carbon trading scheme, set to be implemented by 2015.

Shanghai’s energy demand is forecast to nearly double by 2020 and, considering the country’s vast coal reserves, a corresponding increase in greenhouse gas emissions would be inevitable without some effort at reduction.  The question becomes: by choosing an ETS, has China selected the most effective policy to combat pollution while minimizing the social impact?

The two most popular policies for emissions reductions are carbon trading schemes and carbon taxes.  They are fundamentally different, and therefore, neither is considered a “one size fits all” solution.

Carbon trading, as in the Shanghai scheme, creates an absolute maximum to the emissions of a region or company (the “cap” in “cap and trade”) and allows the market to sort out the most efficient means for achieving that goal.  Trading systems create dynamic economic efficiency by allowing companies with the lowest abatement costs (the cost of reducing their pollution) to do so, and then profit by selling their unused permits.  Companies with high abatement costs can purchase these credits if the credits costs less than retrofits required to meet the cap.  The European Union launched its Emissions Trading System in 2005.  The scheme aims to reduce total emissions 21% below 2005 levels by 2020; results so far have been mixed.  California plans to roll out a carbon ETS in 2013 that will cover approximately 85% off all carbon emissions in the state, including utility and transportation fuels.

The Tax Option

Carbon taxes, on the other hand, place a fee on every ton of carbon produced by specific industries, or on all emissions in a country, region, or state.  Taxes are simpler to implement because their mechanisms are already well understood by both politicians and the general public, and they are relatively easy to enforce.  Unlike a cap and trade system, taxes incent carbon emitters to reduce pollution as much as possible, whereas an ETS only requires reductions to a specific level.

Furthermore, some creative manipulation of the existing tax code can result in minimal economic impacts.  British Columbia has a revenue neutral carbon tax in place, which it has recently increased to $30 per ton.  Revenues from the carbon tax, levied against all the carbon from fossil fuels, are used to reduce corporate and individual income taxes; which have resulted in some of the lowest rates in the G8.  Despite economic growth, the tax has significantly reduced carbon output and fossil fuel demand.

China’s ETS is another signal of the country’s slow but steady shift to free-market capitalism.  From an economic perspective, a trading scheme may be the most logical path to curtail China’s carbon emissions, given the rapid economic expansion of the country, and the corresponding exponential demand for energy. True, the ETS introduces some complications into carbon emission compliance, but its smaller economic impact on businesses, compared to a carbon tax, should help bolster China’s continued growth.  If structured correctly, the scheme will allow China to integrate its carbon markets with Europe, Australia, and others, further incorporating the once-secluded Middle Kingdom into the world economy.

(Photo Copyright Douglas Janson)


New Chinese Subsidies Target Improved Building Efficiency

— June 10, 2012

The Chinese government recently announced a series of subsidies and incentive schemes aimed at energy efficiency and renewable energy proliferation around the country and on June 1, it started offering subsidies for televisions and fixed-speed air conditioners.  The total volume of available subsidies will be about RMB 26 billion ($4 billion), though the program aims to use the subsidies to drive total consumption of RMB 450 billion ($70 billion).  The program represents part of a national plan to stimulate domestic consumption in 2012 by investing RMB 170 billion ($27 billion). Of that sum, more than 50% will be aimed at energy efficiency and renewable energy products under a series of subsidies (that haven’t been announced yet) and other incentive programs.

China represents the world’s largest construction industry, and about 2 billion square meters of new space are added to China’s building stock ever year, as described in Pike Research’s report entitled “Global Building Stock Database.” A surge in energy consumption has accompanied this growth and China surpassed the United States as the largest emitter of greenhouse gases a few years ago.  However, a recent report from the International Energy Agency adds that China’s carbon emissions intensity per unit of GDP fell by 15% between 2005 and 2011.

In an effort to curb its carbon emissions growth, China’s 12th Five Year Plan, released in 2011, laid out the Chinese government’s ambitions to reduce energy consumption per unit of GDP by 16% from 2010 to 2015.  This most recent wave of subsidies is aimed at helping China meet these goals by targeting specific energy-intensive appliances – televisions and air conditioners – that are responsible for a significant portion of the growth in China’s per-capita energy consumption.

As I wrote in Pike Research’s recent white paper, “Smart Buildings: Ten Trends to Watch in 2012 and Beyond,” the Asia Pacific region’s size relative to the rest of the world is not always reflected in revenues for energy efficiency technology.  Despite the region’s dynamic construction activity, it represents just 25% of the global market for building automation systems (BAS) and controls, 20% of the global market for building energy management systems (BEMS), and 17% of the global market for intelligent lighting controls.  However, as the Chinese government bolsters sales of energy efficiency equipment in the next few years through subsidies and other regulations, China’s market share for smart building technology is expected to grow, placing the building industry at the center of China’s strategy to reduce the energy intensity of its economy.


China’s Smart Grid Spearhead

— April 26, 2012

According to a Chinese government source, China intends to install over 300 million smart meters in 2015, a massive increase of 730% from the 36 million smart meters installed in 2011.  China’s utility giant, the State Grid Corporation of China (SGCC), will invest $47 billion in power grid construction over the next five years.  About $100 million of this amount will be used to advance the smart grid technology.

The news media only supplies numbers, so it’s hard to know what the Chinese players are actually doing now.  I feel that the real story behind China’s smart grid program would be even more impressive than the published figures.

Chinese players are engaging across all aspects of the smart grid space: power generation, transmission, substation, distribution and consumption, by adopting advanced information-gathering and intelligent information-processing technologies.  While there are many different views in China’s development in smart grid, my focus is on the utilization of information technology, automation, and intelligent interactivity in components of the power grid infrastructure from utilities to consumers.

The overall goal of the Chinese smart grid effort is to enhance the capabilities and levels of existing elements, including:

  • Power transmission equipment utilization
  • Network security and reliability
  • The quality of electricity service
  • Power grid efficiency

More specifically, on the transmission side, the major goal is to implement sensors to achieve real-time monitoring of transmission lines.  At the substation level, Chinese parties believe that smart grid technology can automatically adjust power levels and achieve rapid fault resolution in intelligent substations, through intelligent switches and transformers.

On the distribution side, Chinese players expect that real-time monitoring, intelligent power distribution, and other networking applications can achieve more rapid failure restoration, a more reliable electricity supply, and visualized operations management tools.  Eventually, these elements could offer advanced functionality in information collection and analysis, intelligent electricity load shifting, and remote meter reading applications to link two-way smart meters.

Recently, a bunch of Chinese players, including RXPE Sieyuan NARI, XJ Electric, Clou Electronics, Holley, and Ningbo Sanxing, have shifted their business focus to pursue huge market potential in the domestic smart grid markets.  At the same time, it’s clear that China could be more aggressive on the global stage.  Huawei announced that it will launch in the U.K. smart meter market after signing a joint venture deal with technology provider Landis + Gyr.  SGCC, meanwhile, has signed smart grid deals in the Philippines, Brazil, and Portugal.    China has also stepped up efforts to become part of the global community in seeking smart grid standards.  For example, China recently insisted on establishing a new committee under the International Electrotechnical Commission (IEC), with the U.S. and European representatives approving this request.  China is signaling its intent to get off the sidelines and instead become directly engaged on the standards front.  That’s an appropriate move, as China becomes a center of global smart grid innovation.


In Solar Trade War, China’s Not the Enemy

— April 9, 2012

The U.S. Department of Commerce (DOC) recently announced the first of two expected import tariffs on Chinese crystalline solar cell and module manufacturers.  This is the latest blow in a feud that has included local content requirements, two-way accusations of strategic underpricing at different points in the value chain, and political posturing that amounts to a clean-tech trade skirmish.  SolarWorld America and other unnamed U.S.  manufacturers initiated the suit claiming a 49-249% “Alleged Dumping Margin” by leading Chinese solar manufacturers which have gobbled up market share at the peril of many U.S. companies.

Here are the main takeaways: This is mostly a symbolic victory in an election year.  The first announcement was a countervailing duty that ranges from 2.9% to 4.73%, with the verdict of the second anti-dumping case expected in May.  This first duty was significantly lower than the 30% figure that many in the industry were expecting.  Even if the anti-dumping duty brings the total duty up to 20%, don’t expect this to cause a resurgence in U.S.  solar manufacturing anytime soon.  Nor should this have a major impact on the cost of installing solar in the U.S. or elsewhere (unless opportunistic installers conspire to do so and use the duty as an excuse to pad their profit margin).  Chinese companies may just ramp up manufacturing in Taiwan and other countries where they have manufacturing capacity to get around the ruling.

The suit and the DOC ruling have caused an antagonistic rift within the US solar value chain.  On one side you have solar manufacturers, led by SolarWorld America and seven other smaller companies that manufacture solar cells and modules.  These companies, despite receiving many tax incentives from state and federal governments in the United States and elsewhere, have witnessed a margin bloodbath and are fighting for dear life.  On the other side, the drop in cost has led to a doubling of installations for the past two years, leading in turn to a boom for U.S. installers, third-party financiers (think SunRun, SolarCity, et. al), and project developers who have seen tremendous growth during this time.  None other than the pioneer of the solar lease, Jigar Shah, founder of SunEdison and leader of Coalition for Affordable Solar Energy, has been the most visible advocate representing this group.

Meanwhile the polysilicon producers in the U.S. who fared well when prices were high in 2009 are now experiencing a race to the bottom on price.  Chinese polysilicon providers now allege that the American competition is selling at artificially low prices that is wiping out Chinese companies.  Go figure.

It’s true the Chinese government has provided an order of magnitude advantage to solar manufacturers in China, primarily through low-interest loans.  But that was a strategic decision by a country that has to figure out a way to raise standards of living for its 1.3 billion people – and is not concerned about ROI for Western investors, elections, and US jobs.  Plus, note that the leading U.S.  residential marketshare leader, SunPower, is not part of the suit.

For a number of reasons, China holds all the cards on this one – and that means the bottom line is that the country is going to play by its own rules. Western crystalline solar manufacturers’ “enemy” is state capitalism, not Chinese manufacturers, so companies (across all cleantech sectors) need to get used to it.  The United States lacks a coherent, let alone strategic, energy policy ‑ and this is one of the repercussions.


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