China's renewable-energy revolution

BEIJING – At the start of 2017, China announced that it would invest $360 billion in renewable energy by 2020 and scrap plans to build 85 coal-fired power plants. In March, Chinese authorities reported that the country was already exceeding official targets for energy efficiency, carbon intensity, and the share of clean energy sources. And just last month, China’s energy regulator, the National Energy Administration, rolled out new measures to reduce the country’s dependence on coal. These are just the latest indicators that China is at the center of a global energy transformation, which is being driven by technological change and the falling cost of renewables. But China is not just investing in renewables and phasing out coal. It also accounts for a growing share of global energy demand, meaning that its economy’s continuing shift toward service- and consumption-led growth will reshape the resource sector worldwide. At the same time, various other factors are reducing global resource consumption, including increased energy efficiency in residential, industrial, and commercial buildings, and lower demand for energy in transportation, owing to the proliferation of autonomous vehicles and ride sharing. According to Beyond the Supercycle: How Technology Is Reshaping Resources, a new report from the McKinsey Global Institute (MGI), these trends are slowing the growth of primary energy demand. If rapid adoption of new technologies continues, that demand could peak in 2025. And with less intensive energy use and increased efficiency, energy productivity in the global economy could increase by 40-70% over the next two decades. While global growth in energy demand is slowing, China’s share of that demand is increasing. By 2035, China may account for 28% of the world’s primary energy demand, up from 23% today, whereas the United States could account for just 12% by 2035, down from 16% today. China has already made significant progress in reducing its resource intensity: between 1980 and 2010, its economy grew 18-fold, but its energy consumption grew only fivefold. According to World Bank data, that reflects a 70% decline in energy intensity per unit of GDP. In its 13th Five-Year Plan, the Chinese government aims to reduce energy intensity by a total of 15% between 2016 and 2020. It is already well on its way toward achieving that goal. At the Chinese Communist Party’s National People’s Congress earlier this year, Chinese Premier Li Keqiang reported that China’s energy intensity fell by 5% last year alone. Renewables are one reason for China’s declining resource intensity. Hoping to become a world leader in the field, China is already investing more than $100 billion in domestic renewables every year. That is twice the level of US investment in domestic renewable energy and more than the combined annual investment of the US and the European Union. In addition, China is investing $32 billion – more than any other country – in renewables overseas, with top-tier Chinese companies increasingly taking the lead in global renewable-energy value chains. China’s State Grid Corporation has plans to develop an energy grid that draws on wind turbines and solar panels from around the world. Chinese solar-panel manufacturers are estimated to have a 20% cost advantage over their US peers, owing to economies of scale and more advanced supply-chain development. And Chinese wind-turbine manufacturers, having gradually closed technology gaps, now account for more than 90% of the Chinese domestic market, up from just 25% in 2002. These trends suggest that China will be a major source of both energy demand and cutting-edge technology, implying that it will have a unique opportunity to provide global leadership. Its experience in reducing energy intensity can serve as a roadmap for developing countries. And its investments in renewables at home and abroad can lead to additional technological breakthroughs that drive down costs for consumers everywhere. But China will also face challenges as it moves from fossil fuels to renewables within a changing global resource sector. Its economy is still highly dependent on coal, implying sizeable costs as it shifts capacity to other resources such as natural gas and renewables. Moreover, the construction of solar panels and wind farms in China has outpaced upgrades to its electrical grid, creating a great deal of waste. And Chinese producers, like most others, are feeling increasing pressure to reduce costs and improve efficiency to make up for slower demand growth worldwide. Despite these hurdles, technological innovation should help Chinese producers realize productivity gains and deliver savings to consumers. According to MGI, by 2035, changes in the supply and demand for major commodities could result in total cost savings of $900 billion to $1.6 trillion worldwide. The scale of these savings will depend not only on how quickly new technology is adopted, but also on how policymakers and companies adapt to their new environment. But, above all, it will depend on China. Jiang Kejun is senior researcher at the Energy Research Institute of China’s National Development and Reform Commission. Jonathan Woetzel is a McKinsey senior partner and a director of the McKinsey Global Institute. Copyright: Project Syndicate.

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China's renewable-energy revolution