By Xavier Chollet
The recent UN summit on climate change saw the emergence of an unlikely champion for alternative energy: China, the world’s manufacturing powerhouse. The country has introduced measures to cut CO2 emissions and plans to step up investment in natural gas, renewables and energy efficiency.
On 23 September, Chinese Vice premier Zhang Gaoli addressed world leaders to pledge firm action would be taken on pollution, including efforts to see emissions peak “as early as possible”. This was the first time such a high-ranking Chinese government member mentioned a peak emissions target.
The Climate Summit took place as new research showed that concentration of CO2 in the atmosphere passed the milestone of 400 parts-per-million for the first time in human history in 2013, a symbolic level beyond which damage to the environment is deemed irreversible.
China’s commitment also comes at a time when pollution is harming the health of Chinese citizens, as large cities suffocate under a thick cloud of smog dubbed “airpocalypse”. The country’s coal power plants and motor vehicles release fine particles that can lodge deep into the lungs and enter the bloodstream, causing lung cancer and heart failure. More than one million deaths can be attributed to pollution each year. Under growing pressure from the international community and its own population, Chinese premier Xi Jinping declared a “war on pollution” in March 2014 and enacted tough measures designed to rein in the country’s main polluters – coal-fired power plants and cars.
Curbing coal consumption
Coal is by some distance China’s dominant fuel source, representing 70% of its energy mix, used mainly for electricity. The government wants to reduce consumption to 63% by 2017 and push natural gas and renewables instead. Natural gas can replace coal in the production of electricity, and is a substitute for fuel for industrial purposes and for heating. China hopes to triple natural gas consumption by 2020.
Beijing authorities are taking the lead by gradually closing down all the city’s coal power plants. As a replacement, the government is promoting natural gas-fired power stations, which are less polluting.
Ambitious solar power targets
China also intends to develop its alternative energy sector. It aims to increase ten-fold the number of solar installations between 2012 and 2017, taking capacity from seven gigawatts to 70 gigawatts over the period. Focusing on solar energy makes sense as the cost of manufacturing solar panels has fallen 70% in 4 years, while at the same time traditional sources of energy such as coal or nuclear energy have become more expensive. This means that for the first time in history, solar electricity is cost competitive in sunny regions of the world, even without subsidies. If Europe accounted for 80% of demand for solar energy four years ago thanks to grants and subsidies, it is no longer the case today. The US, Japan and China are have picked up the solar energy baton. Demand is also picking up in sunny developing economies, where lower solar energy costs are helping to meet fast-growing electricity needs.
Energy-efficient vehicles
Beyond cutting the share of coal in the energy mix, China has also done much to combat another source of air pollution: cars and trucks. The country has introduced tough fuel standards that apply to all new vehicles.
Investment implications
China’s commitment to cleaner energy sources and energy efficiency will create investment opportunities. To meet growing demand for natural gas, the country is expected to pump billions of dollars into natural gas infrastructure. While some companies are connecting new cities to the gas network each year, enabling industrial and commercial users to switch from oil, others specialise in delivering gas to new power plants, most notably in Beijing, where demand has risen following the closure of coal-fired plants.
Prospects are also bright for Chinese makers of photovoltaic panels, with rising volumes in China and abroad since production costs have dropped.
Finally, energy efficiency should also see a wave of investment, whether in industry or in transportation. The sector of energy-efficient transport is experiencing particularly strong growth. Companies specialised in technology that make engines run more efficiently are enjoying rates of growth up to four times higher than in the broader automotive industry.
Xavier Chollet is senior investment manager at Pictet-Clean Energy
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