China’s New Electricity Plan Changes the Global Energy Game

[00:00:00] Speaker 1: A couple of months ago, Canada released its new electricity plan that called for a doubling of the power grid. Now, what's interesting about this is that China, just a few days ago, released its 15th five-year new energy system plan, and it has a lot of lessons to teach Canada, in my opinion, anyway. Anders, I've interviewed you now for two or three years about what's going on in the Chinese electricity system. What's your take on this new five-year plan? [00:00:31] Speaker 2: Well, I think there are a number. As always, there's not one five-year plan. There are many five-year plans. It's an interlocking set of documents, which oftentimes include content that already was published in prior policy. So this is not sort of one plan. But I guess my overall important take on the plan as it regards energy and climate, which is related to energy, obviously, is that I take a different view from other commentators who have pointed out that some of the targets, although they appear aggressive in some cases, are actually quite cautious on the energy transition in that they're less than what some perhaps activists would hope for in terms of the targets on renewables or carbon, for example. My view is different, which is that many of the targets that seem cautious are more there to establish a floor. And that looking at the past five-year plans, going back to when I first moved to China in 2010, mostly the targets have been surpassed because the technology comes down in price, the integration challenges are overcome, and it is in China's own industrial development model to accelerate this transition, not to slow it down. [00:01:43] Speaker 1: Yeah, that's an important point to make here, is that from China's point of view, this is not climate policy. It's not about emissions reduction. It has a goal to be the world's largest industrial power with the geopolitical clout that comes along with it, and it also is very concerned with energy security or energy sovereignty. Would you agree or disagree with that? [00:02:07] Speaker 2: I absolutely agree on both those points, and an important aspect of both of those points is it's China's own internal domestic demand for energy, and that includes for clean energy, whether we're talking about wind, solar, renewables, nuclear, or that's just within the electric power sector, or within the transport sector, new energy vehicles, that's plug-in hybrids and electric vehicles and fuel cell vehicles. So that goes for both the passenger vehicle fleet, and then now what's really interesting in the last 18 months is the heavy vehicle fleet, especially heavy trucks, also transitioning over. That domestic demand helps with energy security, it helps with industrial development, and it leads to an export growth model as well, which is what we're really seeing now with China's domestic economy slowing, internal demand slowing for these products, but now external demand is surging much more than I expected, but I expect more than the local leaders and industrial leaders even hoped for. [00:03:11] Speaker 1: Andrew, a year ago when I interviewed you, we were talking about China's electricity system becoming more and more dominated by renewables, or at least there was tremendous growth, and eventually they were moving towards a system where renewables would provide, if not all of the power generation, at least a very large portion of it, and coal would be relegated to a backup position. But we seem to have reached that point much quicker than we had anticipated during our past interviews. [00:03:46] Speaker 2: Yeah, we're not moving to 100% renewables or even 100% clean energy in the near future, but the rate of change is astounding nonetheless. We're talking about an energy system which is much larger than North America or Europe, and then the power sector as well, much larger in total gigawatt capacity, or energy production for that matter. And it is an energy mix which is changing by a rate of two to three percentage points per year in terms of the wind and solar penetration, and coal share is falling in tandem with that, even as the capacity of coal power is rising very strongly. I wouldn't say it's necessarily fully transitioned to a backup role. That is the stated vision in these policy documents and going back several years now. And indeed, that is what is meant by a new type energy system or a new type power system, is that renewables, not just wind and solar, but low carbon energy in general, become the backbone or core of the power system, with coal becoming a flexible resource that supplements that. That is still some way off, and the coal fleet and the electric power system, in many ways, are not as flexible and not as nimble as what would exist in North America, for example. But that is the vision and the policy. [00:05:07] Speaker 1: And I've seen some analysts argue that what's really important about this five-year plan is that the emphasis is now turning to integration, system integration. How do we make all of these pieces of this a power system, which we have built out at enormous capacity at incredible speed over the last, let's say, five years, but now we have to make all the pieces play nice with each other. Is that a fair way of looking at it? [00:05:36] Speaker 2: It is fair. And that is really, to me, what is standout most interesting about the five-year plan, especially for renewable energy, as well as for the power sector, is a lot of the targets, which make good headlines and tend to be talked about, to me, they're either not new or kind of lowball numbers that will be easily surpassed, like I mentioned. But the focus on renewable integration and the actual quantitative targets around that, to me, those are new numbers. They have never appeared in any document before. And so I've really been focusing in on some of those numbers. I think that you have probably some of those in front of you. But the target for energy storage on the grid is 300 gigawatts, which is, of course, another China-sized, astonishingly large number. But then within that, the government is targeting for nationally wind and solar together to meet 20% of the evening peak load. And, of course, in the evening, the sun is not shining. Now, wind and solar are 22% of total generation. But, of course, that's average, and it would be higher in the middle of the day. In order to achieve 20% of peak load in the evening, you really do need that storage. And my calculations show that the 300 gigawatt number for battery storage, plus the fact that wind is never blowing at absolutely zero across all of China, that's enough to get you there on a national basis. Whether that actually panned out in 10 years of weather modeling would be a different question. But I think that the numbers here do seem to track with what's needed. And those are just a few of the numbers, by the way. But definitely the focus on wind and solar is getting those absorbed and getting them integrated. [00:07:13] Speaker 1: What will the Chinese electricity system look like in five years if all of these targets are met or exceeded? [00:07:23] Speaker 2: Well, I think the targets will be exceeded, definitely. I would perceive that wind and solar have ample capacity to continue to grow their share by the same rate that they have been growing up until now, or indeed accelerate that, not because of accelerating additions, but because of decelerating electricity demand growth, which goes along with the economic developments inside China. At the same time, China is electrifying quite rapidly, quite a bit more rapidly than North America or Europe. Much of that is driven by structural change, especially air conditioning loads in cities, as well as just rising overall residential, commercial, and service sector demand. That leads to higher electricity consumption. You add in, of course, electrification of the transport fleets, especially trucks, but also cars, and a little bit of industrial electrification, although that is moving more slowly. You could get easily beyond the 30% number, which is in the government target. [00:08:24] Speaker 1: Anders, Canada has targeted China as one of the primary markets in Asia that wants to service for oil and LNG exports, and we're talking about building enormous oil and gas LNG infrastructure to achieve that goal. I mean, pipelines to the West Coast that are cost $50 to $75 billion, LNG plants that cost $30, $40, $50 billion to build. But it sounds like we would be targeting an economy that has already begun to electrify those sectors that would use oil and LNG. And I just want to get your observation on, you know, what the trends are in China and what the displacement of oil and gas would be, if that's part of the five-year plan. [00:09:17] Speaker 2: Yeah, it is part of the five-year plan. The five-year plan clearly mentions electrification of transport, but without putting a definite quantitative target on that. There are quantitative targets for electric vehicles, but I would say that they're easily going to be surpassed as the 14 five-year plans were vastly over-surpassed. The provincial five-year plans do include targets for adding new LNG import capacity. But at the same time, the central government is targeting both for heavy trucks as well as the power sector to move more in the direction of renewables. Currently, LNG is a very expensive form of natural gas for China to import relative to its own domestic production. And of course, the plan also includes further increases in domestic production of gas, which coastal LNG is competing for. The power sector is not a big user of gas, and gas only provides 3% of the power mix in China, even though the gas-fired power capacity is growing by its dependence numbers, like 15 to 20 gigawatts per year. Of course, that new gas-fired capacity is competing with this energy storage number, 300 gigawatts of energy storage. That will be providing peak demand and helping balancing out renewables. And it's going to be doing that on a cheaper marginal price than what gas would be able to deliver. So that's a challenge. And then the electrification of the heavy truck fleet potentially challenges the import of gas for heavy trucks as well, which had been a trend in the past few years. [00:11:00] Speaker 1: Anders, we've talked about a lot of different aspects of the five-year plan, the growth of the Chinese electricity system, the changes on the electrification of demand, you know, transportation and buildings primarily, I think. Is there anything that we should have talked about that we didn't talk about? [00:11:24] Speaker 2: Yeah, I think that one of the interesting things that's going on in China right now is in the field of battery technology, where, you know, China really ramped up its production, you know, 10 years ago of lithium-iron phosphate batteries. And that is what enabled the electric vehicle transition to take place in China over the last five to six years. You know, in 2019, 2020, the EV penetration in new sales was 5%. With cheap LFP technology, always getting better in terms of performance and energy density since then, that's how it has gotten to 50%, 60% of new car sales. And that's how it's gotten into the truck fleet as well. With sodium-ion batteries, that is starting to become transformational for the power sector because these batteries can perform very well over a long time horizon. They can perform very well in cold weather. And, of course, the materials restrictions that face lithium batteries are significantly less. And the production of these batteries is ramping up extremely rapidly in China, led by CATL, the largest battery manufacturer in the world. And that's going to start hitting the rest of the world at some point, too, just as battery supplies previously have disrupted not just energy markets, but especially the automotive sector. Those sodium-ion batteries, even if they're still a couple years away from the inflection point, it's going to start affecting the power sector worldwide and lead the energy storage revolution to accelerate quite rapidly. Of course, we know that energy storage capacity is already growing very strongly in both North America, Europe, especially places like Australia, helping to alleviate that debt curve in the power sector. But a new wave is coming. [00:13:11] Speaker 1: Anders, in other interviews and essays that I've written, I've talked about how other Asian countries, India, some of the seven taggers, are adopting the Chinese model or adapting the Chinese model to their own economies. Is that a fair argument to make? Are we starting to see that, that other countries are adopting renewables at scale? They're starting to electrify demand? What's your take? [00:13:46] Speaker 2: I think that is, broadly speaking, true. Every country is different, not just in its energy resources and what it needs and how it can benefit from clean energy, but also in the particular policy obstacles that each country has. Most countries, including in the developing world, have some pretty significant policy obstacles to renewable energy. They might have state-owned monopolies in the power sector. They might have local companies that are resistant to change. But one of the characteristics of the clean energy industry, both true for EVs as well as for solar power and now for batteries, is that distributed energy by its very nature can sort of come in under the tent flap, get its nose into the tent, so to speak, just by virtue of individual consumers and small businesses who want, let's say, more reliable power or who want a cheaper car and need to get their goods to market as cheaply as possible. So that's what you saw, you know, last couple of years in Pakistan, where the energy sector, the power sector, completely disrupted by the sudden arrival of solar energy imports. You're seeing that to some extent in India, Southeast Asia, and now most recently in Africa. And then the same thing is happening clearly with the EV sector, both in heavy trucks as well as passenger vehicles, where, you know, oil imports are expensive. And, you know, unlike some other countries in the developing world which see oil as a growth opportunity, most countries see that as a difficult place to spend foreign currency. [00:15:23] Speaker 1: Anders, you mentioned distributed energy, and I want to talk about that for a bit because I remember earlier in this year, I was reading some data and the about China adoption of solar panels, but half of that adoption occurs on rooftops. It occurs outside of utility scale and the grid. Do you expect that trend to continue? [00:15:50] Speaker 2: I do, but for China, this was only a fairly recent trend. When I first moved to China, actually, many people in China doubted that China would ever be able to afford solar energy. And a few years later, that changed abruptly. But almost all solar installations up until 2020 were large central projects. And indeed, many projects that are classified within China as distributed might be in the multi-megawatt range. So these are not rooftop. These are ground mounted, but they're only distributed in the sense of their location being closer to urbanized areas or industrial facilities. It's only really in the past three or four years that suddenly rooftop solar has taken off in a major way. And that was because of a single government program inside China called the Whole County PV Program, which encouraged county-level governments, and China has over 1,500 counties, encouraged county-level governments to basically select one installer and go do a huge percentage of rooftops all at once, eliminating that pesky soft cost problem, which although soft costs in China are not as high as they are in North America, they are still a barrier to distributed solar. And so that's what changed the game for distributed energy. And so in the five-year plan, it is very clear that integrating that distributed energy is a major policy objective. It is a challenge for policymakers in China. It is not solved. And it's a challenge as well in other countries, you know, in the developing world where you have utility desktop viral problems and difficulty collecting payments for the utilities. That's a problem as well. Just because distributed solar is easy for individual consumers to adopt does not mean that it will not face barriers. [00:17:36] Speaker 1: Well, let's talk about those consumers because, of course, we would have residential, we would have business and commercial, and then we'd have industrial. So are we seeing the electrification of industrial load in China? Are we seeing the electrification of business and commercial load? Or is this primarily led by homeowners? [00:18:01] Speaker 2: Yeah, the electrification rate in China is high by global standards, roughly 30% at the end of last year, 2025, and increasing at about one percentage point per year. So the target of 35% by 2030 is in line with that. And indeed, in line with the forecast of the China Electricity Council. However, industrial electrification is moving slower than that one percentage rate per year. And the hard-to-abate sectors, those heavy energy-using sectors like steel, glass, building materials, chemicals, those industries are only seeing their electrification rate rise by 0.1% percentage point per year. So they are lagging in the same way that many of the advanced economies are also lagging and experiencing difficulty. What is changing more quickly in China is, as you mentioned, residential electrification. Adoption of air conditioning helps with electrification, just because that only uses electricity, as well as heat pump adoption is going quite rapidly in China, although still at early stages. Electric vehicles, that helps, of course, although that's a small contributor to this one percentage point per year process. So the really big factor, the number one factor, is just the structural change in the economy. So data centers, they're using electricity. Services sector, more generally, is using electricity. the slow growth in the industry sector relative to the services sector and, you know, sort of consumer-oriented. And this is the structural economic transition that China had wanted for quite a bit of time, but it is taking its toll on the industrial structure and, you know, slowing industrial demand is a key driver of China's present sort of slowdown economically. [00:19:53] Speaker 1: I don't know if you have these numbers at your fingertips, Anders, but I've been hearing claims over and over and over again over the last two, three years that electric technologies or electrotech is now cheaper than its combustion equivalent. So, you know, an electric vehicle is much more efficient and lower cost per kilometer traveled than a, you know, an electric, sorry, than a combustion engine. So I'm wondering if that's what, if the numbers bear that out when you look at total cost of ownership over time, is the electric technology competitive with or much lower cost than their combustion equivalents? [00:20:37] Speaker 2: I think that it just varies by each sector and by each geography even. So within transportation, you'd have to look at electric vehicles of different sizes. You'd have to look at heavy trucks, which are, for China, still a sticker price is quite a bit higher. And then the total cost of ownership, as you mentioned, depending on how you use it, could be much lower, depending on your driving range and how long you have to drive it. One thing that really helps the case that you're talking about in China is not so much that electricity prices are extremely low, although they are low compared to Europe, they are not necessarily that low on average compared to North America. And of course, there's a big range within North America, but still Chinese electric power prices are not necessarily super low. However, there are time of use prices, which can make it extremely low cost to operate a heavy duty truck in China off of electricity and make that case very compelling. And, you know, I keep coming back to heavy trucks because it's a recent trend the last year and a half or so, but also because it's a significant consumer of oil. So if transportation is roughly 50% of China's oil consumption, China's the world's largest oil importing country, a little bit less than half of that transportation oil demand is diesel. And then a large share of that is for heavy trucks. Heavy trucks turn over more quickly and they turn over based on the total cost of ownership, not based on consumer trends or what new models are available. So that's why that has a bigger effect on the rate of electrification than passenger vehicles do. You know, after several years of the penetration rate of EVs in the passenger vehicle sector being 40, 50%, the vehicle stock is still only about 12 to 15% EVs in China. Whereas for heavy trucks, the average vehicle life is only around seven years. So these trucks don't last as long in the fleet, they get replaced a lot quicker. [00:22:41] Speaker 1: Anders, lots of interesting insights here and I look forward to our next conversation. Thank you very much for this. [00:22:47] Speaker 2: Thank you.