China monthly: China puts its eggs in several baskets

16 June 2014 00:00 Source:ICIS Chemical Business

Anybody who suggests a multi-pronged approach to energy policy in the US runs the risk of either being called a “tree hugger” or a “climate science denier”, depending on what position they take, said a US petrochemicals industry source.

“The tree huggers are those who are against ever-greater use of hydrocarbon energy reserves per se, whether its US coal or our abundant natural gas. They are instead in favour of renewables,” the source added.

“And anyone who backs the coal industry as another option, along with natural gas, is accused of denying the science that backs up claims that climate change is man-made. The ‘logic’ here is that carbon dioxide (CO2) emissions from coal-fired power stations are some 50% higher than those from gas-fired stations.”

eggs REx Features

Rex Features

China puts its eggs in many baskets to spread its energy risk

He worries that the debate about energy is so politicised in the US that “we are in danger of putting all our eggs in one basket. What happens if shale gas reserves are less than many people think, or that the economics of further gas extraction don’t work out as some people predict?

“The energy debate shouldn’t be about politics, but instead should be based on what makes most sense over the long term, including alternatives in case the shale gas-boom doesn’t last.”

But China is different, argue some academics. They claim that China is keeping all of its energy options open as it pragmatically pursues oil, gas, coal and renewables.

CHINA’S RENEWABLES STRATEGY

We published the first of our two-part series on China’s multi-faceted approach to energy, and what it means for chemicals, in May.

In that first article , we looked at shale gas, conventional gas and coal. Our argument was that all three sources would be pursued in parallel, even coal in less-developed regions of China where job creation might still remain more important than the environment. The energy debate has, to some extent, also become politicised in China because of growing anger over air pollution – which is largely the result of using coal for power generation.

Here we will look at how China has been pursuing a renewables strategy for years. This has resulted in a substantial increase in its wind, and hydro- electricity generating capacity. Plus, of course, there is the better-known story of the rise in its solar, or photovoltaics, industry.

The focus on renewables is not just about pollution, said John Mathews, a professor of strategic management at Macquarie University in Sydney, Australia .

“Think about it. You are the Minister for Energy in a fast-developing country with leadership aspirations,” he wrote in an April 2014 article for the online Australia investment news and analysis service, the Business Spectator.

“Are you going to put your faith in oil and gas deposits far from home, in politically troubled locations that call for military support for every barrel of oil shipped – or in building wind turbine and solar photovoltaic cell manufacturing industries at home that enable your country to generate virtually unlimited power from its renewable wind and solar resources?”

This aspect of China’s renewables debate had escaped close attention by energy specialists, he added. In his view, the costs of renewables are less important in China than the contribution they have played in raising China’s energy security.

THE RUSSIA-CHINA GAS DEAL

“I think there is also aspect here, which is job creation. Everything so often comes back to jobs in China,” said a Shanghai-based executive with a chemicals logistics company.

“The renewables industry has not only created lots more jobs, but also the right kind of work as China tries to escape its middle-income trap.”

He was referring to the work of West Indian economist Sir Arthur Lewis who found that developing countries in general have a 15-20 year “free ride” when they can cash-in on cheap supplies of labour.

Once this starts to run out, as is now the case with China, they have to move up the manufacturing value chain in order to justify higher wages – otherwise they will end up being stuck as a middle-income country, with per capita incomes of around $10,000.

“Renewables can help solve this problem as they require more research and development (R&D) investment and, thus, are less commoditised,” added the chemicals logistics executive.

Chemicals demand for ethylene vinyl acetate, which is used in solar-cell manufacturing and epoxy resins and fibre-reinforced composites, which are used to manufacture wind turbine blades, had been boosted by China’s focus on renewables, he said.

In a September 2013 paper on China – Avoiding the Middle Income Trap, Policies for Sustained and Include Growth – the Organisation for Economic Cooperation and Development (OECD) – highlighted the role that renewables had played in moving China up the value chain.

But it warned that more needed to be done, including addressing supply bottlenecks in wind and solar energy and improving investment coordination and grid connectivity.

“This requires continuous R&D support in clean technologies and appropriate framework conditions to introduce greener and more efficient infrastructure to support green growth and sustainable development,” wrote the OECD.

To date, though, the progress on renewables has been very impressive. As John Mathews, the Macquarie University professor, pointed out:

  • By 2010, China was adding more power-generating capacity in hydro, nuclear and ‘new’ renewables than in conventional thermal power stations.
  • In 2013, China invested Rmb372bn ($59bn) in new generating capacity. Of this, only 25% was invested in coal-fired stations, whereas 40% was invested in renewables.
  • China’s National Development and Reform Commission estimates that electric power capacity will total 1.6 terawatts by 2020. Of this total, almost a third (500 gigawatts) will be generated from renewable sources – hydro, wind and solar.

But, as we said, hydrocarbons still remain critical to China’s energy policies – especially the “dash for gas” that we discussed in Part One of this special series.

As we pointed out last month, the prospects for domestic shale gas production have picked up because of technological breakthroughs. China has more shale gas reserves than the US.

Right now, though, of far more importance is the deal that Russia struck with China for pipeline gas supplies, which was announced after our first article went to press.

Russia will supply China with 38 billion cubic metres of gas for 30 years at a total cost estimated at $400bn.

But it is the price per million British thermal units (MMBtu) that has generated most of the interest. China has paid as little as $9.90/MMBtu for the gas, which compares with prices in some Asian markets that can be as high as $18/MMBtu.

The good deal is thought to be partly the result of Russia’s greater dependence on China for gas infrastructure investment. Russia’s annexation of Crimea has raised the prospect of sanctions preventing investments by Western gas companies.

More significantly, though, the low price for the gas might point to the value of China’s diversified energy mix, which has given it the flexibility to drive a hard bargain with the Russians.

The Russia-China deal has also raised doubts over the viability of some of the liquefied natural gas projects (LNG) in the US and elsewhere. China will have less need for LNG imports just as supply of LNG is ramped-up, is the thinking here.

One school of thought is that this would be good news for US gas prices. The less demand for methane there is, which goes into LNG, the lower will be the co-product prices for ethane – which, of course, is used in petrochemicals steam crackers.

“I am not so sure as it could be that if these LNG project don’t go ahead, the rise in overall shale gas production will be less than some people think. This could lead to lower-than-expected ethane availability,” added the US petrochemicals industry source.

“This is another reason why I like the idea of a diversified approach to energy policy.”

By John Richardson