Green transformation in China: renewable energy and beyond Green transformation in China: renewable energy and beyond Green transformation in China: renewable energy and beyond

Green transformation in China: renewable energy and beyond

Redmond Wong

Chief China Strategist

Green transformation initiatives started in 2007

China has set goals of gradually slowing the growth of carbon emissions toward 2030, when emissions are expected to reach their peak and then start falling, reaching carbon neutrality by 2060 . As early as 2007, China launched its first National Climate Change Programme which raised questions about the country’s long-adopted development model since the 1980s of exporting energy-intensive, pollution-intensive, and resource-intensive products. In a subsequent 2008 policy paper, the Chinese policymakers spelled out plans to limit the growth of high energy-intensive and emission-intensive export industries. China started rolling out measures in 2007 to close down some of the country’s thermal electrical generating, iron-smelting, and steelmaking capacities, as well as thousands of small coal mines, papermaking and chemical plants, and printing and dyeing mills. At the same time, it promoted renewable energy, aiming to bring it up to 10 percent of national primary energy consumption . The proportion of coal in China’s primary energy consumption fell from 72.4 percent in 2005 to 55 percent in 2021; the proportion of renewables reached 15 percent (of which 8 percent was hydropower, and 7 percent mainly solar and wind) . The proportion of oil and natural gas accounted for 19 percent and 9 percent of total primary oil consumption respectively in 2021. (Figure 1)

Figure 1: China’s primary energy consumption by fuel

Source: Saxo Markets & BP Statistical Review of World Energy 2022

China’s oil production peaked in 2015 

The output of oil and natural gas in China peaked in 2015. Finding economically viable domestic new oil and natural gas resources has been difficult, and China’s three oil and gas giants have seen their capital expenditures in oil and gas exploration and development declining since 2014 (Figure 2).

Figure 2. PetroChina, Sinopec, and CNOOC combined production and capex

Source: Source: Collins, G (2022). China’s Energy Import Dependency: Potential impacts on sourcing practices, infrastructure decisions, and military posture.

Heavy reliance on seaborne import of oil and natural gas

While China has abundant coal reserves and is close to being self-sufficient in coal, this is not the case for oil and natural gas. As the economy grows, China has become increasingly reliant on importing oil and natural gas (Figure 3). China is importing over 70 percent of its oil consumption and more than 40 percent of its natural gas . Combining these oil and gas imports and presenting them as crude oil equivalent, it will take 2,400 super tankers to ship them annually. Most of the oil and natural gas imports are in fact seaborne (oil tankers or LNG vessels), and not through overland pipelines. Without a formidable blue ocean navy, China’s policymakers are wary about the national security implications of having been so dependent on importing seaborne energy cargos. A question that often comes up is what if adversarial sea powers deny China access to the Strait of Malacca?

Figure 3. China’s fossil energy deficit by energy source

Source: Collins, G (2022). China’s Energy Import Dependency: Potential impacts on sourcing practices, infrastructure decisions, and military posture.

Runaway commodity inflation has accelerated the determination to reduce reliance on importing oil and natural gas

National security aside, oil and natural gas are priced and settled in US dollars. The rise in the prices of oil and natural gas, together with increases in the prices of other commodities, have contributed to a sharp deterioration in China’s commodity terms of trade. IMF economists estimated this to have subtracted 4.7 percentage points from China’s GDP between April 2020 and April 2022 (Figure 4). 

Figure 4. China’s Commodity Terms of Trade

Source: IMF. https://data.imf.org/?sk=2CDDCCB8-0B59-43E9-B6A0-59210D5605D2

Developing clean coal technology is of paramount importance

The rise in oil and natural gas prices has further increased China’s determination to accelerate its green transformation, not only resorting to the use of a larger proportion of renewables and nuclear power, but also the development of clean coal technology. Policymakers in China emphasise the reliance on coal as the primary source of energy; the focus of the green transformation is to develop and apply more advanced technology to increase efficiency, lower emissions, and capture carbon when burning coal to generate power . China’s President Xi said carbon reduction in China “must be based on the basic national conditions of rich coal, poor oil and little gas” and that the “coal-dominated energy structure is difficult to fundamentally change in the short term”.  

China’s solar plants have on average 1,450 to 1,750 hours a year in which they have sufficient sunlight to generate power. In other words, 80–84 percent of the time solar plants do not have sufficient sunlight to generate power. Windmills fare only slightly better with about 2,000 hours a year (i.e., about 23 percent of the time) on average where the wind is strong enough for power generation; for the other 77 percent of the time windmills are idle . The intermittent nature of solar and wind power requires energy storage which is very expensive. The energy density of a battery is only 260 kWh/m3—much lower than the 8600 kWh/m3 of gasoline. Using batteries to store energy from solar and wind plants will require a huge number of batteries, and will drive the price of lithium, cobalt, and nickel to prohibitive levels . Pumped hydro storage is more economical but it requires lots of space and water if applied on large scale. Both water and space are scarce in China. 

Nuclear is a reliable source of baseload electricity, but it has its disadvantages. These include the large amount of initial investment, lengthy years of construction, reliance on imports (on average 15 percent of key components and technology are imported), and the need for a lot of water for cooling. As water is scarce in China, most of China’s nuclear plants are located in coastal areas in which cooling can be done with seawater. In inland China, nuclear power is not feasible. 

The recent drought in Sichuan showed very well the limitations of hydropower in China. Per capita available water supply in the North China Plain is about 250 cubic meters, which is nearly 50 percent below the UN definition of acute water scarcity . While hydropower is contributing 8 percent to China’s primary energy, growing it further will be difficult due to the lack of water resources in China. 

Replacing fossil fuel vehicles with electric vehicles contributes to improving the air quality in cities, but it does not solve the energy problem of generating the electricity that powers the vehicles. In addition, an electric vehicle needs 53.2 kg copper, 8.9 kg lithium, 39.9 kg nickel, 24.5 kg magnesium, and 13.3 kg graphite. If shifting to hydrogen vehicles, it is important to note that hydrogen is not energy itself but a medium of carrying energy that still needs to be generated in the first place.

While China targets bringing the proportion of non-fossil energy, (hydro, solar, wind and nuclear power) to 25 percent of primary energy consumption by 2035 , coal is here to stay at the centre of China’s mix of energy sources and the backbone of baseload electricity generation for the foreseeable future.

Investing in China’s green transformation

China is determined to pursue green transformation and is pouring both spending and credits into infrastructure related to green transformation. As illustrated in this article, companies that have solid technology and strong market positions in clean coal technology, energy storage, hydropower, nuclear power, battery metals, solar and wind will tend to benefit. An important point to note is that green transformation is not just about renewable energy, i.e., hydro, solar, and wind, as well as electric vehicles. Clean coal, copper and battery metal mining, nuclear power, electric grids and electric equipment makers will also be potential beneficiaries during the green transformation. In addition, oil and natural gas, even during the green transformation, will still do well as China is going to beef up investment in domestic oil and gas exploration and development, while trying to reduce the amount of oil and natural gas that the country needs to import from overseas. Fossil energy, nuclear power, and renewable energy will coexist and prosper together, and the journey of green transformation will be long and gradual.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.