Why China will go "all in" on renewables, and why we will be left behind economically if we don't.

With the recent, special climate summit in New York in September 2019 pundits have been busy questioning China's commitment to renewable energy. "China is still building coal power plants and needs 'cheap' coal to power its industrial expansion," goes the standard argument.

While it is not for me to speculate about Beijing's current state of mind on the issue, I project that China has no choice but to go "all in" on renewables; and improving air quality isn't even the strongest driver here.

Yes, China still has a lot of work to do in terms of improving air quality in its large metropolitan areas. But, what China needs above all, and in that regard the Pundits are right, is lots of cheap energy to power its industrial and post industrial development for that matter.

Where the "commentariat" in the press and government gets it wrong, is just how cheap this energy needs to be. Coal is neither scalable nor cheap enough to effectively power China's economic ambitions. Coal is subject to resource economics, its cost increases with demand on finite resources and that is an anomaly in the Chinese model. China has perfected the art of scaling industry and is the very poster child for the proposition that renewables are governed by manufacturing economics. The more you produce the cheaper they get. Much, much cheaper than coal can ever be.

But China has two other drivers towards renewables that often get overlooked: Population dynamics and the government's stated aim to become either selfsufficient or leaders in compute and artificial intelligence technology. The latter goal will continue to drive a massive scale out of compute capabilities and further increase the electricity demand from data centers. - Even when factoring in projected efficiency gains of successive generations of chips. The former, population dynamics, is a more complex, but also potentially the more powerful driver in the long run.

China is ageing fast. In part thanks to decades of the "one child" policy, fewer young people are available to join and grow its industrial workforce. Furthermore, out of that shrinking labor pool China can ill afford to waste talented individuals on menial assembly work, and in deed it is likely that fewer of those talented people would even be willing to consider such a career path.

As the education system more actively filters for intelligent individuals and seeks to develop them into engineers and scientists to supports the government's aforementioned ambitious goals, actual "ground level" workers become more scars. It seems unlikely that China would seek to remedy the situation by promoting unskilled immigration.

Lastly, China finds its position as the workbench of the world increasingly challenged by lower wage, off shore, destinations that have not yet experienced the degree of wage growth that is inherent to advancing industrialization and wealth creation. So, to shore up its competitive position and continue lifting the standard of living for its population under this industrial model, a model that ultimately also ensures the continued hold onto power by the communist party, China has no choice but to do more with less. The less being fewer young, cheap, unskilled workers in this case.

The logical solution to this problem is automation. So it may not come as a surprise that China and Germany, both faced with similar population dynamics and endowed with already strong engineering capabilities are on the forefront of developing advanced automation solutions for the manufacturing sector. Now, once you have an ever increasing degree of automation in your industrial base, variable costs become more important to your competitive position. More specifically, the more automated your entire value chain becomes, the more important your energy costs become. Thus cheap energy, as in "abundant solar photovoltaic level cheap" energy, suddenly becomes a formidable competitive advantage.

In other words, China, and any other industrialized nation with an aging and shirking population, stands to massively benefit from cheap electricity as levels of industrial and computational automation are set to increase.

With help from the Chinese government its solar panel manufactures have scaled their production lines and reduced the unit cost for solar panels dramatically over the past decade. This scale out is a major contributor to new solar projects now generating electricity for less than 2c per kW/h at grid scale.

And there is little to suggest that we have already reached maximum efficiency in this domain, as panel production lines grow further and are increasingly powered by cheap renewable energy, prices are set to continue to fall. That said, with the maturing of reel to reel printed Perovskite based solar cells, we are likely to see a further rapid drop in the cents per kW/h cost, by an order of magnitude or more. This is combined with vastly increased production volumes and thus availability of such cells.

Yes, Perovskite cells may not yet be as efficient or last as long as the best conventional solar cell technology, but they are quickly becoming good and durable enough to be persuasively more economical for deployment, given their dramatically lower cost, and easier production process. Based on their much simpler constructions it also seems likely that their end of life costs could be lower compared to conventional silicone based photovoltaic cells.

Skeptics may point to the intermittency issues plaguing renewables. I.e. what powers your factories when the sun doesn't shine or the wind does not blow? China is again experimenting with solutions here already. Flow cell and other grid scale battery storage technologies are being tested at commercial scale to find viable solutions to then scale out nationally.
EDIT/UPDATE, Aug 12, 2020: Subsequently more accurate numbers for China's grid scale energy storage deployments have become available (as of end of 2019, 32.4GW cumulative incl. physical and thermal storage, 1.7GW of which electrochemical).

The above approach will enable grid segmentation, providing for a more stable and resilient over all power delivery infrastructure. It removes the just in time production constraint for electricity, it will allow "over building" of cheap capacity, with the excess stored and released later during periods of reduced or impaired generator output. Furthermore, we haven't really yet considered what kinds of new business models might be enabled by intermittent excess capacity that no longer has to be constraint just to ensure grid stability.

While this article may appear to paint China and its commitment to a clean energy future in rosy terms, we feel confident that cold hard economics combined with the country's specific competitive advantage in scaling mass production, will inevitably lead it down the path of a low cost renewable energy future. Unlike Europe and the United States, China has fewer constraints from established economic interests of classic grid and generation asset operators, and so is free to re-imagine its power generation and delivery infrastructure. If we in the so-called west don't overcome these impediments to progress, then the so-called east will out compete us economically thanks to much, much, lower energy cost within a decade. While a greener cleaner China is great for the planet, it also raises the bar for the rest of the developed economies to keep up.

At the time of writing the piecemeal, incremental, risk averse approach by industry and governments even in the ostensibly climate change aware economies of Europe is deeply uninspiring in its lack of both strategic vision and speed of execution. The EU commission's disjointed approach can be "admired" here. Strategic excellence and world class execution look different when you are trying tackle an existential issue. Which leads me to the conclusions that the Commission hasn't yet quite grasped just how important this issue actually is. Against this backdrop the appointment of a career politician for the post of EU Energy Commissioner, with degrees in history and political science, does not inspire much confidence either. It looks like we will continue to waste precious time with a slew of incremental policy initiatives, rather than pursue the decisive execution of a bold transformative agenda.

After rolling out the world's largest high speed rail network and a massive highway network in record time, China might very well be about to start the roll out the world's largest next generation, decentralized, energy grid. And just like roads and high speed rail, the initial colossal upfront costs will likely be repaid many times over in the resultant beneficial network effects. This power delivery infrastructure will enhance the overall competitive position of the country in ways that can't even be accurately project at this point, since there is no precedent or blueprint for it anywhere else. However, taking a look at the macro drivers outlined above, massive real world economic benefits seem assured.

If we don't start to radically overhaul our own electricity generation and distribution systems with haste, we might very well be left behind.

Good luck, till next time!