Saturday, November 19, 2005

Will Chinese Innovation Protect Us From Peak Oilers' Gloomy Predictions?

Suppose there is sharp learning by doing in the renewable energy industry. As this article below discusses, China is getting ready to make a major investment in wind turbines. If the Chinese government creates the demand for renewables technology and rewards those who develop such technology, could this help the world make a "smooth" transition away from fossil fuels?

This article below suggests that government intervention is needed to give renewable energy a "fighting chance" to compete. I'm not sure if this is true or not.

What I find interesting about this article is the basic point that ideas are public goods. Once Chinese researchers figure out new technologies, these ideas will diffuse around the world. Perhaps the United States should be subsidizing such research in China?

The article has a slightly negative tone suggesting that the U.S is about to lose out in another new market but here the issue of comparative advantage arises. Is China relatively well endowed with the inputs needed to make wind power a low cost energy alternative?

Peak Oilers tend to stress that we will "run out of oil" because of India and China's growth. This article turns this logic around and suggests optimistically that China's growth may create the resources to allow a solution to be found. The article highlights the adaptation strategies that real world firms engage in when energy prices increase.

China charging up

Beijing's rapidly expanding investment in renewables could transform energy markets—and give China a leg up on on the United States. By Lisa Margonelli

WHEN CHINA’S national oil company tried to buy California-based Unocal this summer, the United States reacted like an old dog startled out of a deep sleep: We barked loudly, and aggressively. A fearful Congress voted the sale a threat to U.S. security and the deal fell through.

Across the pond in China, a different sort of frenzy took shape: As power plant outages rolled on and fuel prices climbed over the sweaty summer, the papers reported all sorts of bold and varied schemes for alternative fuels. There was, first of all, something called “hydropower mania,” and then there were many large wind energy projects, and Beijing’s plan to make 18,000 city buses and taxicabs run on clean fuels—some on an exotic mixture of natural gas and hydrogen—by 2008. Provincial taxi drivers were spending $690 to convert their gasoline cabs to cheaper natural gas, while Chinese automaker Geely was announcing plans to build a hybrid car with all-Chinese technology. Beijing mulled an unconventional scheme to use geothermal heating and cooling to replace 800,000 tons of coal. As the summer drew to an end, a decree came down from above: government bureaucrats were to abandon suits and ties to save energy, and the air conditioning in the Great Hall of the People was to be no lower than 77 degrees.

New sources of energy are key as China gears up to attack its twin goals: reining in energy imports and tripling per capita GDP to $3,000 by 2020. Despite adding enough electrical power plants to supply all of California’s energy needs last year, blackouts in China have continued. Renewable energy doesn’t require oil imports (or produce greenhouse gases). But some decision-makers think renewable energy can also guarantee higher incomes in the future. By using its vast market to drive demand, China can nurture industries related to renewable and clean energy. And as fossil fuels are phased out, China will already be making the products the world wants. Message to Congress: Don’t worry about who’s buying your old fossil fuel. Worry about who’s going to sell you the fuels of the future.


Last December, President Hu announced a dual plan for energy conservation and producing oil substitutes. In February, the National People’s Congress quickly passed the National Renewable Energy Development Law. The country’s goal is to import only 5 percent of the energy they consume. (Right now they import 12 percent, and the United States imports 33 percent.)

Watching Beijing’s announcements care-fully is Joanna Lewis, a senior international fellow at the Pew Center on Global Climate Change in Arlington, Virginia, who says that she’s less interested in the numbers than in “the political signals they’re sending.” Lewis’s research in Berkeley’s Energy and Resources Group suggests that the impact of China’s push for more wind power may dramatically change the feasibility of wind power around the globe.

In the short term, China’s goals are modest. By 2020, China plans to install enough wind turbines to supply roughly the equivalent of 20 coal-fired power plants (20 gigawatts). While this is a lot of turbines whirling across the landscape of Inner Mongolia, it pales when you consider that the country is currently installing the equivalent of one coal-fired power plant (1 gigawatt) every week.

Longer term, China hopes to develop a domestic wind turbine manufacturing industry. To this end, Lewis says, China has mandated that most large wind projects consist of 70 percent locally-produced parts rather than buying state-of-the-art turbines from Europe or the United States. This is difficult, and Chinese technology has a long way to go, she believes. At the moment only one company, GoldWind of Xinjiang, is successfully producing turbines that are half the size of those in Europe. (Bigger turbines are better turbines, goes the current thinking.) However, the rewards for local manufacturers are potentially large because China
estimates it could eventually generate 250 gigawatts of energy from wind—a staggering amount when you consider that the world’s total wind capacity is about 50 gigawatts.

Huge prizes, though, come with bigger scale. If Chinese manufacturers start producing more turbines, Lewis speculates that they may be able to reduce the price of wind equipment by 25 to 40 percent, making wind energy much cheaper than conventional power plants. “It could make wind even more viable for developing countries in Africa, as well as India and Pakistan,” Lewis says. “You can see parallels to other industries where they’ve reduced the price dramatically—like color TVs.” And if all goes well (and it may not), the new industry could be very rewarding: the global wind business is already projected to grow by 17 percent a year through 2009.

Last year, China also raised auto fuel efficiency standards, which are among the toughest in the world. The new regulations reward smaller cars while imposing strict fuel efficiency standards on larger ones. Initially, only one U.S. SUV passed the standards. “We learned our lessons from the United States,” says Wang Junwei, who helps set the Chinese government’s auto standards. “We are going to clamp down on them early!”

The big benefits are, again, long term. A U.S. consultant who worked with the government says the new standards were designed to pressure joint ventures like GM and Volkswagen to send their newest technology to China, so that China can sell cars to efficiency-conscious Europeans in a decade or so. Referring to Detroit’s reluctance to make small cars with better fuel economy, he laughs, “China doesn’t subscribe to the idea that what’s good for GM is good for the country.”

China seems to be starting a lot of little projects, seeing which ones thrive, and then nurturing them to a potentially big payoff down the line. With this attitude, even pie-in-the-sky technologies like hydrogen start to seem reasonable. Beijing’s Tsinghua University has developed a hydrogen fuel cell bus that runs on the cheap. Designed to cost less than half the price of the Mercedes fuel cell bus and using one-third the hydrogen per kilometer, the Tsinghua bus’s top speed is only 35 miles per hour. But what bus driver between Beijing and Bombay can go any faster? Ouyang Minggao, the coordinator of the 100-person bus development team, plans to have 15 buses on the streets of Beijing for the 2008 Olympics and have commercial production in place by 2010. He sees a niche market for hydrogen buses in developing countries. “China will be very competitive,” he says, “not the best quality, but reasonable.”

The road from a zillion ideas to several thriving industries is long, expensive, and treacherous. China would do well to study the experience of California (whose incentives and technology they’ve partially adopted). During the heyday of renewable power in the 1980s, California companies were doing much of the research and development on wind, solar, and solar thermal power—driven by government incentives and a growing market. In 1985, California had 95 percent of the world’s installed windpower. But with the deregulation of the electricity industry, and the arrival of seemingly cheap natural gas, California stopped nurturing its market and the state’s industry fell apart, just when the rest of the world started to take wind seriously.
Lisa Margonelli is a writer based in Berkeley. She’s working on a book about the culture of oil called Oil On the Brain: Travels in the World of Petroleum that will be published by Nan A. Talese/Doubleday next year.